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The Hidden Value of Trading Organizations

Author:  Frank Marguier

When I was a young executive, I questioned the value of traders which, in my view, were just acting as a middle man between two  main actors of the supply chain network.

At a time where data is abundant and communication is fast-paced, one could easily imagine that suppliers and customers could seamlessly work together in harmony, thereby avoiding a third party such as a trader. However, it’s just not that simple, there are many purchasing situations and supply chain nuances that have proven traders play a critical role in the supply chain.

For instance, a global business trader uses either a customer request and tries to find suppliers able to match the demand, or the trader receives a product or services offer from a supplier that he presents to different customers. In the case where the trader cannot find an immediate customer, they might either reject the product or service or choose to store the merchandise (because it’s perceived value and/or a unique offer) and take on the cost of warehousing at the risk of not being able to re-sell it with margin or, even worse, not to sell it at all. To ensure customer confidence, the trader must be an expert in their area and understands the various degrees of quality and will attract the right customer.  The trader must also have confidence in what they stock in the event he cannot find a customer right away.

Goods sold from country “A” with currency “A” and sold inside a different currency “B” may suffer fluctuation resulting in diminishing or raising the value during the period of the deal which may take several weeks. Because of this, the trader might work with a hedging financial instrument to make sure that the company will not lose money on currency uncertainty. These hedging instruments, provided by banks, allow the firm to gain on one side what is lost on the other side, thereby acting as if the currency is fixed.

Considering a customer could be in any country, the trader needs to avoid risk by ensuring the payment is made in advance or is in the form of a letter of Credit  (L/C) through a banking partner. Nevertheless, an L/C taken through a banking partners is no simple task, a plethora of documents need to be processed and made available during the logistics process.

The trader must plan and execute the logistics thoroughly by organizing and making sure the goods go through the various transportation vehicles at the right price to bring the goods to the final destination in good quality with a decent margin. To illustrate the goods might go through a truck, customs, boat, container handling, storage, customs, truck again, and final materials handling. The goods must be insured and might also have to go through an reestablished quality gate to ensure that the shipment manifest agrees with the requested order. All this is performed by third parties which each have corresponding costs. These costs need to be planned and executed in a flawless process, otherwise, there will be additional costs that will  impact the final margin. So, along this entire complex process, the trader is essentially playing the role of a logistics architect.

Lastly, the trader is also a financial controller as he needs to still realize margin at the end of the deal in order to survive for the next opportunity. Since the volume of a transaction is sometimes huge, a small error in one step of the process might have strong negative margin implications and endanger the whole company.

As you can see, a trading company is not only an expert connection in the supply chain network, they are also a hedging agent, a logistics architect, and a financial controller. They really are the glue that makes the supply chain work.

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