Supply Chain Finance Innovation in Trade and Distribution Industry

Supply Chain Finance Innovation in Trade and Distribution Industry

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Description: Today, an increasing number of distribution companies are seeking to transform themselves into integrated logistics and service providers, so as to overcome the pressing challenges of disintermediation. Nowadays, many manufacturers do not possess strong logistics capabilities/know-how nor own any advanced logistics facilities. This provides an opportunity for distribution companies with advanced logistics capabilities.

They can offer speedy distribution services and financing solutions to both upstream and downstream customers.

 
Author: Winnie Lo (Fellow) | Visits: 203 | Page Views: 340
Domain:  Business Category: Management 
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Contents:
Supply Chain Finance (III)

Supply Chain Finance Innovation in
Trade and Distribution Industry
The Li & Fung Management Book Series
Winnie Lo
Management Theories and Business Models
March 2016

1

Capabilities of modern distribution companies
Supply chain operations capabilities
Reflects in the performance of various
aspects of distribution logistics

Relationship building capabilities
Refers to the ability to develop and
maintain relationships with suppliers
and downstream customers

Capabilities to develop
transaction processes
Reflects in the smoothness of the supply
chain transactions and the degree of
market expansion. Sales and operations
planning, funds management and supply
chain financing are all relevant
components
2

Transformation of the trade and distribution
industry
• Today, an increasing
number of distribution
companies are seeking
to transform themselves
into integrated logistics
and service providers,
so as to overcome the
pressing challenges of
disintermediation

Global
network
operations

Integrated
industry
service

Dimensions of
transformation

Collaborative
commerce

Deep market
penetration

3

3 models of supply chain finance in
the trade and distribution industry
Market penetration & service capability

- based on the 4 dimensions of transformation

2

3

Logistics-oriented
Supply chain
finance

Integrated
supply chain
finance

1
Traditional
distribution
service

Market-oriented
supply chain
finance

Collaborative commerce & market expansion capability
4

Model 1: Logistics-oriented supply chain finance







Nowadays, many manufacturers do not possess strong
logistics capabilities/know-how nor own any advanced
logistics facilities. This provides an opportunity for
distribution companies with advanced logistics capabilities.
They can offer speedy distribution services and financing
solutions to both upstream and downstream customers
These logistics-oriented supply chain finance service providers possess strong
logistics capabilities; they offer comprehensive logistics services, such as
warehousing, distribution, customs clearance, and quality inspection
However, they have limited participation in clients’
collaborative commerce and market expansion
activities, and the business flow of the supply chains.
Instead, these companies have a major function in
linking the financial and logistics businesses
See also case: YH Global

5

Model 2: Market-Oriented supply chain finance
• Market-oriented supply chain finance service providers have relatively
strong collaborative commerce and market expansion capabilities. They
can effectively organize different parties in the supply chain
• The market-oriented supply chain service
providers serve as the platform provider, as
well as the coordinator
• However, they have limited participation in
actual logistics operations. Their supply chain
finance solutions are built upon the
collaborative commerce process
• See also case: OneTouch

6

Model 3: Integrated supply chain finance






Integrated supply chain finance service
model has the merits of both the logisticsoriented and market-oriented models
Leveraging financial service, the service
providers not only possess market
penetration and logistics capabilities, but
also help customers find new growth points
and cut the entire transaction cost in supply
chain operations by coordinating the
information and business flows of customers’
upstream and downstream operations
Indeed, the service provider is both the
coordinator and orchestrator of the supply
chain operations

7

Case 1: Shenzhen YH Global Logistics Co., Ltd
(YH Global)
Founded in

1997,

YH Global established itself as a freight service provider

Multinational and domestic clients: Philips, Intel, Samsung, Dell, LG, Foxconn,
BenQ, Quanta, TPV, Lite-On, Hasse, CPT, etc.

China’s largest integrated logistics service
providers in the IT industry. It ranks first in the LCD panel logistics business
Today, YH Global is one of

With a total registered

capital of RMB 600 million Yuan, YH Global has 8 major bases, 16 offices,

and 30 service locations both at home and abroad.

supply chain service modules

YH Global’s
: transportation and distribution, international
freight forwarding, import/ export agency, VMI/JIT warehousing, bonded logistics, global sourcing and
distribution, supply chain finance, and sales channel management.
8

Case 1: YH Global & Philips
1997
YH Global began its collaboration with Philips. YH Global
was responsible for Philips’ raw materials logistics
operations, such as customs declaration, transportation,
and warehousing
2004
YH Global deepened its cooperation with Philips by taking
charge of the latter’s domestic sales transportation, as
well as import/export trade agency businesses

2005
YH Global became the exclusive distribution agent of
Philips in southern China
2007
Philips further outsourced a range of logistics operations
to YH Global for consolidation. Prior to the cooperation
with YH Global, Philips relied on different companies to
manage various aspects of its product distribution
Up to present
YH Global served as Philips’ integrated logistics service
provider; and leveraging its logistics capabilities. YH Global
also looked to provide auxiliary supply chain finance
solutions to Philips
9

Case 1: YH Global & Philips (Cont’d)
Sales and purchase agreement
Philips OEM
factories

Container terminal
transportation

Transportation
Pay for the materials
on behalf of Philips

Customs
clearance

Customs declaration

National
transportation

Transportation

YH Global platform

Distribution

Sorting

Retail
distributor

Delivery and quality
inspection
Settlement of
sales proceeds

• Sales and purchase agreements are signed between Philips and its distributors.
• YH Global is responsible for the entire logistics operations of Philips’ distribution process and provides the auxiliary
supply chain finance services.
• YH Global provides advance to Philips for product payment and pays the value-added tax and import tariffs on
behalf of Philips during the distribution process.
• After receiving the sales proceeds from retail distributors, YH Global collects its logistics and financing service fees.
10

Case 1: YH Global & Philips (Cont’d)
Results:
For Philips

For Philips’ distributors

• Centralized logistics operations by YH Global
reduce the transaction cost and ensure product
quality and safety.
• The financing service by YH Global accelerates
its cash conversion.

