1. Combining Logistics with Financing for Enhanced Print this paper
Profitability
(4/15/1999) Ascet Volume 1 Send as email
By Richard Palmieri, Credit Suisse First Boston
The traditional view of supply chain management is that real savings come
from the substitution of information for inventory and the integrated
management of both the physical product and information flows. However,
the financial flow, perhaps even more than the physical and information
flows, holds substantial promise for cost reduction. The hidden truth is that
the costs to finance products moving through the supply chain, over 4% of
GDP in 1998, approach the costs associated with transportation and
distribution. The financial opportunity for the owners of supply chain
information to share in the revenue streams associated with the financing of
that product often far exceeds the cost reduction opportunities in
transportation and distribution operations.
INTRODUCTION
The goal of successful supply chain management is to minimize mass and time. To do this
effectively, one must be able to measure the costs associated with not only the physical
movement of the product and the associated information requirements, but also the costs
associated with the inventory: financing, taking credit risks upon sale, supporting trade credit and
the like.
Because few companies have a clear idea of this "total" cost, they tend to target the more
tangible elements of logistics costs, such as transportation and warehousing. As with every
service, however, there is a point at which costs can no longer be reduced without affecting
service quality. Many feel that if the transportation industry isn't there now, it's close. Meanwhile,
while many conclude that the reduction in inventory carrying costs over the last several years
from about 5.4% of GDP in 1990 to just over 4% last year is due to great strides in reducing
inventory levels, the facts show that a marked reduction in interest rates over the same time
frame has driven the majority of the benefit. In short, cost reducers, or logistics companies
seeking new sources of revenue, need a new, more tangible target. When one considers the total
dollar value of goods shipped through third party providers, the value created by reducing the
financing cost by even a few basis points is far greater than any cost savings possible from
traditional transportation and warehousing targets.
Current Situation
Three phenomena, none of which are likely to go away anytime soon, are driving this cost
reduction opportunity. The first two, the failure of supply chain information owners to share and
coordinate shipment status and product availability data with financiers, drives financing costs
artificially higher; the third, the relentless pressure on suppliers in virtually every industry to
accept longer and longer trade terms to enhance their customers' return on invested capital
(ROIC) and return on assets (ROA) comes from Wall Street pressure: when managing ROA, if
you can't up the "R," cut the "A". In short, own the inventory for the shortest time possible.
Lack of Information Sharing
Could owners of supply chain information, if that information were shared, influence the costs to
finance inventory? Consider the components of an interest rate; In addition to the cost to fund,
embedded in any financier's rate is the risk premium associated with credit and the costs to

2. service, e.g. the costs to audit and inspect inventory. In effect, financiers seek out the same
information that logistics providers require to provide service to their customers, and/or that
customers gather directly, as financiers rely on asset tracking as a means to verify collateral
levels and location to establish borrowing bases from which they extend credit. This alone
provides a revenue opportunity in that real-time information on inventory levels and status has
value to financiers because certainty of asset location and control of physical movement and
possession results in a reduction in risk that can be reflected in the cost of credit. Put another
way, the risk premium and servicing cost components of the interest rate are artificially high
because financiers gather supply chain information independently and far less accurately than
logistics providers, increasing risk and cost, resulting in an artificially higher rate. In short, reliable
supply chain information is credit-enhancing. Owners of this information have a great asset, but
they fail to maximize its value.
Poor Coordination
At the same time, each supply chain participant typically arranges financing separately. Suppliers
establish lines of credit with financial service providers to acquire equipment to produce their
products, to provide financing to build inventory and to support the extension of trade credit.
Manufacturers, distributors and value added re-sellers follow the same practice (see Figure1). In
so doing, each participant typically utilizes different financial service providers, each with its own
terms and conditions, pricing hurdles, risk parameters, credit capacity and industry/product
knowledge. Objective coordination with information exchange and physical movement through
the supply chain to support the financing of inventory as it passes from one participant to the next
is rare. As a result, process duplication occurs between suppliers utilizing a variety of different
Figure 1.
