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When you are shipping goods from A to B, the safe arrival of the goods in the right place is obviously critical to the success of international trade flows.
At the same time, as we all know, equally important are the financial flows – without which those goods couldn’t be paid for.
But think for a minute about the third flow in this model: the flow of information: Where are the goods? Who owns title to them? Has the buyer paid for them yet? Has the supplier received the cash?
Thinking about the information flows prompts thought about the substantial role played by the logistics service providers (LSPs), and how their role could change in future.
As it is, we are already seeing some LSPs playing a significant part in the financing of the supply chain. We’ve even seen LSPs who simply take ownership of the goods in their supply chain – whether they sit in their warehouses or their boats or trucks.
Leveraging their knowledge about the information flows, LSPs can, in effect, become the bank of the supply chain. This means that traditional banks will have to seriously look at how they cooperate with the LSPs that sit on heaps of information – information that makes the supply chain easier to finance – or even enter into joint ventures with LSPs.
The information they have could lead LSPs to extend their service offerings even further, to include all sorts of administrative processes around invoicing, ordering, customer helpdesk services and so on.
LSPs are going to have to give serious thought to moving into these higher value-added areas because the margins are better than in their traditional business of transporting goods from A-to-B.
Look at all the players in the supply chain and it’s not a great leap of the imagination to foresee that even harbour management companies or airports – which have a lot of information about the goods flowing through them – might actually reach out to become an orchestrator for the financial flows that go through the harbour or airport.
Certainly, this would be a huge challenge for some LSPs. So is this going to be an industry mega-shift over the coming decades? Or a phenomenon we see in just a few isolated instances?
It’s difficult to say at the moment who will be the winner or how it will all turn out. The problems with LSPs at present is that it is a fragmented industry: there are only a few players who are truly global and which can offer these kinds of financing solutions.
It’s also a very traditional industry which, for the most part, currently lacks the financial sophistication or the balance sheet strength to take on a financing role.
Consolidation is one solution that would deliver the scale and financial strength to bring about a transformation of the industry. The biggest consequence I would expect is that some of these transportation companies will cede their traditional role to others and become information management companies: rather than performing the A-to-B logistics services themselves, we would have operators who would actually carry the goods and the companies that orchestrate and organise it all. Such LSPs would transform into orchestrators without the heavy infrastructure of a transportation company.
So the sector could polarise between those that concentrate purely on shipping things from A to B and those that orchestrate all the flows. Only four or five of the world’s largest LSPs could probably do both because of the scale that they have. But the group of players below them will have to choose – or transform.
Changing role for the banks
As orchestrators, if such LSPs don’t need to own the vehicles or the boats then there could be a changing role for the banks, as well. They have the cash and the funding but without the information they don’t necessarily become the orchestrator of the supply chain the way that LSPs can. Banks become the operator of the financial flows but not the supply chain orchestrator. Banks have the balance sheet, they have the cash. But they need the information and so they will need to work with these transformed LSPs.
Will banks see this as an opportunity or a threat? The biggest ones may see this as an opportunity. We may even see in 10, 15 or perhaps 20 years from now that banks will acquire these transformed LSPs which will then become part of the banks’ offering to clients.
At the moment, obviously, the trend is the other way, with banks disposing of businesses and assets. But who knows what the situation may be in 20 years?
What about the players that control the e-invoicing flows and the order flows? Any type of IT platform or provider that sits on this information flow could potentially grow into an orchestrator and be an operator in the financial streams, as well.
It’s a busy environment – all the other players that provide services to the supply chain could actually move in this direction. You can see that clearly in the reverse factoring landscape where we see new entrants coming in from providers of treasury management systems and e-invoicing platforms.
Many different types of organisations are trying to play a pivotal role in this information role in the supply chain. Who will win? It’s far too early to say. But the one big advantage that the LSPs have is the information stream on the physical flows.