Cash is King — The Role of Supply Chain Financing in Logistics Industry
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The rise of supply chain financing has undoubtedly offered the suppliers solution to the crucial issue of getting paid on time. Moreover, this scheme could positively impact the cash flow and relationship across the supply chain, especially in the logistics industry. By exploiting SCF, shippers enjoy the benefit of on-time shipment service at the best price. Transporter gets paid early and ensured to receive shipment orders, and finance providers can perform low-risk financing. Ultimately, this could strengthen the logistics system nationally.
Is the logistics system a zero-sum game?
- Shipper (owner of goods) pays the service at the lowest rate possible and applies longer payment terms (TOP).
- Transporter struggles to find high rate shipment and obtain cash.
- The finance provider/conventional bank provides the financing scheme merely for big transportation enterprises.
To get a clearer picture, let’s take a look at each party challenges:
Challenge
Shipper Enterprise (Owner of goods)
- The complexity of managing shipment
Logistics and procurement have dealt with various challenges. For instance, managing numbers of suppliers/transporters starting from sourcing, contracting, procurement, invoicing, and approval invoicing. This has led to greater complexity as it involves a cross-functional team (vendor, operations, finance, account, etc.). Moreover, it requires complex orchestration, particularly in a company with a conventional system (use email, spreadsheet, basic ERP with no supporting modules, telephone, fax, etc.)
- A rigid conventional system that slows down the sustainability of transporters/suppliers management
The high complexity of managing the shipment, as elaborated before, has caused the employment of rigid systems to manage transporters well. For instance, By applying the 30, 40, 60, or 90 days of payment, only small transporters can supply the demand. This results in the incapability of the logistics/procurement division to ensure the sustainability of the vendors.
Transporter
- Transporters require flexible working capital
It is a common situation that a cash gap has been circulating in the logistic industry. The cash gap itself refers to the timing difference between when the companies receive the payment (revenue) and when they pay suppliers (expenses). For instance, transporters have to prepare cash (to purchase fuel, toll fee, crossing cost, loading and unloading labor service) all the time. In contrast, shippers are very likely to apply the 30/45/60 days TOP since transporters submit the invoice.
The condition could get worse if the invoice submission system of the shippers still employs conventional methods. This definitely leads to a delay in the payment. On average, the delay could take up to 30 days (one month!). Several factors arise in wrong invoice formatting, inadequate supporting documents, unsigned minutes document, etc.
This situation becomes a big challenge to any transporters/suppliers. As seen in the picture above, Every 15 days delay causes higher logistics costs, about 20%!
Bank/Financial Institution
- Struggle to perform a risk assessment
Bank/Financial institutions are unwilling to penetrate the area for financing logistics systems. Several valid reasons underlie this. However, the most common reasons as follows:
Know Your Customers (KYC) in the trucking industry is greatly fragmented.
Know Your Customers is a standard process that needs to be followed by a financial institution/bank to identify and assess the risks. Therefore, they can grant credit or working capital. Based on data from Aptrindo 2020, there are 1,900 trucking industries across Indonesia. 80 percent of them are small — medium-sized industries and run conventionally. The high fragmentation in the logistics industry, however, results in difficulty in applying the KYC process. According to the data, 74 percent of the small-medium-sized transporters are likely to face rejection from the bank/financial institution due to the imbalance between the financing and risk, onboarding cost, compliance, servicing, and completeness of supporting data of the credit assessment purpose.
Supply Chain Financing Program Opportunity
Supply chain financing is one source for working capital gains to ensure the business chain's sustainability by facilitating schemes to transporters/vendors to fulfill the demand from shippers/buyers.
Supply chain financing can fill the cash gap, which has been a challenge for a long time for both shippers and transporters in running the business. This program, in fact, has been offered since a long time ago by banks/financial institutions. On the practical level, the issues, which have been elaborated initially, have affected the hardship in implementing the program between 3 parties as follows: shippers, transporters, and bank/financial institutions.
Due to that fact, the emergence of technology platforms as the fourth party has great potential in facilitating the positive shift in the logistics industry and eliminating the challenges above.
There are 3 maturity levels regarding how the technology platform could assist the success of a sustainable Supply Chain Financing program.
- Stage 1 — Form a Structured Business Processes
This first stage is the basic foundation in employing sustainable supply chain financing. Initially, enterprises have to refine the business process from sourcing to procurement. The adoption of digital systems can play a huge role in implementing the first step.
In this article, we had elaborate the strategy in implementing digital systems comprehensively.
- Stage 2 — Perform process automation starting from initial invoicing process to payment process
Invoicing and payment systems have to be shifted from paper-based to digital systems. The adoption of e-invoice, on the other hand, could enhance the effectiveness and efficiency of the process flow, starting from approval to payment. In the following, we can use the data to gain more accurate data regarding the amount of cost to pay and the extent to which the company can pay. By owning the ability to gain insight from the data, enterprises can strategize their finance better.
