In a globalising economy, supply chains are more complex and globalized than ever before. While the flow of goods are increasingly integrated and optimised, information and finance flows are often fragmented.
During the recent credit crisis, liquidity dried up and many companies adopted aggressive cash management strategies to safeguard their cash levels in the face of declining credit from financial institutions. Often, that meant extending payment terms for their suppliers. This continuous push for payment term extensions with suppliers had meant to free up cash for investment and growth, but it increased risk of supply chain disruption. The excess of working capital due to excessive inventory and prolonged payment terms is hardly sustainable, especially in country like Italy, where it hits most heavily.
A solution to this problem is Supply Chain Finance (SCF), a mix of models, solutions, and services aiming to optimize the financial performance and specifically to control working capital of a Supply Chain, exploiting knowledge on Supply Chain relations and dynamics. Large buyers typically control and steer supply chain improvement processes. We see several examples of large multinationals using SCF models such as reverse factoring for this purpose. An early example of successful reverse factoring implementation is that of Unilever, which has freed up 2 billion USD in overall working capital. The first movers in SCF, located mainly in Europe and the United States, are experimenting with Supply Chain Finance models on a global scale, reaching to second, or even third, tier suppliers. The power of such models is very clear:
- It creates stability in the supply chain, letting suppliers survive times of financial difficulties. In 2007, following the bankruptcy filing of CIT, Wal-mart set up a Reverse Factoring program to ensure continuity of financial access to strategic suppliers;
- It allows the supply chain to grow, proving financial resources at the right moment and the right time. It’s the case of Mercedes, that in 2012 set up an SCF program to empower selected strategic suppliers with the necessary liquidity resources to increase production and meet new targets;
- It ensures the loyalty of the best in class. In 2012, ASML, the world top chip equipment maker, instead of applying for a new loan, asked its major suppliers for liquidity to fund R&D for the new-generation chip technology. IBM quickly answered with a 4.1 billion USD injection that ensured them premium access to the most promising technology that will be available on the market.
And what about Italy? Are there any first movers? Are we being left behind? The Osservatorio on Supply Chain Finance, MIP School of Management, Politecnico di Milano, in 2014 counted more than 509 service providers active in the SCF market in Italy. However, the Italian market is not as ferment as the rest of the world: in 2014 the Osservatorio counted more than 100 financed startups in the SCF field, and many more interesting new initiatives in Europe, Asia and America, while innovative players in the Italian market are still very few. More than 85% of the total market offer of SCF in Italy is composed by traditional financing services.
However, the need to support the supply chain and actively monitor working capital at the inter-firm level is spreading strongly in Italian companies, and state-of-the-art projects do exist. It is the case of OTB (Renzo Rosso’s group), which provided a Reverse Factoring line for the group of mirco-suppliers constituting the backbone of the top-level production of the fashion company. Access is based on the operative performance of these suppliers (quality, flexibility, and so on), in order to promote and financially support who does its work best.
This is the future of working capital management: ICT-base integration of financial and operative information to support cutting-edge, competitive supply chains. However, in these times of information uncertainty many commit the error to narrow the field of investigation of credit scoring to fewer and fewer data. On the contrary, it is necessary and beneficial to extend it from a single company perspective to the entire supply chain. Collect and use data that describe relationships and dynamics among supply chain players is the key to truly reduce credit risk.
It is time to overcome the drawbacks of current credit rating system, integrating them with the structured and digitalized supply chain information that stream from e-Invoicing, ERP, extranet and other digitalized B2b networks. A truly innovative credit rating method and financial services based on the supply chain structure could transform the banking system into the value-added financial partner that our companies need. It is time to change, to financially empower our supply chains rather than consider them liabilities. It is time to unleash the power of Supply Chain Finance.