Luca Gelsomino: 0:03

In 2016 Puma for example, started this programs of facilitating payments to suppliers. And they added a component that said, well, okay, I will give the best terms and I will work with my banks so that the best terms go to suppliers that have the best sustainability rating.

Tom Raftery: 0:25

Good morning, good afternoon, or good evening, wherever you are in the world. This is the Digital Supply Chain podcast, the number one podcast focusing on the digitization of supply chain, and I'm your host, Tom Raftery. Hi everyone, and welcome to episode 330 of the Digital Supply Chain podcast. My name is Tomara Rri and I'm excited to be here with you today sharing the latest insights and trends in supply chain. Before we kick off today's show, I want to take a moment to express my sincere gratitude to all of this podcast's, amazing supporters. Your support has been instrumental in keeping the podcast going, and I'm really grateful for each and every one of you. If you're not already a supporter, I'd like to encourage you to consider joining our community of like-minded individuals who are passionate about supply chain. Supporting the podcast is easy and affordable. With options starting as low as just three euros or dollars a month, that's less than the cost of a cup of coffee, and your support will make a huge difference in keeping the show going strong. To become a supporter, simply click on the support link in the show notes of this or any episode, or visit tiny url.com/dsc pod. Now. Without further ado, I'd like to introduce my special guest today, Luca. Luca, welcome to the podcast. Would you like to introduce yourself?

Luca Gelsomino: 1:41

Thank you for having me. And of course. My name is Luca Gelsomino. I am Italian in case you were wondering. But I live in the Netherlands since several years and I work as an assistant professor at the University of Groeningen, very much in the north of the country. If you're familiar with the Dutch geography. And I do research on the integration of supply chain and finance. And as part of my tasks, I'm also the academic director of the Supply Chain Finance Community. A global not-for-profit foundation based also in the Netherlands that connects together universities in Southeast Asia, Europe, and the United States that have interest in the topic of supply chain and finance, and especially have interest in connecting with the rest of the industry, whether they're corporates, providers or whatever to exchange research, exchange interesting cases, and develop events and other forms of dissemination.

Tom Raftery: 2:46

Okay, fantastic. And we met Luca last week at the, or is it two weeks ago now? I'm losing track at the CSCMP event in Barcelona. And you give a fascinating talk and. It, it it, that's the reason I invited you to come on the podcast. It it, it, it struck me that it's not always obvious, the intersection of finance and supply chain. And I suspect I wouldn't be alone in thinking that. So could you, maybe for people who are listening, talk a little bit about why finance and supply chain are so interlinked, or in what ways they're interlinked.

Luca Gelsomino: 3:27

Yeah, absolutely. And you are absolutely right that it's not immediately obvious. And I think before 2020 it was even less obvious. Why would someone talk about supply chain and finance? And it was usually about, okay, you are an an academic, so you like to talk about this weird stuff, but in practice they're not, they're not intertwined. But they are actually intertwined. They are interconnected and the events that happened from 2020 up to today are showing that more and more and more they're like lowering the water in the famous image that goes on and on, on LinkedIn and social media in which you lower the water level and all the rocks come up. And the need, the imperative of integrating finance and supply chain comes out. That is I can give you a lot of examples of why that is that is important, why that is relevant. The easiest one is payment terms. Payment terms are a typical example of integration between finance and supply chain. If you increase payment terms to your suppliers, you have a direct benefit in terms of working capital because you pay later. But of course your supplier will receive their money later. So they will have a direct cost in terms of working capital. And while this is finance, there is a supply chain implication in the relationship with that supplier. Supply chain implication in the risk of that supplier. And we have seen with the Covid 19 pandemic with supply chain disruption around, around cheap manufacturing with the uncertainty in supply chain management, that having good relationship with your key suppliers and making sure that your suppliers receive money in a timely fashion and that your most strategic supplier receives money as soon as possible, especially if they are not in a good situation from a financial perspective, is not a finance decision, it is a supply chain and finance decision because it has to do with the reliability of your supply chain, with the resilience of your supply chain. And these decisions multiply and come up very strongly in moment of crisis. And with them also come solution arrangements that are typical of these integrated supply chain and finance thinking. After the financial crisis of 2008 and 2012 came the Supply Chain Finance Market. This idea that large buyers, Unilever, Procter and Gamble, Coca-Cola, Walmart, and so on and so forth. You name one, they probably are in this list. Mm-hmm. They all came up with a program to facilitate payment to suppliers with the support and collaboration of their own financial institutions. Which basically they approve invoices very quickly to the financial institution and the financial institution based on that approved invoice from a large buyer is able to provide an advance payment for their invoice to suppliers at a very, very limited cost. I'm not here to argue that these programs, which by the way go by the name Supply Chain Finance programs. I'm not here to argue that these programs are necessarily perfect or that they, that they are always used in a let's say collaborative and relationship positive way, but they, they do serve the purpose of integrating financial and supply chain thinking in a sense that they provide financial sense for the buyer and the supplier, but at the same time, they serve a purpose in procurement and supply chain strategy of the same company. This type of, of arrangements, this idea of collaboratively working with your suppliers to improve the management of financial flows, that's what we are interesting about. That's what the companies that we talk with, the companies that work with us, and we do, we collaborate from a researcher perspective, that's what they are interested about. And we call this the imperative of integrated thinking. The idea that there's not anymore a supply chain and a finance strategy, but that these two must come together, especially in times of strong uncertainty in order to provide more value through collaboration to all the companies in the supply chain.

