Move away from credit-based logistics: set short payment deadlines

Bastian Späth, CEO/Vorstand EIKONA AG

Long payment deadlines are common practice in logistics. This is true for shippers paying their service providers and freight forwarders paying their carriers. The problem is, if legitimate claims for payment are paid late, providers may lack the cash to pay bills themselves. First there is a delay in payment. If worse comes to worst, unpaid claims could even result in insolvency. Digital solutions provide relief: suitable software accelerates administrative processes and allows agreements to be properly documented.

Rapidly rising costs with long payment deadlines: logistics companies face an enormous challenge between inflation and diesel prices. The situation is so critical that BGL, a German industry association, is warning of a wave of insolvencies. This is despite the fact that, for years, most service providers have contractually defined consumption costs as flexible items that are passed through directly to customers. At least theoretically. In reality, they often have to wait up to 90 days to get paid. This situation turns logistics companies into involuntary lenders to customers in the event of a sudden price increase and produces something inconceivable in everyday life: it is like eating rolls before paying for them at the bakery counter. All this is happening even though digitalisation long ago enabled automatic and immediate payments for logistics services as well. This can be done by automating contracts so that payments are made automatically by following if-this-then-that statements. The data remains secure and confidential since the transmission is encrypted.


General conditions: where does logistics stand?

Shippers and customers often have the upper hand in logistics. They use more or less interchangeable services in a competitive environment that favours fierce price-based competition. They also negotiate rates and terms for long periods of time, making it almost impossible for service providers to gauge whether they can break even within the agreed price range. It is difficult because freight forwarders often purchase the required transport capacity long after the price negotiations are over – and are subsequently dependent on their customers' goodwill if prices unexpectedly increase. This arrangement has held up so far despite an increasing shortage of skilled workers and drivers . However, there are increasing signs that the logistics market is tilting in favour of providers who can find customers almost automatically. Resource scarcity and postponed transports limit economic growth because global supply chains are disrupted and goods can only be sold with a delay. These developments have already happened with the blockade of the Suez Canal and pandemic-related closures of Chinese ports. They have resulted in extreme volume fluctuations and capacity bottlenecks in downstream transport and logistics processes.


Automated exchange of services instead of long payment deadlines

Payment delays and long payment deadlines do not reflect market needs. The market also includes a large number of small and very small companies that take on large sections of transport chains as suppliers in logistics structures. Due to their size, these companies do not have the capacity to cover large price increases for their customers for longer periods of time until their invoices are due. They count on being able to pay their own bills as their customers' payments come in – after all, they have to meet their suppliers' payment deadlines, too. Depending on the order volume, liquidity management is a challenge even for mid-market logistics companies, and customer defaults are a real risk. The logistics chain could be financed much more securely with fast, direct and automatic billing. Everyone involved in providing the service would get their money much sooner. Also, the administrative effort would be significantly reduced. All the technical requirements are already in place: the logistics service providers' IT systems automatically record every step of each transport, from order receipt onward, and share it with all the stakeholders in real time. The systems thus generate reliable proof of contract performance – and document it properly, to boot.


Smart payments reduce payment deadlines and improve process efficiency

The IT systems and platforms that connect logistics providers to customers, partners, and recipients serve as a single point of truth. They securely and officially store contracts, rates, and terms and keep them current and accessible to everyone involved in the process. An enterprise platform also provide transparency and security regarding diesel floaters. In addition, this data source serves as a trusted entity for automatically approving payments for services rendered. The payments can be operationally implemented using online systems for micro payments, i.e. invoices for individual services that can be connected to the platform. Micro payments are invoiced and become due immediately upon completion of a service. Also known as smart payments, these types of payments are widespread in the B2B sector and increasingly common in the B2C sector. So how does this change service relationships? For an answer, simply look to pay-and-display machines in car parks. They link prices, services and payments as clearly and directly as automatic payment systems would in logistics.

Conclusion

Secure and efficient: immediate payment deadlines instead of logistics on credit

Digitalised billing has the potential to significantly reduce administrative costs in logistics. However, the greatest benefit of automated processes and shorter payment deadlines is that it will sustainably improve liquidity for all stakeholders and eliminate payment delays. Automation thus improves the position of smaller players in the logistics market and helps to strengthen its decentralised structures. It is an important mark of responsibility for big customers and almost a necessity in times of ever-scarcer resources.


Bastian Späth
Bastian Späth
CEO

As a college-educated computer scientist, Bastian Späth understands how IT solutions are developed from the ground up. For more than 15 years, he has spent every workday collecting requirements, finding ideas, developing designs, setting up projects and getting them safely across the finish line.


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