Invoicing, payment inefficiencies cost $34.4 billion

Date: Thursday, May 10, 2018
Source: American Shipper

 The shipping consultants Drewry claim in a new white paper that there are massive inefficiencies in current invoicing and payment processes in the container shipping business.
   Drewry said it compared current invoicing and payment processes to what it says would be “ideal global container liner shipping industry with frictionless invoice reconciliation, settlement and immediate payments.”
    “We estimate that the cost of today’s process inefficiencies and lack of trust represent $34.4 billion annually,” the London-based consultants said in a study that was sponsored by Mastercard.
    That’s about 20.7 percent of the $166 billion transport revenues generated by the global shipping industry in 2017, said Drewry.
    Of the $34.4 billion in inefficiencies it identified Drewry estimates:
    • $30.7 billion is from transaction costs for payments and reconciliation;
    • $2.1 billion is from bad debt, 0.6 percent of sales for shipping lines and 1.3 percent of sales for forwarders and NVOCCs;
    • And $1.6 billion is from the cost of credit. It estimates trade receivables (days outstanding) for shipping lines average 25 days for shipping lines and 50 days for forwarders and NVOCCs. 
   Drewry said that the impact of those inefficiencies felt most by smaller stakeholders, which “tend to be more reliant on spot markets where more of the processes are manual, freight rates and supplier bases are most volatile and most of the invoice errors occur.”
   In contrast, it said, the “larger stakeholders tend to rely more on long-term contract,s which allow for IT solutions to be developed that, after the initial setup cost, provide for nearly frictionless freight invoicing, checking and settlement processes.”
   “Among shippers and forwarders the level of automation of invoice reconciliation and settlement is very low, particularly among small and medium sized players. For shipping lines invoicing is largely a manual activity,” the white paper says, “except for a few large setups at beneficial cargo owners where self-billing and/or electronic data interchange solutions are in place.”
   Drewry says “cash against documents,” the standard payment arrangement for new commercial relationships and destination charges “increasingly looks like an antiquated way to manage the question of trust and payment risk in container shipping.” 
   “The ‘cash against documents’ payment arrangements cause extensive manual verification of ‘hard-copy’ payment and shipping documents and are responsible for a substantial part of the $30 billion in transaction cost inefficiencies that we identified.”
   “The underlying industry issue which causes ‘cash against documents’ payment arrangements is the lack of trust between providers and their customers in the context of global and ever changing trading arrangements. As justified as this concern may have been historically, in modern times this can be addressed: Third-party financial services organizations have started offering innovative technological solutions whereby they provide payment guarantees at a much lower cost that the current process inefficiency.”

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