Tom Raftery: 8:16

Okay? And I can see the benefit to the suppliers in getting timely payments and the benefit to the buyers in that it takes some of the risk out of the suppliers that they have. It makes them, it makes the suppliers more secure, less likely to fail. Are there other benefits to both parties that I'm not seeing there?

Luca Gelsomino: 8:42

Yes. Well, of course I, I have to mention that I don't want to come across as overly naive, so it's important to mention that that buyers also have financial gains by doing these schemes. For example, they repay financial institutions later than when they would repay suppliers outside of the scheme. So that is a net gain also for the buyers. So there is a financial gain. But that's, that's, in normal terms, that is okay because it means that the solution makes sense from a financial perspective, also from the buyer. So there are net gains on both sides and net gains from a financial as well as a supply chain solution. But beside the financial gain on both sides, beside the increase in in, in the quality of the relationship that should happen if everything is set up correctly. I would say that these programs also carry out a lot of opportunities, some of which have not yet materialized fully but that we started to see them coming around in the market a lot. One of the opportunities comes from I would say the sustainability angle. So the idea that some buyers and companies like Puma, Levi's, and Nike are at the forefront of doing this. Some buyers, as I was saying, are starting to use these programs, as a sort of a reward for sustainable suppliers. So in 2015, in 2016 Puma for example, started this programs of facilitating payments to suppliers. And they added a component that said, well, okay, I will give the best terms and I will work with my banks so that the best terms go to suppliers that have the best sustainability rating. So that my suppliers the one that drive my own sustainable performance by being sustainable suppliers, they also get a direct, measurable financial gain, financial benefit mm-hmm. By doing so. And this is a lot of it's, it's a very big opportunity for buyers right now because it connects together the objective of the buyer from a sustainability perspective, with the possibility to offer a tangible financial gain to suppliers if they behave more sustainable. To the point that after this initial program that started in 2016, that involve those three buyers, nowadays we know there are many, many more programs active in the market. I cannot even remember all of them, but I can mention Bridgestone, Henkel and many other large corporates, Nestle, that are doing these type of programs. It gives the buyer a nice PR material, so I'm being sustainable and giving the financial incentives. It gives suppliers financial incentives to be more sustainable. And overall it promotes this idea of sustainability across the supply chain. These type of opportunities are what are driving development of supply chain finance. A second big opportunity is mm-hmm, as I was mentioning, related to the current situation. So uncertainty is now driving most supply chain management thinking. So what we have noticed in the past two, two to three years is that the number of programs in which this idea of financial incentives is disconnected from okay extending payment terms and getting a financial net gain as a buyer. And it's more and more connected with the idea of supply chain resilience. So creating a supply chain or transforming a supply chain in a way that ensures the ability to recover from disruptions and the ability to recover from disruption also means having the opportunity for suppliers to access liquidity very quickly. Cuz disruption at the end of the day comes down as a lack of cash. Yeah. So if my customer bankrupts, if a factory stop for whatever reason, if there is a ship locked in the Suez canal, it comes down to a lack of cash to continue operation. So if you have the opportunity or the possibility, the ability to access liquidity very quickly, that's the key component of your supply chain resilience strategy. And in this sense, supply chain finance, whether is this specific arrangement or the IT collaboratively managing financial flows gives a very strong I would say a very strong arrow in the, in the buyers favour in managing resilience across their entire supply chain.

Tom Raftery: 13:55

Okay. And is this just something for large companies, like the ones you named, or is this starting to trickle down into smaller and midsize companies as well now?

