Alternative Inventory Financing

Page 12 LOGISTICS CHEManager Europe 10/2010 Alternative Inventory Financing Optimizing Cash-to-Cash-Cycle for Chemical Companies by Transferring Inventory Ownership Market Pressure – Many compa- Logistics Service Provider buys customer’s nies see their current inventory as too goods in its own name and for its own account high and are interested in methods to Inventory financing is part of supply chain financing (SCF). SCF enriches the role and increase liquidity. Methods and con- the responsibility of logistics and supply chain managers by financial aspects. In con- cepts of traditional inventory reduction trast to conventional financing (on-balance) inventory financing (off-balance) is based have often been successfully applied, on outsourcing of inventory management. Logistics service providers (LSP) interim finance customer’s inventory, which is managed in LSP’s warehouses or in transport. but pressure from the market and com- Transfer of ownership happens when LSP has physical possession of goods. pany shareholders still remains. The LSP can offer a “bundled serv- However chemical companies are ice package” to provide a value-add- less aware of the goals of LSPs and The adoption of inventory financing ed work flow approach for the other therefore find it difficult to engage them methods offers a means in which the stakeholders, wonly building upon but in supporting inventory financing. position of all of the stakeholders may adapting the vendor managed inven- be strengthened, thus making the tory model. The LSP consolidates the Business Benefits and Key Success Factors of entire supply chain more robust. Al- material flow towards the manufac- Inventory Financing though many warehouses have been turers or consumers, and reduces the strategically outsourced to logistics activity to one interface. The owner- Based on the multitude of possible service providers (LSPs), logistically ship of the goods is transferred at the combinations arising from the chang- handling the customer’s goods or even latest possible moment with the call- es in liquidity, capital costs, and bal- managing their inventory, financing of off of the goods by the manufacturer ance sheet indicators, there are few inventory remained responsibility of or consumer as in the case of classical standards. Each business situation the customers. consignment inventory. needs a case-by-case evaluation. As a consequence financing inven- Supply chain partners, already tory through LSP can be considered as Why Didn’t this Financing Method Infiltrate cooperating in this financing method a next step towards a strong strategic Chemical Markets Faster? agree on the fact that a pure window collaboration to increase liquidity and dressing objective based on optimizing reduce capital costs for the customer. The chemical industry is positioned balance sheet indicators is not sustain- The LSP increases customer reten- at the beginning of the value chain. able. Collaboration should be based on tion. Nowadays, chemical companies That’s why the chemical companies the target to decrease administration expect more than just competitive are particularly affected by forecast and bad debts, increase inventory prices. Logistics firms must be will- errors and variations in demand (bull- turnover, improve equity ratio and ing to demonstrate innovative strate- whip effect). Furthermore they are permanently keep capital costs low, gic capabilities to win new customers confronted with high volatility of raw at least neutral in terms of account- or assure existing ones. material prices. In the face of inven- ing. The combination which leads to LSPs are interested in a long-term tory risk companies build up safety an overall positive impact could be cal- strategic relationship with their cli- stock which constantly ties up capi- culated thoroughly as a business case. ents. This comes by providing the tal. This buffer conceals challenges This business case can be the basis benefits expected by the customers, to optimizing inventory in reference for further discussions with potential i.e. freeing capital tied up in inventory to service level agreements with cus- partners and could be finally imple- through the “bundling” of financial tomers. In contrast to the European mented as a successful project. itiating such a method is that all of the and logistics services. automotive industry which was con- ▪ Successfully implemented financing collaboration partners are aligned on Applying this financing method, fronted with low prices by cost-sen- projects are comprised in the fol- the project goals and that the avail- the stakeholder with the best access sitive competitors in the eighties of lowing basic elements: able options for such a project are to capital markets and lowest inter- the last century the chemical indus- ▪ An atmosphere of trust and coop- rigorously analyzed. est rates should finance the inven- try was in the comfortable situation eration between the collaboration tory over the longest possible time to cushion cost challenges by a pric- partners Dr. Alex Wild and Joachim Getto, frame, while the other, beneficiary ing policy based on high quality and ▪ Well-articulated and aligned goals est risk associated with this financing stood the language of the financial Camelot Management Consultants stakeholders proportionally compen- service requirements. that bring value for all of the part- method is located on LSP side: insol- world. Until now, only a few are able sate the financing stakeholder. Thus, In the automotive industry success- ners vency of the manufacturing partner. to express the chance of the financial 2 Contact: the companies jointly optimize the ful companies identified innovative ▪ Well-defined guidelines to drive Furthermore, with the implemen- strength of the supply chain for their Camelot Management Consultants AG cash-to-cash-cycle of the entire sup- concepts especially in the field of sup- the entire process from project tation of a supply chain partnership, companies. Mannheim, Germany ply chain.