Executive Briefings

Supply Chain Financial Solution Matches Capital with Logistics

Supply chain professionals need the ability to successfully grow their organization in a structured well-defined environment. A growth option is to combine capital with the logistics solution, so that the customer gets a broader and more comprehensive solution facilitating growth and customer loyalty.

The operational cycle starts with a contract with the end user, purchase orders issued to vendors for product, completion and configuration of the finished goods, warehousing, shipping and maybe distribution. The accompanying financial need includes paying for the products ordered from vendors, billing customers and collecting from the end user. The key steps for the logistics partners in offering a solution is to take away the "liquidity crunch" caused by timing, eliminate credit limit ceilings with vendors during high growth cycles, and remove credit risk.

Credit has become tighter over the past year. Payment terms are being strictly adhered to. Many logistics firms are finding it very difficult to grow revenue when key vendors are unwilling to increase lines of credit. Obtaining larger credit lines from vendors is a constant battle. As a result, it has become necessary for supply chain professionals to partner with financial solution providers to provide purchase order financing.

To facilitate these partnerships, managed service agreements are entered into between the supply chain organization and the financial solution provider. Typically, the financial solution provider maintains payment and surety relationships directly with the technology vendors, and the logistics partner has access to product they might not otherwise have. In addition, the financial solution provider provides financial administrative oversight and expertise to logistics partners to help ensure that transactions flow properly and in accordance with terms. Ultimately, the vendor payment processing and surety provides a comprehensive solution that eliminates the capital risk and administrative constraints inherent in the supply chain environment.

As part of the managed services agreement, collections are managed through a lockbox system. Cash is separated and cleared into the appropriate accounts of the logistics partner and the financial solution provider. Payments are guaranteed through the use of credit insurance on the end user.

To summarize the entire cycle:

1. The end user awards a contract to the logistics partner.

2. Logistics partners order product from the vendors with the backing of the financial solution provider.

3. The financial solution provider acquires the receivables from the logistics partner as collateral to finance the cost of goods sold.

4. The financial solution provider pays the vendor for the cost of goods.

5. The logistics partner invoices the end user when the contract is completed.

6. The end user pays the invoice by remitting payment to the lockbox.

7. The financial solution provider subtracts the cost of goods sold and finance charge and forwards the balance to the logistics partner.

Financial solution providers can also assist the Electronic Management Services / Contract Manufacturers in providing alternative financial solutions to certain customers. It may be desirous to have the financial solution provider enter into a buy sell contract directly with the end user. An example might be that the contract manufacturer may not want to take on high-volume, low-margin business. The contract manufacturer would also enter into a separate agreement with the financial solution provider to perform the necessary operational aspects of the agreement (warehousing, configuration, packaging, shipping, distribution, etc.).

In these situations the financial solution provider makes payments directly to the vendors, takes on related risks, collects from the end user, and pays the contract manufacturer for the actual work performed.

Source: Global Technology Finance

Supply chain professionals need the ability to successfully grow their organization in a structured well-defined environment. A growth option is to combine capital with the logistics solution, so that the customer gets a broader and more comprehensive solution facilitating growth and customer loyalty.

The operational cycle starts with a contract with the end user, purchase orders issued to vendors for product, completion and configuration of the finished goods, warehousing, shipping and maybe distribution. The accompanying financial need includes paying for the products ordered from vendors, billing customers and collecting from the end user. The key steps for the logistics partners in offering a solution is to take away the "liquidity crunch" caused by timing, eliminate credit limit ceilings with vendors during high growth cycles, and remove credit risk.

Credit has become tighter over the past year. Payment terms are being strictly adhered to. Many logistics firms are finding it very difficult to grow revenue when key vendors are unwilling to increase lines of credit. Obtaining larger credit lines from vendors is a constant battle. As a result, it has become necessary for supply chain professionals to partner with financial solution providers to provide purchase order financing.

To facilitate these partnerships, managed service agreements are entered into between the supply chain organization and the financial solution provider. Typically, the financial solution provider maintains payment and surety relationships directly with the technology vendors, and the logistics partner has access to product they might not otherwise have. In addition, the financial solution provider provides financial administrative oversight and expertise to logistics partners to help ensure that transactions flow properly and in accordance with terms. Ultimately, the vendor payment processing and surety provides a comprehensive solution that eliminates the capital risk and administrative constraints inherent in the supply chain environment.

As part of the managed services agreement, collections are managed through a lockbox system. Cash is separated and cleared into the appropriate accounts of the logistics partner and the financial solution provider. Payments are guaranteed through the use of credit insurance on the end user.

To summarize the entire cycle:

1. The end user awards a contract to the logistics partner.

2. Logistics partners order product from the vendors with the backing of the financial solution provider.

3. The financial solution provider acquires the receivables from the logistics partner as collateral to finance the cost of goods sold.

4. The financial solution provider pays the vendor for the cost of goods.

5. The logistics partner invoices the end user when the contract is completed.

6. The end user pays the invoice by remitting payment to the lockbox.

7. The financial solution provider subtracts the cost of goods sold and finance charge and forwards the balance to the logistics partner.

Financial solution providers can also assist the Electronic Management Services / Contract Manufacturers in providing alternative financial solutions to certain customers. It may be desirous to have the financial solution provider enter into a buy sell contract directly with the end user. An example might be that the contract manufacturer may not want to take on high-volume, low-margin business. The contract manufacturer would also enter into a separate agreement with the financial solution provider to perform the necessary operational aspects of the agreement (warehousing, configuration, packaging, shipping, distribution, etc.).

In these situations the financial solution provider makes payments directly to the vendors, takes on related risks, collects from the end user, and pays the contract manufacturer for the actual work performed.

Source: Global Technology Finance