Luca Gelsomino: 15:21

Yes, that's a, that's a very good point. And since the podcast, it's called Digital Supply Chain, I think it's time that we start talk about the digital part. So, if you, if you had asked me that question when I start work on this which is 10 years ago, more or less, I would've said very decisively, yeah, you need to be 1 billion euro,$1 billion or larger to do this. But that's not the case anymore. And we have a lot of examples of much smaller companies that actually do this on one side or another. And there were two obstacles on one. The first obs obstacle is on the buyer side. The buyer needs to be large enough to actually do this. That was the standard up to five to 10 years ago. Because if it's too small, there are not enough suppliers, not enough volumes, and so on and forth. And the second obstacle was on the supplier side. So suppliers also need to be large to join these, these programs traditionally because Right, otherwise the value of the single invoice is too low, and no one really wanted to do this. But the digital transformation that has happened in a supply chain. And also in treasury and business and management more in general in the past 10 years meant that nowadays there are a lot of fintechs of technological providers that provide the underlying structure for these solutions to operate and that do so very efficiently and effectively to the point that they can target a lot smaller buyers and virtually any supplier that is connected to that buyer. This is a trend that started, I would say around five years ago, and nowadays is becoming more and more the standard in the market. And it would take I would say two or three podcasts to understand why exactly that has happened and probably is not the most the most interesting part, or at least to me that's not the most interesting part. But the reality that we are observing today is that any mid-size company, can start one of these programs. There are no major obstacles anymore. And all of their suppliers, no matter how small, can access some form of advanced payment on their invoice or any type of supply chain finance solution.

Tom Raftery: 17:50

Okay. And just from a practical perspective, how would a mid-size program, or sorry, how would a mid-size organization start such a program?

Luca Gelsomino: 17:59

Yeah well, of course you will have pragmatically speaking well, you need to find the provider. I will say, and I'm not gonna name any provider, not go into any difficult conversation later, later on, but they're, they're, they're everywhere. You can just look them up. And I would say nowadays, technologically speaking those solutions connect to any type of ERP or whatever. I do not see any discussion anymore on whether a specific solution, a specific platform or environment can connect to the ERP of the company That's not a point of discussion anymore, basically. And that's both on the supplier and on the buyer side. I will say at the very least in in Western Europe and the United States. If we move And I will say also in Southeast Asia, if then we move to other geographical area, there might still be a discussion on the technological maturity of, of companies and whether that creates an obstacle for this solution to be applied. But even in those areas, we have collected a lot of cases recently of providers that use text messages to communicate with suppliers and send suppliers the proposal for a, an app for an advanced payment on a specific invoice or that use apps or that use blockchain technology even to connect to farmers in Africa or in Latin America, and to secure some kind of financing for the products that they are producing by tokenizing the products and putting it into a blockchain. And transferring that information to either financier or larger companies in in other parts of the world. So I would say the digital transformation is making supply chain finance more and more available to any company everywhere in the world. And that is a very positive development because as we know and as we always say, 10 years ago, it was a matter of large buyer with large suppliers and the one that needed the most, which were probably smaller suppliers, were cut off. Now we are bringing into the programs, the smaller suppliers, and we are being, bringing into the programs mid-size companies that maybe are not in the Netherlands or in the United States. That's a very positive development.

Tom Raftery: 20:28

Okay. And where to next for these kind of programs? I mean, what do you see happening in these in the next five, 10 years?

Luca Gelsomino: 20:35

Absolutely. I think that the most important development right now in the market is this idea of going beyond the first year of supply. So if you think about a supply chain, we usually think about a very linear thing that goes on from raw materials to consumptions. So basically from us here up to the distributor, wholesaler, manufacturer, and so on and so forth. But actually, supply chains are network, and network is a better representation for a supply chain that actually a linear chain. And if you think about a network, you realize that the idea of a single buyer and the first tier supplier, so the supplier directly connected to them, it's kind of limiting. Very much the scope of supply chain of supply chain management for that buyer, you should really look at the network. This is the idea, for example, of the Nexus supplier. This concept that is a theory developed by Tom Choy at Arizona State that poses that states that and in the network, embedded into the network, there are much more critical, much more strategic suppliers that the one that you can actually see and observe directly connected to you. So, why am I mentioning this? I'm mentioning this because the challenge and the most interesting and insightful trend that I'm, that I see happening in supply chain finance is, this idea of going to those companies of targeting suppliers with whom the buyer is not directly connected to. And to do that, there are different technical forms that are different arrangement that you can put in place. But the idea is extend this concept, whether it is advanced payment, whether it is financing for inventories, whether it is a guarantee, whatever you want, extend that beyond suppliers with whom you are directly connected. And this is a trend that actually comes from China in the sense that in the Chinese business landscape, this concept of going beyond the first tier supply, which is called deep tier financing. So financing the deep tier of your supply chain has been on the table for several, several years already. Already in 2018, I visited a couple of providers in China that were already providing this type of solution to large supply chains within mainland China. And of course, again, we should have a separate episode uh, discuss why specifically in China that that was happening and why are they at the forefront? It's a very complicated discussion, but they do have this solution going on. It does work quite well, at least in their environment. And for me, I am very intrigued to see whether they, they can somehow scale it up and move it out of their own environment of mainland China. And whether that can be applied also in Western Europe or in Latin America, or in the United States or in wherever, wherever you want. Cause that really is an answer to the challenge of today's. And I am a bit confident in saying that it is an answer to the challenge of today because when I started to talk about deep tier financing in my network, in the network of the supply chain finance community in 2018, 2019, I was really excited and maybe too excited about it. And I didn't get a very warm response. I got a bit of a cold response because people were saying, yeah, okay, but that's not that's not what works here, that's not what we need and so on and so forth. But nowadays, I actually get questions about deep tier financing more than having to push to talk about it. And that is because again, with everything that has happened between 2020, 2023, there is a bigger need for integrated thinking and because companies have started to realize that their extended network is the source of their supply chain risk. That it's not that first tier supplier where supply chain risk starts and end, so that first tier supplier is at best the canary in the coal mine. But it is not the beginning and the end of your supply chain risk. That is deep in your supply chain. And as we sometimes say to summarize this ask yourself what happens to your supply chain if a, a major event like a new war or invasion of Taiwan or something that else like that happens again? How does that come back to your company? It's probably through something happening in the fourth, fifth, 10th, or third tier of your supply chain and maybe not directly in the first tier of your supply chain. And as I said during the CSCMP speech, my conclusion was okay treasurers, over the past four years have spent a lot of time learning how supply chain works. So they learned about the structure of the supply chain of their company, which maybe they didn't spend a lot of time thinking about it in the past. But nowadays there is also need for the supply chain manager, for the procure procurement manager to become more knowledgeable about the financial implication of the decisions that are taking supply chain and the financial implications of the conditions that are around the company and around the supply chain, and how those financial implications impact your supply chain, like inflation, like, changing in the cost of, of capital and and so on and so forth, because those changes, those implications, they affect your supply chain and affect your deep tier suppliers. They affect the deep tier of your supply chain. And if you want to be proactive and address that, In a in a proactive fashion, you do need the integrated thinking and you do need something like Deep Tier financing or, or something else to work. But, but Deep Tier financing requires supply chain and it requires finance.