For YH Global
• The collaboration with Philips enables YH Global
to be better integrated into Philips’ operating
process.
• The supply chain finance service also represents
a new source of income for the company.

Limitation

• More efficient logistics flow lowers the entire
transaction cost, which translates into better
pricing of Philips’ products.
• YH Global also provides financing to the
distributors, easing their pressure in making full
product payment to Philips.
• YH Global also helps them secure product
supply and enjoy the benefit of volume
discounts.

YH Global only plays a limited role in managing the business flow of the
supply chain, and its price negotiation power is not strong. The supply
chain finance model is more driven by YH Global’s logistics capability than
by its market control.

11

Case 2: Shenzhen OneTouch Enterprise Service
Co., Ltd. (OneTouch)
Founded

Reached a break-even
point and began to
achieve sustained profits

2001

2009

OneTouch
• The first e-commerce service platform
provider in China to provide import and
export business process outsourcing
service targeting small- and medium-sized
import and export companies
• Offers a wide array of supply chain finance
services, such as financing, tax rebates
processing, customs clearance, and foreign
exchange hedge

Became a member
company of Alibaba
Nov 2010
Total trade value
reached USD 4
billion, and its trade
financing amount to
SMEs totaled RMB
5.5 billion

End-2013

12

Case 2: OneTouch

Finance service for open account trade:
• OneTouch’s e-Credit line targets customers participating in open account transactions.
Customers can receive a financing amount of up to 80% of the goods value within three
business days, greatly easing their cash flow pressure.
• To be eligible for the e-Credit Line, customers must use the customs clearance and logistics
services by OneTouch, and let OneTouch collect the payment on behalf of them as well.
• The overseas buyer of the customer must pass the credit check by the China Export and
Credit Insurance Corporation.
• Payment terms of the open account transactions must be audited by OneTouch and should
not be longer than 120 days.
• See also slide 15

13

Case 2: OneTouch(Cont’d)

OneTouch’s online collaborative commerce
platform offers a number of benefits:





It lowers the supply chain cost of SMEs.
It accelerates cash conversion of SMEs.
Informatization expedites customers’ import/export process.
Online platform helps boost the efficiency of government agencies, such as the Customs,
Inspection and Quarantine Bureau, State Administration of Taxation, and State
Administration of Foreign Exchange.

14

Case 2: OneTouch’s e-credit line
1. The customer concludes the transaction on the OneTouch
purchasing platform.
2. The customer applies for the e-Credit line online.
3. OneTouch will contact the customer for an application
review within a week, and if qualified, both sides will sign
the basic service agreement.
4. The customer provides OneTouch with the information on
the overseas buyers, as well as the fees for buyer credit
check. Meanwhile, OneTouch commissions the China
Export and Credit Insurance Corporation to conduct the
credit check.
5. The customer, overseas buyer, and OneTouch ink a tripartite
cooperation agreement and conduct a financial audit to
ensure that there are no past records of default.
6. OneTouch determines the credit terms and limit for the
customer.
7. The customer signs the sales contract with the overseas
buyer after OneTouch completes the auditing.
8. The customer delivers the goods in keeping with the
agreement.
9. The customer presents all delivery invoices to OneTouch,
and OneTouch provides the customs clearance and logistics
services.
10. The customers will receive the agreed financing amount
within three business days.
11. Upon buyer’s confirmation of receipt of the goods,
OneTouch collects the sales proceeds and pays the
remaining balance to the seller.

1
Customer

Oversea buyer

5
2
4

3
6
7

8
10

One Touch
(Bank of China)

9
11

China Export and
Credit Insurance
Corporation

15

REPORT SERIES
1

Overview [Please click Here ]

2

Supply chain finance innovations in manufacturing industry [Please click Here ]

3

This series

4

Supply chain finance innovations in logistics industry

5

Supply chain finance management in commercial banks

6

Supply chain finance innovations in e-business
16

Source
This report is based on the book “Supply Chain Finance”, written by Prof. Song Hua.

Song Hua is a Professor of supply chain management at
the School of Business, Renmin University of China. He is
also a market research and regulative expert at the
Ministry of Commerce, the Assistant Secretary General of
the Chinese Society for Management Modernization, and
the Chairman of the Beijing Modern Institute of
Enterprises Research. His main research interests include
service supply chain, inter-firm relationships, and supply
chain flexibility.
Prof. Song has published over 60 papers in refereed
conferences and journals including Asia-Pacific Journal of
Management, Transportation Journal, Decision Sciences,
International Journal of Operations and Production
Management and Chinese Management Studies.

17

Contacts
Management Theories and
Business Models
Winnie Lo
Research Manager
Tel: (852) 2300 2488
Email: winnielowl@fung1937.com

Fung Business Intelligence Centre
10/F, LiFung Tower,
888 Cheung Sha Wan Road,
Kowloon, Hong Kong
Tel: (852) 2300 2470
Fax: (852) 2635 1598

Email: fbicgroup@fung1937.com
http://www.fbicgroup.com/
© Copyright 2016 Fung Business Intelligence Centre. All rights
reserved.
Though the Fung Business Intelligence Centre endeavours to have
information presented in this document as accurate and updated
as possible, it accepts no responsibility for any error, omission or
misrepresentation. Fung Business Intelligence Centre and/or its
associates accept no responsibility for any direct, indirect or
consequential loss that may arise from the use of information
contained in this document.
Picture source: freepik.com
18