Finance and Risk Management for International Logistics and the Supply Chain

Stephen Gong, Kevin Cullinane

• Publisher: Elsevier
• Year: 2018
• Print ISBN: 9780128138304
• eBook ISBN: 9780128138311
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

Finance and Risk Management for International Logistics and the Supply Chain presents a detailed overview of financial and risk management tools, activity-based costing, and multi-criteria decision-making, providing comprehensive guidance for those researching and working in logistics and supply chain management. The book breaks new ground, combining the expertise of leading authorities to analyze and navigate the funding components for these critical transportation functions. As the international logistics and supply chain transportation fields have recently received heavy investments, this research and the theory behind it provide a timely update on risk management, finance and legal and environmental impacts.Users will find sections that address the wide-ranging issues related to this emerging field that are presented from an international and holistic perspective.- Provides a valuable reference covering the full slate of financial issues of interest to global players in the international transport, logistics and supply chain industries- Covers a truly international perspective, addressing a diverse variety of worldwide transport, logistics and supply chain contexts- Features finance and risk-management strategies related to the banking industry, exchange rates, fuel prices, climate-related funding, freight derivatives and legal aspects

Chapter 1

Editorial

Finance and Risk Management for International Logistics and the Supply Chain

Stephen Gong¹ and Kevin Cullinane², ¹Xi’an Jiaotong-Liverpool University, Suzhou, China, ²Department of Business Administration, University of Gothenburg, Gothenburg, Sweden

In today’s increasingly competitive global economy, companies must not only compete on cost and price, but also on service quality. Against this backdrop, there is a growing recognition that it is through logistics and supply chain management that the twin goals of cost reduction and service enhancement can be achieved (Christopher, 1998). In an effort to reduce costs, companies build strategic partnerships, strive for just-in-time delivery, and source globally to take advantage of lower cost labor and access to raw materials. Such practices, however, have made the typical company’s logistics and supply chain more complex, leading to potentially greater vulnerabilities. It is apparent that to create value through logistics and the supply chain, finance and risk management (as well as strategy, operations, marketing, and other functions) must be considered jointly.

Following the above logic, in Chapter 2, Supply Chain Finance and Risk Management: A Selective Survey and Research Agenda, Gong (2018) presents a literature review of the interrelated fields of supply chain finance (SCF) and supply chain risk management. The author identifies significant diversity within each of these fields in terms of the key concepts underpinning the disciplines, their scope, and the research methods which are utilized. A similar diversity is also identified as present within the specializations of the researchers engaged in these fields of research, where there is representation from operations management, transportation, logistics, accounting, finance, and economics. This supports and reinforces the multidisciplinary nature of both fields of research, although the author does suggest that there is a relative dearth of economic, financial, or management research in the field of supply chain risk management compared to the more recently emerging field of SCF. Gong (2018) goes on to identify a number of knowledge gaps which are present within both fields and sets outs a research agenda which would fill these gaps. In so doing, he advocates the continued reliance on an integrated and multidisciplinary approach to undertaking this research.

The logistics discipline has long since championed the need to look at logistics as a series of parallel flows or chains that interact and overlap. These flows are most obviously concerned with the physical flow of the cargoes themselves through a series of nodes and links that comprise the logistics infrastructure. Although other flows, most commonly of information and funds, are also emphasized, it is only in very rare cases that the academic literature has explicitly addressed how these flows might interact and overlap. In Chapter 3, Different Perspectives on Supply Chain Finance—In Search of a Holistic Approach, however, Basu Bal et al. (2018) focus specifically on the interface between physical and financial flows in logistics operations by addressing the thorny problem of how SCF solutions can be delivered to the entire supply chain. The authors build a conceptual model based on that of Liebl, Hartmann, and Feisel (2016), but extended to encompass logistical, financial, and legal aspects of the provision of SCF along the supply chain by logistics service providers. On the basis of their analysis it is concluded that, should it occur within an appropriately robust legal framework, the expansion of SCF throughout the supply chain will have significant advantages in terms of greater financial inclusion, the potential to raise small to medium-sized enterprise visibility and a general improvement in confidence and transactional efficiency that will boost the availability of capital for investment. The responsibility for developing the framework which will facilitate this rests with the collaborative efforts of policymakers, industry stakeholders and financial institutions.

A shortfall of available finance to support transactions which take place within the supply chain is not the only form of risk which can occur. In Chapter 4, Modeling Risks in Supply Chains, Sheffi (2018) analyzes and models the full gamut of potential risks which exist within supply chains. Through a number of case studies, the author attempts to identify those risks, categorize them, and assess the potential risks for supply chains. The case study approach adopted reveals that companies are frequently in a position to model the likelihood and impact of different risks on a wide range of logistics facilities, suppliers, operations, and infrastructure, but that many of these risks are buried so deeply within supply chains that they might be extraordinarily difficult to identify and evaluate. Recent trends have made logistics companies more vulnerable to the occurrence and impact of risks. These include increasing global trade, globalization and outsourcing, greater product complexity, rising global competition, lean manufacturing, natural resource constraints, and the consolidation of suppliers in some industries. Sheffi (2018) suggests that the nature of today’s business environment requires that the analysis of risk within supply chains now needs to be conducted at three different levels—at company level, at supplier level, and at a deeper third level of the supply chain, whereby suppliers are impacted by the risks associated with their suppliers and other third parties. Although incredibly difficult to implement in practice, this level of detail in the analysis of risk will yield a true understanding of how disruptions arise and propagate in supply chains. Only with this understanding, will come the ability to develop optimal approaches to risk management.

