Report by the Supply Chain Finance Observatory, Politecnico di Milano School of Management

The Politecnico di Milano School of Management main conference hall was completely full on Thursday, March 23rd, when the final event of the fourth edition of the Supply Chain Finance Observatory took place. The Observatory (www.osservatori.net) is the leading research initiative on SCF in Italy, and works in close collaboration with the Supply Chain Finance Community. Around 450 attendees were present, ranging from corporate executives, bank and ICT providers’ representatives and leading consultants and researchers in the field.

The Observatory Scientific Committee opened the event with a welcome from Prof Alessandro Perego, head of the School of Management; Prof Stefano Ronchi gave an introduction to SCF followed by a reflection about the role of the banking system by Prof Marco Giorgino. The agenda was rich and alternated research insights from the Observatory, corporate presentations of SCF implementation success stories and thematic round tables with partners and sponsors.

Prof Federico Caniato, director of the SCF Observatory, captured audience attention by presenting key numbers about the Italian SCF market. In 2015 (the most recent data available), the cumulative net operating working capital of 1.16 million Italian companies was €620bn (€559bn of receivables, €582bn of inventories and €521bn of payables). This translates into high values in the cash conversion cycle measured in days (DSO=78 days; DIO=80 days; DPO=137 days), far exceeding the European average. Assuming the receivables outstanding as a proxy of the potential SCF market, the following picture (Figure 1) presents the potential vs served market in Italy, revealing the attractiveness of the Italian market potential for SCF compared with European benchmarks (Figure 2).

Figure 1: Potential vs served market in Italy

Figure 2: Potential vs served market in Italy (traditional solutions) – European benchmark

 

The numbers speak for themselves: only one quarter of the Italian market is covered by traditional SCF solutions (factoring and invoice discounting). Therefore, a large piece of the cake is still available and may represent a great opportunity for innovative SCF solutions.

The Observatory also analysed the different business models adopted by SCF providers. Two actors have been identified as critical for the SCF implementation: platform providers and financial providers. An exhaustive map for both has been proposed at the Italian level with a European comparison for platform providers. The combination of both perspectives leads to the emergence of four main business models, characterised by the presence and access criteria of the platform in place:

1.       Analogic: a ‘one-to-one’ company-financial provider relationship without any ICT infrastructure. This is the most widely used paradigm in the Italian context, entailing manual and paper-based factoring or invoice discounting offered by a great number (more than 300) factors and local banks.

2.       Closed: a ‘one-to-one’ company-financial provider relationship based on the exploitation of a platform for communication and digital document exchange. This paradigm relies on a highly-integrated relationship with the financial provider and naturally stimulates collaboration among the parties. Providers range from typical B2B collaboration platforms (such as Ariba, Oracle, etc) to fintechs operating in the SCF domain (such as PrimeRevenue or Kyriba).

3.       Open finance: a ‘one-to-many’ single company-many financial providers relationship intermediated by a platform, which is tailored to the company needs. Multiple financial providers are allowed to access the platform and compete among each other to provide the best financing conditions to the company. Supplier on-boarding capabilities are enhanced. Fintechs such as Taulia, Demica, PrimeRevenue and others provide such platforms.

4.       Double open: a ‘many-to-many’ companies-financial providers relationship, achieved through the exploitation of a two-sided platform acting as a broker between demand and supply. Platform providers such as WorkInvoice and KickFurther are enabling this paradigm, still largely neglected in the Italian context so far.

The third output of the Observatory, presented by Prof Antonella Moretto (co-director of the Observatory), addressed the credit merit assessment. This is a hot topic within the SCF field, since it directly affects the conditions for access to credit. Most credit merit evaluations are still based on financial records only, creating a negative bias against small and micro companies, which in Italy constitute 97.4% of the entire population.

The Observatory’s idea for a possible countermeasure is clear: given that SCF grounds itself on a company’s relationships within its supply chain, it is time for the credit merit evaluation to systematically include operational performance and supply chain information, as well. Indeed, from an analysis of data from 143 companies of various sizes, it emerged that in 40% of cases the financial and operational evaluations were not consistent with each other, therefore supporting the argument that integrating both perspectives will provide a better risk assessment.

