Circular Economy, circling the line

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”:

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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“.

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Supply Chain Finance is more than improving Cash Flow

The goal of working capital management is to ensure that the firm is able to continue its operations and has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses, but Banks present Supply Chain Financing just as a tool for improving cash flow. Supply Chain Finance (SCF) is much more. SCF means:

  • Risk mitigation. Supply Chain Finance is a tool for minimizing the risk of supply chain disruption, which is one of corporates’ biggest risks and not only for improving cash flow. Supply Chain Management solutions providers can add a lot of value if they include innovative SCF tools to minimize the risk of supply chain disruption.
  • Business Process Alignment. In the physical supply chain, risks change rapidly from the order stage to the final delivery and from one tier level to another. SCF solutions can offer services that optimize the allocation of financial resources according to the different needs, and enable the proper alignment of the financing and cash management activities with the rest of the business processes along the whole physical supply chain.
  • Collaboration. Corporations have implemented business network applications to leverage the trust between buyers and sellers. Companies that collaborate effectively across the supply chain enjoy dramatic reductions in inventories and costs, together with improvements in speed, service levels and customer satisfaction.

Supply Chain Finance adoption

Currently, only a small percentage of companies are using SCF techniques, but more than half have plans or are investigating options to improve supply chain finance techniques. Slow adoption of SCF programs does not depend on lack of demand from businesses but on the resistance of the Banking System to change the way it operates. However, some banks are putting their factoring business under the wider Supply Chain Finance “umbrella”, trying to move from a traditional product-centric approach to a client-centric strategy. But client-centricity is not about naming but about solving the customer problem.

Banks’ reluctance to adapt their services to the new needs is causing the rise of solutions that promote the investment of available liquidity in one’s own supply chain, accelerating payments and cash collections, so that early payment discounts are seen as an asset allocation alternative with higher profitability and less risk than those offered by banks. This collaboration creates a win-win relationship for members of the chain, increasing their combined financial strength.

These solutions, although very interesting, do not meet the characteristics defined above. Can we say that a company has an integrated physical supply chain if it has only optimized its relationship with its direct suppliers? What happens if there is a stock issue further down the supply chain? As the integration of the physical supply chain has advanced incorporating a greater number of tiers of suppliers, SCF solutions should do so also.

LICUOS and the new SCF

LICUOS differentiates itself from other payment platforms, banks or SCF solutions as it goes one step further, leveraging not only the supply chain itself but also the network that each individual company creates from its own daily operations in order to find potential netting cycles that can compensate commercial debts.

Through this process, companies are able to minimize the number and volume of cash transactions, and hence, the banking fees associated with the same transactions. The solution allows businesses to reduce their dependence on the traditional banking system alternatives and at the same time significantly improve their working capital and cash flow management. By applying these techniques, businesses achieve an important reduction in their funding needs and credit risk exposure.

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”. In B2B networks companies are buyers and suppliers at the same time.  “Since you already have B2B networks allowing companies to transmit sales orders and other types of documents between one another, why not use those networks to carry out the task of matching payments? Then companies can benefit by being given opportunities for companies to use these balancing payments and debits as collateral to receive payments on time, for instance,” says Camerinelli.

More than a SCF solution

LICUOS is much more than a SCF solution. LICUOS is the first payment platform that helps businesses reduce their debts instead of just paying them. Winner of the Innotribe start-up disrupt, LICUOS is a global B2B payment platform where businesses, including public administration and nonprofit, can compensate and pay their commercial debts, allowing them to reduce their dependence on the traditional banking system alternatives.

LICUOS´ patent-pending technology generates the most convenient and efficient A/R and A/P netting, payment and funding proposals for businesses, significantly improving their working capital financing and cash flow management activities and reducing their credit risk exposure.

LICUOS, as the first Innotribe start-up disrupt winner, will be presenting at the Innotribe tunnel on Wednesday, 18 September at SIBOS in Dubai. The aim of the Innotribe Start-up Disrupt competition is to encourage and recognize financial technology firms that have the capacity to transform the Financial Services industry. The first Startup Disrupt was organized on 25 June 2013 at Next Bank Madrid.