International shipping is the one area of the logistics industry where the study of finance has traditionally been closely connected. As such, shipping finance represents, therefore, a mainstream theme of research work in the field. The next few chapters of this book reflect this high level of activity. In Chapter 5, The Evolution of Modern Ship Finance, Drobetz and Johns (2018) provide a comprehensive overview of the development of shipping finance from ancient times, with its origins in the financing of trade itself, until the sophistication of today’s shipping finance arena. The authors’ historical analysis reveals how the operation of ships has evolved over the centuries and how this has been linked to the development and use of different financial strategies and instruments. Because of the intertwining of personal and public interests together with the sources of finance, all taking place in a market context where distortions created by direct and indirect government intervention are common, the authors conclude that ship finance is quite a distinct discipline where, despite the considerable risk and volatility involved, the different available methods and strategies for dealing with this do not conform with the standard “rules” of corporate finance. They further suggest, in fact, that the level of complexity which pervades the financing of shipping has resulted in a systematic underpricing of the risks involved and that this characteristic may be an antecedent of the consistent overbuilding in many shipping markets, the relative dearth of representation on public capital markets and why structured investments have proven difficult to market. The chapter ends by highlighting the potential for the greater proliferation of more structured financing models for ships given the recent continued absorption of shipping, particularly in terms of ownership, into the wider supply chain.

Moving to contemporary questions in shipping finance, Chapter 6, Investor Sentiment, Earnings Growth, and Volatility: Strategies for Finance in International Shipping, by Pouliasis et al. (2018) focuses on the influence of investor sentiment in the dry bulk shipping sector. Acknowledging that the international maritime logistics industry is characterized by significant volatility in freight rates, the authors hypothesize that having a measure of the sentiment of the investors involved in the industry can provide significant advantages in terms of formulating market expectations, asset valuation, generating industry entry (buy), and exit (sell) signals, as well as potentially increasing liquidity. The authors test their hypothesis through an empirical analysis of the relationship between investor sentiment and vessel earnings. The results of the analysis indicate that market sentiment exerts a statistically significant effect on the conditional mean and variance of market earnings growth rates, with fluctuations in earnings being driven by shocks to the sentiment level and volatility. In addition, a further investigation of the lead–lag relationship between investor sentiment, earnings, and their respective volatilities reveals the existence of a two-way feedback relationship between sentiment and vessel earnings. The authors conclude, therefore, by pointing to the possibility of using measures of investor sentiment (i.e., changes in the level of market optimism or pessimism) to predict earnings and volatility in shipping markets. This will yield significant advantages, not only in terms of industry players making better investment decisions, but also for policymakers in their efforts to facilitate trade by reducing the level of price volatility in what is a critically important element of transport costs.

Motivated by the impact of the 2008 financial crisis, Gounopoulos and Paltalidis (2018) (Chapter 7: Tail Risks in Credit, Commodity and Shipping Markets) investigate the presence of dependence between shipping markets and the more generic financial, commodity, and credit markets, in order to determine the extent to which shocks to stock, commodity, and credit markets are transmitted to the shipping markets. Uniquely, the authors apply three copula functions with different dependence structures to measuring the conditional and tail dependence between the main shipping indices and indices of prices in the stock, commodity, and credit markets. The empirical analysis reveals that significant and symmetric lower tail dependence exists during periods of financial crisis, but that lower tail dependence exceeds conditional upper tail dependence. The results imply that (1) during periods of economic turbulence, dependence increases and generic financial crises will quickly spread to shipping markets, causing asymmetric contagion which advances as market downturns deepen and (2) during periods of general economic recovery, the level of dependence drops and the shipping markets become sluggish in mirroring the speed of general economic recovery. All this implies some form of hysteresis effect in the relationship between the major shipping market indices and generic economic indicators in that these markets will crash together but recover independently. The analysis also reveals that the dry bulk market is more susceptible to these downside risks and contagion than the tanker market, as are the markets for larger ships compared to medium-sized vessels. By capturing the source and the transmission channel by which price volatility in the shipping markets are amplified, the research reported within this work has important ramifications for the evaluation of risk, hedging strategies, and asset pricing.