Business speakers give real-world perspective

In the morning of the conference, much time was given over to business speakers. In particular, three executives were invited to report their experience with SCF implementation. Dr Andrea Buralli, group operations sourcing director at Luxottica, the global leader in the eyewear industry, reported the successful transition of Luxottica from traditional factoring to reverse factoring, which allowed small suppliers to access cash at a lower interest rate. His speech particularly highlighted the necessity to tailor the specific SCF solution to various kinds of suppliers, deploying portfolio management logic. This is of crucial importance when dealing with an extraordinary varied supply base (as in the case of Luxottica), ranging from giant multinationals to local small companies. At an organisational level, this is possible only by means of an increasing integration between procurement and finance.

The second business leader to speak was Dr Michelangelo Bottesini, supply chain director of WindTre, the leading Italian mobile telecom operator, which has manage the replenishment of a network of 4,750 retailers across Italy. In the last 10-15 years, the smartphone revolution has dramatically increased the price of mobile devices, negatively affecting the financial exposure of retailers and leading to a triplication of credit risk for WindTre. Its successful Trade Credit Insurance Programme allowed WindTre to segment its credit cap towards retailers according to a thorough assessment of their performance based on a number of factors including: commercial performance; credit merit; impact on WindTre margins; external info-provider evaluation; and so on. This comprehensive assessment allowed to offer the needed trade credit to support the business growth, while limiting the credit risk and the insurance premium.

Two more corporate representatives, Paolo Fontana (credit and senior risk manager, Samsung Electronics), and Francesca Bucci (purchasing manager for Italy, San Marino, Greece and Cyprus, Henkel Italia), provided a two-sided perspective on the present and future of SCF, by answering the same set of questions from the points of view of sales and procurement, showing a surprisingly similar view on the need for and potential benefit of SCF.

The third corporate speaker was Dr Paolo Ferrari, CEO of the Comoli & Ferrari Group, a leading distributor of electrical materials. Again, the financial exposure of the multitude of small retailers was a critical problem. Comoli & Ferrari’s solid financial position enabled them to offer financial support to their customers and to negotiate with the banking system credit access conditions for their customers. This is critical to sustaining the business but entails a careful process of downstream market analysis.

Two more corporate representatives, Paolo Fontana (credit and senior risk manager, Samsung Electronics), and Francesca Bucci (purchasing manager for Italy, San Marino, Greece and Cyprus, Henkel Italia), provided a two-sided perspective on the present and future of SCF, by answering the same set of questions from the points of view of sales and procurement, showing a surprisingly similar view on the need for and potential benefit of SCF.

Roundtable discussions

The event was enhanced by two roundtables with research partners and sponsors. The first was aimed at discussing the current developments and future challenges of SCF. The need for innovative SCF solutions to penetrate the Italian market has emerged as a key issue. Inventory finance and purchase order finance appear to be the most promising ones, followed by invoice auction and dynamic discounting. The demand seems mature enough to implement these solutions and a consistent offering is likely to develop in the next future.

The second roundtable probed further into the critical role of information in enabling the implementation of more innovative SCF solutions. Technology per se is not a problem anymore: the ‘Internet of Things’ allows for greater capabilities for data collection; cloud computing has vastly expanded storage capabilities and efficiency; big data and advanced analytics enable smart, structured analysis of huge volumes of data. The question is: are companies and SCF providers ready to rise to these challenges? Another challenge is the internationalisation of business and the global supply chain. Working across different nations means different regulations, different currencies, different cultures, often different banking systems and even different DSO and DPO cultures. How can SCF be effective in this scenario?

Approaching the end of the event, Prof Michiel Steeman, director of the SCF Community, addressed the frontiers of SCF, which include new actors such as logistics service providers, the ‘circular economy’ perspective and the role of blockchain technology, all opening up new opportunities and challenges.

Italy confirms itself as a promising landscape for SCF, yet a higher level of cooperation among the different stakeholders is needed, embracing corporates, the financial system, technology providers, insurance companies, information providers, and logistics service providers. The SCF Observatory team has already started working on the 2017-18 edition, aiming at consolidating its role as a reference point for SCF in Italy and actively contributing to the SCF Community. We are ready… are you?