Supply chain finance tools have barely scratched the surface in the Italian market, according to the latest research from Osservatori Digital Innovation at the Politecnico Milano School of Management. In its report, The Future Is Already Here, it estimates that Italian businesses had receivables worth €559bn, a figure that the institution takes as a proxy for the total potential market.
And yet while supplier-initiated programmes such as factoring and invoice discounting cover €87bn and €57bn of receivables respectively – 26% of the total potential market – reverse factoring accounts for just under €3bn. The figure is calculated by using a number of different sources including interviews with 40 buy-side and sell-side companies.
Growth in the market looks likely to be supported in coming years by the emergence of new fintech start-ups. Osservatori identified 50 such firms that have been founded since 2009 and which are still operating in the B2B solutions market. The list includes now-established players such as Taulia, C2FO and Tradeshift. Six new fintechs originate from Italy. But the research also noted that, while start-up fintechs typically focus on the financing and flexibility demands of SMEs, in Italy “the solutions in play are all too often based on traditional solutions”.
A mix of solutions
Osservatori also sought to help companies define their supply chain finance strategy by identifying the correct mix of solutions for their own circumstances. The report identified three main types of costs:
- Selection costs
- Implementation costs
- Usage costs
And four main types of benefits:
- Financial benefits (linked to shorter cash-to-cash cycles, longer payment terms, reduced financing costs, improved access to credit)
- Economic benefits (linked to higher turnover and/or lower purchasing costs)
- Intangible benefits (better management of bank and/or supply chain relationships and improving sustainability performance)
- Operational benefits (such as more efficient and effective processes)
But the research also found that companies often decide to implement the same SCF package across their whole supply chain, in the belief that this will lower implementation costs and raise the level of supplier engagement. Interviews conducted with companies suggests that such a “non-diversified” approach is in fact matched by very low usage on the part of suppliers.
Instead, the report suggests that it is more and more necessary to identify the correct mix of solutions. It cites the example of Vodafone, winner of the 2016 SCF Awards, which introduced a platform with multiple solutions for suppliers: reverse factoring, dynamic discounting or factoring.
Suppliers should be categorised depending on their strategic importance and supply market difficulties (such as the difficulty in finding alternative suppliers or the balance of power between suppliers and buyers), as a means of identifying what type of supply chain finance solution is appropriate for different types of suppliers. At the same time, buying organisations should be integrating the operational information they hold on their suppliers with the financial information available. In many cases, the report found, there is no correlation between a supplier’s operational performance rating and its financial performance. So, for example, a supplier that is regarded as having a good operational scorecard could, in fact, be struggling financially and therefore well able to benefit from some kind of supply chain financing arrangement.
Innovations and trends
Inventory finance is a service that shows promise as logistics service providers (LSPs) play an increasingly important role in providing it, combining as they do not only financial information but also operational information about the movement of stocks.
Three key trends and developments are now expected to drive the supply chain finance market. Firstly, the legislative framework in Italy has taken a notable step forward with the introduction of the non-possessory pledge – a regulatory development that is expected to help enable the introduction of more innovative solutions in the areas of inventory finance and asset-based lending.
Secondly, it is expected that a more holistic and integrated approach to supply chain finance will look beyond the traditional tripartite supplier-buyer-bank model. Such a framework would encompass not only tech firms but logistics service providers and information providers.
Finally, technological innovation, including the likes of big data, blockchain and APIs (application programming interfaces) will open up new opportunities. “Companies are ready to implement this new world [and] all the ingredients to do so are now on hand,” the report concludes. “That is why we believe we can say that for supply chain finance, tomorrow is already here.”