In one of their latest publications, “Remaking the industrial economy“, McKinsey & Company review a regenerative economic model, the circular economy. This concept is starting to help companies create more value while reducing their dependence on scare resources.
The authors explain that “the era of largely ignoring resource costs is over”. “The circular economy aims to eradicate waste (…) systematically throughout the various life cycles and uses of products and their components”, “this approach contrasts sharply with the mind-set embedded in most of today´s industrial operations, where even the terminology –value chain, supply chain, end user- expresses a linear view”, they claim.
Companies like Renault, Ricoh, Michelin, B&Q, H&M, Desso and Veolia are mentioned in the publication as success cases of the implementation of “circular economy” concepts through innovation, joint ventures or collaboration projects with their suppliers. However, “individual corporate actions, while necessary, won´t suffice to create a circular economy at scale”, McKinsey & Company says. The real reward will come when multiple players come together to “circle the line” and re-conceive processes and flows. This will result in superior financial returns, from the overall elimination of waste, and the associated wider economic benefits.
Physical and Financial Supply Chain disconnection
A circular economy is one where waste is designed out, through addressing the nature of products and their supply chain. However, its benefits are not so easy to obtain due to, among other reasons, the disconnection between the Physical Supply Chain (PSC) and the Financial Supply Chain (FSC).
The PSC and the FSC are disconnected in many organizations as a result of how corporates perceive the inherent risks of physical and financial supply chains and how banks present their SCF solutions (a tool for improving cash flow). Distorted information, from one end of a Supply Chain to the other, leads to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, ineffective transportation, missed production schedules, disruption risk and excessive funding needs. Enrico Camerinelli, senior analyst at Aite Group, categorizes the reasons why Physical and Financial Supply Chains are out of sync.
There is still a wide gap to bridge between Physical Supply Chains and Financial Supply Chains but some banks, companies and technology vendors are working hard to close this gap. The launch of LICUOS SCF, based on the LICUOS patent pending core technology, has been an important milestone for solving disconnection. The commercialization in the US of LICUOS SCF started in January 2014 when LICUOS opened its first US office and the technology will be demoed at Bank Innovation 2014 in Seattle on March 4th.
LICUOS SCF objective is to facilitate transactions between trading partners by providing multi-tier financing and payment options that are negotiated to improve each partner´s financial position. The LICUOS SCF solution allows Companies to optimize their working capital with a multi-tier approach. Our solution is much more than a cash flow optimizer and helps companies reach these objectives, among others:
- Supply Chain disruption risk mitigation. Supplier liquidity safeguards uninterrupted flow of supplies.
- Business Process Alignment. Looking at the whole physical supply chain and structure the supply chain financing facilities accordingly.
- Collaboration. Requiring a single connection for buyer and suppliers that can cover the entire accounts payable and receivable gamut.
Financial Circular Economy
Finance almost misses the train of Supply Chain but will definitely lead the circular economy adoption and growth.
In a circular economy, products are designed to enable cycles of disassembly and reuse, thus reducing or eliminating waste. The circular economy is an industrial system that is restorative by design. View the complete World Economic Forum Paper “Towards the Circular Economy: Accelerating the scale-up across global supply chains”:
As noted above, circular supply chains are up and running, they’ve gone global and they suggest that the business opportunities in a circular economy are real and large. Their success provokes a question: Could the “circular economy,” which restores material, energy, labor and, why not, financial inputs— be implemented leveraging existing physical and financial supply chains?
Existing supply chains are the key unit of action, and will jointly drive change. The transition between linear supply chains to circular supply chains needs trust and collaboration between independent companies and belief in the effective management of common resources. Building trust-based relationships and minimizing wastage of resources allow both buyer and suppliers to gain more benefits with fewer resources.
Traditional SCF solutions do not allow an efficient use of financial resources as companies are financing more than they actually need. Disruptive SCF solutions, such as LICUOS SCF, offer two primary benefits to the circular economy approach: economic (more efficient and resilient use of financial resources) and collaborative (deeper connections among buyers and suppliers). LICUOS´ patent pending technology aims to improve companies ‘ability to put financial resources to their most productive use. When cash is tight, liquidity providers funding can be used to meet payment obligations. In healthier times, additional savings can be derived by paying under an early discount program. In both scenarios, LICUOS SCF allows the company to react quickly enough to adjust strategy to current conditions.
Obviously, as Albert Einstein said, “insanity is doing the same thing… expecting different results.” LICUOS SCF, that has already demonstrated its capability in linear and multi-tier supply chains, is a unique solution to leverage the potential of the new circular manufacturing processes and flows of materials and products. The inherent circular nature of LICUOS provides an efficient tool to implement these new concepts in Finance and Supply Chain Finance. As Enrico Camerinelli, senior analyst at Aite Group, said in an interview conducted by Chris Davis at TreasuryToday, “if you look at what LICUOS are offering, that is exactly the sort of direction that I think SCF should be moving in”. LICUOS SCF allows the implementation of multi-tier and circular payment and financing processes allowing companies to take advantages of the synergies and benefits generated by a circular supply chain.
LICUOS wish to thank the World Economic Forum, McKinsey & Company, Finextra, Aite Group and TreasuryToday for their contributions to this post.
For an in-depth look at circular economy industrial system, see the economic and business rationale for making this transition, see the complete World Economic Forum Paper “Towards the Circular Economy: Accelerating the scale-up across global supply chains” and the McKinsey & Company publication “Remaking the industrial economy“.