Tom Raftery: 27:38

Fascinating. Fascinating. Luca, we're coming towards the end of the podcast now. Is there any question that I didn't ask that you wish I did or any aspect of this we haven't touched on that you think it's important for people to be aware of?

Luca Gelsomino: 27:51

Yeah, of course. I would like, I would like to speak for four hours about all of these topics, but of course, of course that is not the case. What have we left out that might be relevant? We left out the transition and why transition is a critical topic and again I'm becoming a bit repetitive. That would also require a separate podcast. But I'm just gonna say one thing. Even though I'm not the biggest expert in, in just transition or in a transition pathways or energy transition and so on and so forth, one thing it's especially clear to me and it is that transition, it's not going to be easy on the companies. It's not going to be easy on supply chains, and it's going to have a deeply impactful transformation on supply chain structure and supply chain relationship. And one way in which I think this could be governed is to have not only good command of supply chains and not only a good governance of the supply chain, whether it can be supply chain resilience models or whatever it is, but also the right financial structure in place. I'm thinking about the transition towards hydrogen. What are the financial structure and the financial arrangements to support suppliers in transitioning towards hydrogen in the logistic industry? I'm thinking about regenerative processes in, in agriculture. What are the financial incentive systems? What are the financial products? That are going to be offered to support the transition towards regenerative processes in agriculture. I think that transition, whether it is energy regeneration, circular economy, is everything that we have experienced in the past three years times 100. And if supply chain and finance was relevant in the past three years. If the integration was imperative in the past three years, it's going to be 100 times imperative when transition will need to happen, which is rather soon than later. So my, my message and what I came to believe is that transition needs not only supply chain governance, not only financial funds and grants and whatever, but integration between supply chain and finance.

Tom Raftery: 30:25

Fascinating, fascinating. Luca, if people would like to know more about yourself or any of the topics we discussed in the podcast today, where would you have me send them?

Luca Gelsomino: 30:36

Well, the first stop is for sure our website, which is www.scfcommunity.org, where you can find all the information about who we are, what we do, our upcoming events, which are free. So if you're in the area, feel free to join, and if you want to get in contact with me or the other people that work with me in the SCF Community, you can look us up on, on LinkedIn. That's probably the easiest way. And send us a quick message. We are always open to talk with everyone.

Tom Raftery: 31:09

Perfect, perfect. I'll put those links as well in the show notes of this episode so everyone has access to them. Luca, that's been fantastic. Thanks a million for coming on the podcast today.

Luca Gelsomino: 31:19

Thank you for having me. It's been a pleasure.

Tom Raftery: 31:21

Okay, we've come to the end of the show. Thanks everyone for listening. If you'd like to know more about digital supply chains, simply drop me an email to TomRaftery@outlook.com If you like the show, please don't forget to click Follow on it in your podcast application of choice to be sure to get new episodes as soon as they're published Also, please don't forget to rate and review the podcast. It really does help new people to find a show. Thanks, catch you all next time.