Current State
finance and logistics providers. In short, supply chain partners rarely talk about financing as part
of their vendor negotiations, and as a result all pay more.
Elongated payment terms
Countless suppliers are in effect financing their customers, as "net 30" becomes net 60 or worse.
Most supplier discounts e.g. 2% 10 days/net 30 are either not taken or abused. Again, the
Fortune 1000's relentless focus on ROA is the culprit; in effect, suppliers who do not want to lose
an important account pay the price.
As a result, a gross inefficiency exists in most supply chains as higher cost of capital suppliers
finance lower cost of capital manufacturers, assemblers, retailers or distributors. Almost
regardless of industry computer PCs, automotive and retail to name a few the little guys are
financing the big guys, creating a significant revenue opportunity for supply chain information
owners to share their data on product movement and, working in conjunction with financiers, to
manipulate the resulting arbitrage opportunity while earning a slice of the financing revenue in

3. return.
CREDIT SUISSE FIRST BOSTON'S SOLUTION
Partnerships
Progress to date in achieving the supply chain goals of suppliers, manufacturers and retailers has
focused on forming closer relationships or "partnerships" with one another. In theory, by working
more closely together, all parties should achieve their ultimate goal of exceeding customer
expectations at a lower cost with more seamless delivery. The overuse of the term "partnerships"
and mixed results to date notwithstanding, we believe that to achieve real value, these
partnerships must not be confined to traditional supply chain participants, but extend to financial
service providers. To realize value, we utilize the following well-structured approach one that
demonstrates the fundamental improvement opportunities and is articulated to the CEO, CFO
and senior logistics management.
Solution Model
CSFB's solution model is the creation of a
structure whereby logistics providers jointly
market their core products in conjunction with
financial services designed to support
customer solutions, or customers using third
parties direct their provider(s) to offer these
more comprehensive services to their vendor
base. As a result, logistics vendors include
financial and insurance services in conjunction Figure 2.
with their core offering (see Figure 2). The CSFB Model
objective is to establish service groups
composed of finance and insurance companies that work in unison with supply chain participants
to facilitate the movement of products while altering the current method of logistics and financing
interaction to lower costs. As part of this equation, the use of asset securitization is key to further
reduce the financing costs of product distribution. Note that this "single source solution model" is
not the creation of a new product, but rather a re-alignment of existing processes to realize yet-
untapped cost reduction opportunities.
Mechanics
In its most basic format, the logistics service provider and/or customer leverages its information
capabilities and physical movement controls in a cooperative venture with the appropriate
financial providers to capture excess charges between trading partners for financing and
insurance. In most in-bound cases, this takes the form of accelerated payments for goods in-
transit and the introduction of a Product Transit (insurance) Policy to cover insurable risk. In those
situations where the supplier has a higher cost of capital than does the customer and the
customer's actual payment practice has created extended payment situations (45 + days), the
economics of accelerating payment can be substantial. Since the payments are made by a party
unrelated to the customer, there is no increase in the customer's liabilities, while transaction costs
are covered by the discount captured by accelerated payment of the suppliers' invoice. That is,
we use the prompt payment discount often 2% or more to fund the program. To enhance the
potential margin, the funding source needs to be more highly rated than is the customer and have
the ability to tap the securitization markets. Revenue flows to the participants in the form of fees
for sharing product status information and asset management services, including continued
responsibility for accounts payable management. Note that this continued responsibility for
accounts payable management allows the customer to maintain vendor contact while benefiting

4. from the arbitrage opportunity with its suppliers. Meanwhile, the use of the Product Transit Policy
consolidates the placement of insurance coverage, replacing the current process of independent
and uncoordinated coverage placement. The net result is a lowering of costs to insure for all
parties involved in the product's movement.
