New ways to finance the process industry

The blockchain is catching on in the process industry by way of the financial department. It contributes to drastically reduce the cash conversion cycle and enables the supplier to access liquidity earlier.

Buyers of chemical products rely on the continuous availability of their raw materials. In order to guarantee constant availability and quality of supplies, a high focus is put on monitoring, automating and digitising entire supply chains through measurement technologies and sensors along the path. Therefore, shipments can now be controlled and executed as needed to ensure that the flow of goods meets the customer’s requirements.

In addition to consumption-based provisioning through methods such as vendor-managed inventory (VMI), automated consumption-based financing is the next step to release capital tied up in the supply chain and thus reducing capital and transaction costs. In fact, in today’s production economy, the terms of payment only cover parts of the time where the capital is tied up in current assets. In addition, there are production and transport times or consignment stocks. The time span between from leaving the producer’s warehouse, to delivery and storage at the customer’s warehouse, to reimbursement can therefore easily cover several months. By applying innovative approaches like factoring, these unproductive periods can be shortened. This is only possible with considerable administrative efforts (or not at all), despite the potential financing volume of hundreds of billions of euros of global capital tied up in the supply chain. While buyers benefit from long payment periods and consignment agreements, sellers have to bear the costs in the form of financing current assets.
Issuing the invoice and the corresponding payment (or even financing from a partner institution) as soon as a product is ordered or consumed, e.g. from a consignment stock, would significantly increase the cash-to-cash cycle and reduce the pressure on the supplier. However, in most cases, insufficient data quality does not allow any action to be implemented in a fully automated way since a legal proof-of existence is only provided with the respective shipping notice being delivered. Often, orders display too small ticket sizes for banks to propose attractive financing solutions and have to be processed manually.

Innovative technologies, like blockchain and distributed ledger technology (DLT) in general, will play a major role in enabling autonomous payments in the industry. Blockchain technology can increase trust, transparency and privacy of business processes by providing a shared, decentralized distributed ledger for information used in business processes by different players at the same time. A blockchain system can therefore be used to store data collected from Internet of Things (IoT) devices, like sensors or machines. It enables harmonized and standardized data standards between multiple parties.

If data is collected on a blockchain, the data is also protected from manipulation as long as not every party involved consents. As soon as a blockchain is used in combination with inventory measuring sensors, the creation of a certain proof of existence for inventory is enabled, stating which amount of a good was stored at which point in time at a certain location. Information processed and stored immutably on a blockchain serves as a perfect basis for autonomous processes since further inventory checks are made redundant.

If applied on a consignment structure with a monthly inventory cycle, for example, sensors can be used to continuously measure the inventory levels in each silo and record this information on a blockchain set up between the supplier and the customer. Due to the data quality ensured by the blockchain, every inventory level measurement equals a proof of existence for the material. Therefore, every inventory movement is a proof of consumption by the customer or of a new delivery. Instead of paying the consumed inventory monthly, the information on the blockchain can directly trigger a corresponding payment process. Each time a consumption is measured and recorded on the blockchain an invoice is created and the payment from the customer is validated. This process drastically reduces the cash-to-cash cycle and enables earlier access to liquidity for the supplier. Since most customers are not interested in shortened terms of payment, accordingly, a financing institution can be integrated providing instant liquidity in terms of supply chain financing for each consumption.

Besides the sole advantage of having access to cheap liquidity, the system allows each silo or warehouse system to act as a single profit centre from an accounting perspective. This adds transparency, enables activity-based costing approaches and makes the underlying assets accessible for institutional investors as well as securitisable (tokenisation). Furthermore, when directly connected to the respective legacy systems, all manual steps regarding the ordering and invoicing process can be made obsolete. If set up properly, all the mentioned processes would autonomously run for months without any human interaction required.