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How inventory monetisation and blockchain could alleviate supply chain pressures

How inventory monetisation and blockchain could alleviate supply chain pressures 1

By Nicola Bonini, Head of Origination, Supply@ME

No company disrupted by a crisis ever welcomes the chaos unfolding around them. However, crises are often the catalyst for innovation, and force companies to solve problems they have not faced before. The supply chain crisis of 2021 is no exception. As we look to 2022 and beyond, the tools that will give companies the financial (and physical) flexibility to adapt to a new post-pandemic, post-Brexit normal will be underpinned by revolutionary financial technology.

Before the pandemic, many businesses were guilty of taking for granted the smooth-running of their complex logistical operations, simply because they had worked so well for so long. But when non-essential retail and leisure closed last year, the unprecedented supply and demand shock meant supply chains were heavily disrupted worldwide.

As a countermeasure, the supply chain model is shifting from a lean ‘just in time’ (JIT) model, which sees stock delivered just when it is needed for the next step in the chain, to an abundant ‘just in case’ (JIC) model, which will see more goods manufactured and stockpiled, just in case of future supply chain delays.

At least, it will for the companies that can afford it. Shifting operations so drastically relies upon having the working capital to buy goods in larger quantities; increase warehouse space to store more goods; and hire additional staff to manage a more intensive process – among many other considerations for manufacturers with complex logistical operations. Specific purchases will vary between industry sectors, but the common denominator is liquidity.

Adequate working capital has long been a consideration for companies in a supply chain, and there are plenty of options already on the market – from bank loans and equity injections, to asset-based and invoice financing. However, in the wake of Covid-19, traditional lenders’ appetites have, quite reasonably, shrunk. Often, it is the small-to-medium sized enterprises (SMEs) that need it most which suffer – while their businesses might be perfectly viable, they do not meet minimum lending requirements and have difficulty finding the cash required to adapt and scale.

The fintech sector has risen to this challenge with vigour, and the number of solutions entering the market is increasing at pace – from peer-to-peer finance platforms to specialist SME funders. A revolutionary addition to the space is inventory monetisation (IM), which helps companies to unlock working capital based on the value of their inventory, without incurring debt.

Supply@Me’s fintech platform, for example, facilitates the sale of a company’s unsold, non-perishable inventory to a specialist inventory funder (such as a bank) via a monetisation scheme. Supply@Me then sells the value of inventory back to the company at a later date, once ordinary trading conditions have resumed. As the process involves a “true sale” of the inventory, companies are able to release cash from their warehoused goods without incurring debt. The working capital generated by IM can be used to pay suppliers and creditors in a supply chain, thus releasing the pressure upon it – even when onward movement in the chain is delayed.

The IM process is underpinned by blockchain, or distributed ledger technology, whereby a company’s inventory is digitised and tracked. The company with inventory maintains physical possession of, and can continue to sell, its inventory through a commercial contract (aiming for balance sheet derecognition), thus minimising trading disruption. Additionally, from a third-party financing perspective, the digital security serves to reduce counterparty and credit operational risks and enhance trust.

The applications of blockchain, or distributed ledger technology, in supply chain management extend much further than IM. A distributed ledger records transactions (or each step in a supply chain) as a series of ‘blocks’ which are linked together on a chain. Once on the chain, a block cannot be altered or tampered with. Instead, new blocks are formed when there is a change or if a transaction progresses. The ledger itself is connected across multiple computers, which are updated each time the blockchain is updated.

The information held on the blockchain is uncompromisable and verified, which has the potential to eliminate many costly manual tasks and, therefore, reduce the number of steps within the supply chain. This means greater efficiency, and ultimately cost-savings that can be re-invested back into other operations. Further benefits of blockchain include improved security, traceability and speed, because no records can be replaced, destroyed or lost.

For example, consider a shipment of wine from South Africa to Europe. A chain could involve hundreds of interactions between more than 20 organisations. With unknown partners dotted across the globe, the journey is complex and often lacks transparency. By simply adding a QR code to wine bottles and batches, each bottle can be scanned, verified and accounted for on the blockchain without the need for manual intervention. When the shipment reaches each next destination and fulfils a contract deliverable, payment can be triggered automatically, and could minimise the need for banks and clearing houses.

As we enter 2022, manufacturers and traders will be reshaping their operations and reconsidering their source(s) of capital to support these changes. Professionals in the fintech space are ideally placed to combine the latest financial and technological innovations to help companies transition from JIT to JIC as smoothly as possible. Together, we must absorb the lessons learned from this year’s supply chain crisis and put in place the measures to prevent the next one.

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