All companies strive to increase their working capital, either by reducing the need for it or by increasing its flow from existing operations. So when thinking of their supply chain, most companies immediately zero in on inventory reduction as a means for increasing working capital, since this reduces the capital employed. But most companies do not even consider the untapped opportunity in leveraging their freight spend to increase working capital.
This accelerated access to working capital from operations can provide funding for acquisitions or capital equipment as well as reduce the dependence on borrowing, resulting in fewer interest payments and a positive P&L impact. Some banks who offer Freight Audit and Pay (FAP) services may also provide trade financing in addition to their audit and payment services, which can increase working capital for both the shipper and the carrier while also improving the shipper/carrier relationship. Freight spend itself commonly ranges from 3%–12% of revenue, making it a large untapped resource for working capital improvement.
Source: Aberdeen Group, January 2016
As the table above shows, the Best-in-Class outsource 2.7 times the percentage of invoices for their non-parcel shipments compared to All Others, and 1.6 times the percentage of invoices for their parcel shipments vs. All Others. As a result, their average cost to process a freight invoice is 31% less than All Others ($9.81 for Best-in-Class vs. $14.15 for All Others).
The real surprise is the high percentage of All Others who choose not to outsource their freight audit. Of that percentage, even fewer use a third party for the settlement process, which is where the trade finance solution option can solve so many problems for the shipper and the carrier.
How? Most negotiations with carriers, when handled directly, cover payment terms, as well as the cost of the service being contracted. However, where a bank can offer trade financing, these payment terms can be eliminated from the discussion. The carrier can get paid immediately or at least within a few days, and the shipper can extend their “Days Payables Outstanding” (DPO) to as much as 90 days, adding 2 or more months of working capital for the freight component of their total spend and related cash flow.
The net effect of these changes is an increase in the percentage of parcel shipments for all shippers at the manufacturer, wholesaler, and even retail level. In other words, to support omni-channel workflows, freight costs are increasing for nearly all shippers. In most cases, the shippers (manufacturers, wholesale distributors and “brick and mortar” retailers) have to absorb the freight cost to compete with online retailers, or they risk losing the order.
These costs must be covered in some manner or there will be an unfavorable hit to the bottom line. Using a trade financing solution may be a necessity for companies facing increased freight costs due to parcel shipments stemming from increased B2C activities. The savings generated by increased working capital may help to defray these freight costs, as well as tie events and costs together, offering near real-time visibility into those costs.
For more insights and advantages, check out the full report.