A major strand of current research in the field of logistics and supply chain management is concerned with securing improved environmental performance, mainly in the transportation arena. Whatever the available operational or technological possibilities for achieving this, in almost all cases a significant investment of capital will undoubtedly be required and, of course, this will involve having recourse to suitable sources of finance. In Chapter 8, Financing Ships of Innovative Technology, Schinas (2018) considers this issue from the perspective of the financing required specifically for technically advanced and innovative technology in the shipping industry. The traditional mainstream source of finance for shipping has been debt. Since the financial crisis of 2008, this has understandably become more difficult to obtain, mainly because of a more stringent regulatory regime faced by the banking sector. At the same time, because ships have had to achieve compliance with the continuously emerging environmental regulations, the demand for additional finance to meet the increased costs of doing so has significantly increased. Quite apart from the inherent risk of innovation, ships that have better environmental credentials will have a cost premium that translates into a higher required freight rate (RFR) than competing conventional ships. In order to overcome the potential problems this higher RFR might pose in the short to medium term, the author suggests that unconventional financial options should be considered and advocates both export credits and leasing in this respect. The cases of LNG-fueled ships and fully autonomous ships are used as practical examples of innovation to illustrate how these concepts might play out in practice. In conclusion, the author asserts that the adoption and successful implementation of technical innovation in shipping will depend on financial innovation and the extent to which novel approaches, methods, and techniques emerge as the “new normal.”

The final few chapters comprise applied case studies which illustrate the general theme of the book as a whole. The first of these focuses on the cooperative movement. The cooperative as a form of business organization has been around a long time (Balnave & Patmore, 2017) and is now widely applied across numerous countries and industries. It should be recognized, however, that over the years the operating practices and capital structures of cooperatives have evolved to meet the needs of the contemporary business environment. In Chapter 9, Operational and Financial Management in Agricultural Cooperatives, Qian and Olsen (2018) identify the common features of cooperatives, irrespective of sector or size, which distinguish them from other forms of business organization. Among a number of singular characteristics, cooperatives are most critically and uniquely differentiated by the feature that “…those who transact with (patronize) the organization also own and formally control the organization” (Evans & Meade, 2005). The authors also highlight the fact that ownership and control by cooperative members, as well as the distribution of profits, are uniquely based on patronage (i.e., a member’s won economic transactions with the cooperative organization) rather than, for example, the value of capital invested in the organization. The operational practices of cooperatives are illustrated by analyzing two case studies of agricultural cooperatives (for kiwi fruit and dairy products) that are owned, controlled, and invested in by a group of farmers who collaborate by pooling resources for their mutual benefit. In so doing, the authors pay particular attention to quality management, payment schemes, financial management, and capital structure innovations.

Chapter 10, Cold-Chain Systems in China and Value-Chain Analysis, by Wang and Yip (2018) also has a focus on agricultural supply chains, as well as the supply chains for frozen processed foods and pharmaceutical products, with their analysis of the rapidly emerging market in cold-chain systems in China. Driven mainly by a growing desire for high-quality food by end-consumers and for better quality assurance from food businesses, the demand for chilled and frozen consumer products within China is burgeoning. However, in 2008, a melamine contamination of milk which caused six infant deaths (Chan & Lai, 2009) and a vaccine scandal in 2016 (Wang & Burkitt, 2016) have undermined public confidence in the ability of China’s cold-chain systems to ensure the quality and safety of products during the distribution process. The authors apply value-chain analysis to the examination of the supply chain structures of three different cold-chain products and then analyze the integration strategies of China’s three leading cold-chain service providers. Proposals are then formulated not only for improving the performance of the cold chains on the basis of supplier relationships, but also for government policy and setting the direction for the cold-chain industry in China.

The focus of Chapter 11, Choosing Cross-Border Financial Guarantee Instruments—Economic Implications and Hidden Risks, is on the tariffs, taxes, duties, and fees that are imposed on transport carriers for moving cross-border cargoes. Urciuoli et al. (2018) analyze the financial, operational, and security implications associated with the temporary suspension of these charges on cross-border movements. Through the use of an illustrative case study based around an intermodal cargo movement (road and sea) routed via five countries—Serbia, Bulgaria, Turkey, Georgia, and Azerbaijan—the authors reveal the variety of methods and financ...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• List of Contributors
• Chapter 1. Editorial: Finance and Risk Management for International Logistics and the Supply Chain
• Chapter 2. Supply Chain Finance and Risk Management: A Selective Survey and Research Agenda
• Chapter 3. Different Perspectives on Supply Chain Finance—In Search of a Holistic Approach
• Chapter 4. Modeling Risks in Supply Chains
• Chapter 5. The Evolution of Modern Ship Finance
• Chapter 6. Investor Sentiment, Earnings Growth, and Volatility: Strategies for Finance in International Shipping
• Chapter 7. Tail Risks in Credit, Commodity, and Shipping Markets
• Chapter 8. Financing Ships of Innovative Technology
• Chapter 9. Operational and Financial Management in Agricultural Cooperatives
• Chapter 10. Cold-Chain Systems in China and Value-Chain Analysis
• Chapter 11. Choosing Cross-Border Financial Guarantee Instruments—Economic Implications and Hidden Risks
• Chapter 12. Regional Effects of Port Free Economic Zones on Real Estate Speculation: A Korean Case Study
• Chapter 13. Risk Management in the Airline Industry
• Index