- Stage 3 — Apply Supply Chain Financing and Dynamic Discounting
Once the company runs the process automation in the invoicing and payment process, the platform can provide a solution that entails bank/financial institutions' involvement, which is supply chain financing and dynamic discounting.
Supply chain financing programs encourage banks/financial institutions to offer sources of working capital. Therefore, vendors/transporters can request quicker payment using the approved e-invoice.
Benefits of applying SCF as follows: companies can gain benefits in terms of flexibility of TOP, small-sized transporters can gain working capital, and bank/financial institutions can offer working capital with minimum risk after considering the track record between companies and transporters. They can access all related information through the digital platform.
On the other hand, dynamic discounting is best-suited to be adopted by companies that have healthy cash flow. This scheme allows companies to request discounts from vendors to receive quicker payment. Besides transporters obtain more flexible working capital, they will also indirectly invest in maintaining good relationships with top transporters and ensuring the trucks' availability.
Ritase Enterprise SaaS Solution — SCF Platform
As the pioneer of digital logistics systems, Ritase has always enhanced the platform to become a one-stop solution for logistics requirements. One of the ways is expanding the Ritase Supply Chain Financing (SCF) Platform. Ritase SCF Platform completes the current ritase system that has been used by a lot of national and multinational companies residing in Indonesia.
By adopting the Ritase system, you would possess the main foundation to implement financial strategy, for example, supply chain financing and dynamic discounting. This could be much more simple with a digital proof of delivery and e-invoice on Ritase marketplace and Ritase Enterprise SaaS.
The transporter invoicing process's request and approval system is available on the digital platform, delivered through the Ritase Enterprise SaaS Solution. All stakeholders can process the verification and approval process easier and monitor each vendor's outstanding through the Ritase dashboard.
Moreover, the system allows the user to monitor the due date based on the agreed TOP with the transporter vendor. This calculation can be generated automatically based on the agreed e-quotation (the e-quotation feature is explained in this article). By utilizing the data, the company could gain insight regarding the outstanding payments to the vendor. Therefore, vendors have the capability to manage the payment to ensure the cash flow.
Next, we could also determine the payment method adopted within the company, whether we would apply the dynamic discounting or require agreement with the third party to gain profit from the supply chain financing program.
Transporter vendors can request to receive the working capital directly through Transporter Management System (TMS) Dashboard Ritase. The system enables the process to occur effortlessly as the user only has to create and send the document (e-invoice) digitally. It also allows transporters to select the source of the financing. There are two types of sources as follows P2P lender and direct financing from companies (dynamic discounting).
Ritase has been working with some Fintech P2P and Bank, linked to the Ritase SCF Platform. Our platform allows the financial industry to perform KYC well; all data (deed of incorporation, the decree of the ministry of justice and human rights, other supporting data) is available online and can be downloaded easily. This digital platform also provides information such as the shipment transaction history, reputation/rating in performing the shipment, and other supporting information obtained from this platform.
Transporters also gain flexibility in choosing the length of payment. This feature allows the flexibility for transporters to adjust the time based on their financial capability. This process can be performed seamlessly through TMS Dashboard Ritase.
All digital processes and financial strategy can be used and implemented by using Ritase SaaS Enterprise and SCF Platform as solution in your company!
Benefits that would be gained by each party using the Ritase SCF Platform as follows:
- Benefits for shipper
To maintain a good and sustainable relationship between supplier and vendor, this platform offers payment options flexibly. It rewards transporter vendors for keeping the partnership without risking the stability of the company’s finance.
- Benefits for transporter
To gain working capital based on the invoice. Once the task is completed, the verified invoice (by shipper), the transporter can determine the invoice payment regarding a company's cash flow condition. By doing so, the transporter does not have to wait for the payment too long.
- Benefits for bank/financial institutions
To attain potential in becoming a financial institution with a low-risk profile. Ritase, as the logistics digital platform, can display the historical data (includes successful orders, length of a partnership between shipper-transporter, average payment without SCF, and other supporting data), which can be valuable in performing the KYC.
Ritase consists of committed and passionate people who can provide comprehensive and accurate solutions to address the logistics industry's complex issue.
It is our commitment to deliver the right solution to the user. Therefore, we would not stop only by providing the marketplace for trucking or SaaS enterprise solutions but also by delivering the Ritase SCF Platform to address Indonesia's logistics industry's current challenge.
Rarely do we find men who willingly engage in hard, solid thinking. There is an almost universal quest for easy answers and half baked solutions. Nothing pains some people more than having to think - Martin Luther King, Jr.
To find out more about our features, you can drop your email and phone number on our website page or send us an email to SaaS@ritase.com.