Clearly, participant selection is key to program performance, as each customer's trading situation
is unique and each financing/logistics solution is tailored to the specific requirements of the
customer's trading practices.
Value Creation
When a supplier ships products to a customer utilizing a logistics provider offering this single
source solution, the supplier is able to receive an immediate payment for the sale, subject to the
terms and conditions under which it has sold its products, instead of having to book a receivable
and fund it on the company's own balance sheet. Note that if the supplier wants to transfer
ownership of the receivable or title to the goods, it will be able to do so. As a result, the supplier
has a new source of financing geared to the credit quality of the customers it sells to rather than
to its own balance sheet. As a result, larger credit exposures can be taken with customers than
would otherwise be possible, while financing costs generally fall because the interest rate is
associated with the customer's credit rating, not the supplier's. At the same time, both the
customer and the logistics provider share in a potentially significant revenue stream (or viewed
another way, lower costs), while the logistics provider has a new, differentiated service vis-a-vis
the competition with no balance sheet encumbrance.
More generally, value creation arises from the coordinated utilization of existing processes
inherent in logistics services and financing. The difference between what is charged currently
under a poorly coordinated set of services versus the savings that can be generated by delivering
these services in a revised format results in reduced costs. In addition to the cost savings, there
is the opportunity for reduced recourse and off-balance sheet treatment that may accrue to the
suppliers and manufacturers serviced under these programs.
EXAMPLES
Computer PCs
Figure 3 depicts an inbound logistics program
for a major computer assembler. The logistics
provider, in this case, a major asset-based
provider with the exclusive contract to support
the assembler's plant, picks up from key
vendors, delivering to the assembly center on a Figure 3.
just-in-time basis. At any given time, $250
million in inventory value is outstanding, that is, Example: Computers
delivered but not yet paid for (in financiers' terms, this $250 million represents the "average net
investment"). The vendors, smaller than the computer assembler and less creditworthy, offer on
average a 2.5% prompt payment incentive to the assembler, i.e. a "trade discount", but the
assembler chooses to ignore it.
This solution is fairly straightforward. The logistics competitor continues to control inbound
product movement and provides product status information to the special purpose company
(SPC) set up to make and receive payments. The invoice servicer supporting the SPC provides
electronic payment to each supplier at point of control by the logistics competitor, less the 2.5%
trade discount. The servicer also provides cash management and risk underwriting. Note that the

5. SPC now "owns" the inventory, not the logistics provider. Meanwhile, the computer assembler
pays the full value of each invoice to the SPC under its normal payment practice.
This program generates $3.3 million in free cash flow per year. What is the key to success here?
We use the trade discount and a bona fide receivable from an investment grade credit (the
Figure 4.
Prioritizing Opportunities
computer assembler) to cover the costs to fund, service, risk underwrite and insure. The free
cash flow is split among CSFB, the logistics provider and the computer assembler.
Generalizations
We are often asked to generalize the set of circumstances that make for the best opportunities.
While such generalizations are difficult because each customer situation/solution is customized,
we can make a few summary statements (see Figure 4). First and most simply, higher value
products offer larger cost improvement opportunities because there is more to finance for any
given volume of product and level of inventory turns. Likewise, faster turn products generally
mean more potential for cost improvement for any given product value and trade terms. Next,
trade terms that are offered but not taken e.g. "2% 10 days/net 30" accompanied by an
elongated or abused payment cycle make for extremely low hanging fruit. These opportunities are
especially lucrative when the supplier has a higher cost of capital than the customer to whom it
ships. Sound familiar?
CONCLUSION
We believe that the proper definition of logistics embraces three flows: physical movement,
information and financial; any solution that addresses only information and physical movement is
not a complete solution, only a transitional one. The service providers that can articulate this new
definition to customer decision makers and deliver a single source solution or customers
progressive enough to direct their logistics providers to offer an integrated service will add
significant economic value to their customers' businesses and enhanced revenue to their own
bottom line. As we look out over the business landscape, we see major outsourcing projects
under consideration in industries where global growth requires new supply chain solutions, all of
them requiring financing.
