Supply Chain and Finance Integration: A Case Study on Financing Logistic Assets

By Leo Laranjeira, Ph.D. and Vitor Fernandes

Supply chain management plays a crucial role in a business' outcomes, directly impacting the three main financial statements of the company. This relationship is fundamental for creating shareholder value, influencing aspects such as revenues, costs, employed capital, and business risk, while also contributing to the organization's sustained growth potential. Therefore, it is essential that finance and supply chain operate in an integrated manner, with coordinated and aligned decisions, thus ensuring efficiency and effectiveness in operations and overall business strategy. In this brief article, we will discuss one aspect of this interaction by presenting a case study on the financing of logistic assets.

Instruments for Financing Logistic Assets: A Case Study

Recently, at ILOS - Especialistas em Logística e Supply Chain , we faced a challenge in planning the storage capacity for a consumer goods company. The client needed to decide among different warehouse operating models, each with varying levels of outsourcing and operational leverage. The option that appeared to be most economically advantageous was one with higher operational leverage and process automation; however, this alternative required significant capital expenditure (CapEx) and was ultimately set aside in favor of a more manual and less capital intensive.

That scenario prompted us to consider financing options for logistic assets, using financial instruments that could convert CapEx into operating expenses (OpEx). The company in the case was growing at a fast pace and operating at the limit of its storage capacity, relying on third-party warehouses to meet demand. Projections indicated that continuing this approach would be unsustainable, leading to elevated operational costs in the future.

The analyses conducted revealed a set of alternatives for the company, as illustrated in Figure 1. The first alternative involved maintaining the status quo; the second considered increasing the capacity of the company's own warehouses through layout improvements and the hiring of new third-party warehouses in closer locations; the third alternative proposed expanding the existing warehouse using a manual operational model; and the fourth alternative contemplated expanding the current warehouse using an automated model. The evaluation of these options demonstrated the concept of operational leverage, where capital investments (CapEx) can reduce operating expenses (OpEx) but come with higher risks, as they involve a trade-off from variable costs to fixed costs. The greater the investment, in this case, the greater the savings compared to the status quo.

Although the fourth alternative, which presented the highest operational leverage, was positioned as the most advantageous in terms of net present value (NPV), its implementation faced obstacles due to the need for investment approvals. However, there is the possibility of converting virtually all CapEx into OpEx through available capital markets instruments. Examples include sale-and-lease-back (SLB), long-term lease agreements for built-to-suit (BTS) properties, and securitization. In the SLB model, the company sells the equipment to an investor and, in return, pays rent. In the BTS case, the investor constructs the equipment according to the company's specifications, and payments can be made on an ongoing basis over time. Securitization, on the other hand, allows a company's assets to be converted into tradable securities, facilitating operational financing.

Another strategy to consider is the splitting of real estate assets into shares, through the establishment of Real Estate Investment Funds for assets of significant value or through digital tokenization methods, mainly for lower-value assets.

This case study illustrates how collaboration between finance and supply chain is essential, highlighting the importance of synergy and information exchange between these areas for strategic decision-making, cost control, cash flow management, and overall performance analysis.