Andrea Buralli is group operations outsourcing director (CPO) for Luxottica Group, the world’s largest eyewear producer and distributor famous for many well-known brands, not least Ray-Ban, which first launched in 1937. The business pulls in €9bn in revenue, and growing.
Very much a vertically-integrated operation, from design to retail, suppliers are key to the company’s success and SCF is a key element of the supplier relationship for Luxottica’s global network of 12 manufacturing plants.
The first SCF programme was launched in 2012, but it had several downsides, including a lack of transparency. In the changed interest rate environment of the past several years, the company was unable to renegotiate the discount rates.
The company decided early in 2017 to launch a new programme. Ten banks competed for the opportunity and a shortlist of four was whittled down to the final two that were chosen for the programme – one bank covering Europe and the other covering the rest of the world.
The target was to use a single bank for each global supplier to simplify the onboarding and programme management, but Luxottica finally settled for on two banks for each supplier.
Suppliers were segmented according to spend: 70% of spending is with medium and larger companies. There is a large number of micro companies for which a reverse factoring programme is not regarded as suitable.
Wave 1 of the programme covered incumbent suppliers; Wave 2 was small-to-medium suppliers with medium/high spend who requested early payment; and Wave 3 was large suppliers with medium/high spend.
A different onboarding strategy was used for each wave: Wave 1 speedy as this group already familiar with the programme. Wave 2 will be more of a customised approach and collaborative. Wave 3 process is controlled by the group, with more resources required.
Offering reverse factoring means a more attractive interest rate for suppliers from the banks. Other benefits include increased transparency with suppliers and giving them confidence that Luxottica is supporting them. A key success element is strong collaboration between procurement and finance. But of course the banks have helped with their expertise and good relationship management.
There is always some pushback from suppliers, though, as some have expressed several concerns. A healthy supplier with good financials doesn’t feel the need for additional sources of credit, even at attractive interest rate. But the company has been able to persuade them of the full benefits.
Others were concerned that the system could be bureaucratic, costing suppliers lost time in payment of receivables. But once invoices have been posted, they are approved by us. Convincing internal stakeholders did not prove as difficult, however.
The original projection was that full scale implementation would give a cash flow improvement of €50m, based on a supplier adoption rate of 30%. Luxottica is now looking to the next steps – dynamic discounting for micro suppliers and introducing blockchain to many of the company’s operations. And more financing sources are likely to be deployed rather than just the two banks currently used.