About The Authors
Jon M. Africk

6. Managing Director, Co-Head of the Global Transportation and Logistics Group.
Jon Africk is a Managing Director in the Investment Banking Division of Credit Suisse First
Boston, responsible for co-leading its investment banking activities in the Transportation and
Logistics sectors. Prior to joining CSFB, Mr. Africk co-founded the logistics investment banking
practice at Deutsche Morgan Grenfell, and spent seven years with A.T. Kearney, where he was a
partner in the Transportation Practice. Leading the firm's work with global logistics companies,
Jon Africk was A.T. Kearney's link between its carrier strategy practice and supply chain
integration team. He has more than ten years experience in the industry.
Jon Africk received his MBA from Northwestern University's Kellogg Graduate School of
Management where he is now a guest lecturer and member of the Transportation Center's
Business Advisory Committee. Jon Africk earned his bachelor's degree in economics, magna
cum laude, from UCLA.
Richard P. Palmieri
Managing Director, Co-Head of the Global Transportation and Logistics Group.
Rich Palmieri is a Managing Director in Credit Suisse First Boston's Investment Banking practice,
and responsible for co-leading the Transportation and Logistics Group. Prior to joining CSFB, Mr.
Palmieri was Managing Director of Logistics and Supply Chain Financing for Deutsche Morgan
Grenfell where he co-founded the logistics investment banking practice. Mr. Palmieri was
Executive Vice President of Marketing and Corporate Development for Deutsche Financial
Services, the Asset Based Financing subsidiary of Deutsche Bank and President of Deutsche
Credit Helicopter Finance.
Before joining Deutsche Bank, Mr. Palmieri was President of Whirlpool Financial Corporation,
Chairman of Whirlpool Financial Aerospace, Ltd. and Chairman of Whirlpool Finance Spain.
Mr. Palmieri is an Officer of the Commercial Finance Association and a member of the Expert
Advisory Panel to the United Nations Commission on International Trade Law. Mr. Palmieri has
over 25 years experience in the Distribution Finance Industry.

7. SPC now "owns" the inventory, not the logistics provider. Meanwhile, the computer assembler
pays the full value of each invoice to the SPC under its normal payment practice.
This program generates $3.3 million in free cash flow per year. What is the key to success here?
We use the trade discount and a bona fide receivable from an investment grade credit (the
Figure 4.
Prioritizing Opportunities
computer assembler) to cover the costs to fund, service, risk underwrite and insure. The free
cash flow is split among CSFB, the logistics provider and the computer assembler.
Generalizations
We are often asked to generalize the set of circumstances that make for the best opportunities.
While such generalizations are difficult because each customer situation/solution is customized,
we can make a few summary statements (see Figure 4). First and most simply, higher value
products offer larger cost improvement opportunities because there is more to finance for any
given volume of product and level of inventory turns. Likewise, faster turn products generally
mean more potential for cost improvement for any given product value and trade terms. Next,
trade terms that are offered but not taken e.g. "2% 10 days/net 30" accompanied by an
elongated or abused payment cycle make for extremely low hanging fruit. These opportunities are
especially lucrative when the supplier has a higher cost of capital than the customer to whom it
ships. Sound familiar?
CONCLUSION
We believe that the proper definition of logistics embraces three flows: physical movement,
information and financial; any solution that addresses only information and physical movement is
not a complete solution, only a transitional one. The service providers that can articulate this new
definition to customer decision makers and deliver a single source solution or customers
progressive enough to direct their logistics providers to offer an integrated service will add
significant economic value to their customers' businesses and enhanced revenue to their own
bottom line. As we look out over the business landscape, we see major outsourcing projects
under consideration in industries where global growth requires new supply chain solutions, all of
them requiring financing.
About The Authors
Jon M. Africk