Blockchain in The Supply Chain Use Cases: Inventory Finance

The analysis of use cases proposed by Community NdT participants continues.

Inventory Finance (proposed by a winery). The use case leverages the characteristics of blockchain data traceability and uniqueness to access funding for the purchase and growth of vineyards and the transformation of wine products.

Currently the winery advances the cash needed to purchase "raw materials" (e.g., plants, agricultural materials, barrels) necessary for the collection and production of wine. It then hands off the vineyard to farmers that will take care of the plants until the harvest. At this point the farmers are paid for the work done, and the harvested grapes enter the production plant to be transformed into wine, put into barrels, mature, get bottled and finally sold. Only at this point the winery recovers the operating expenses and the initial financing.

Considering the multi-year life cycle of wine, it becomes immediately evident that the winery has to bear a considerable financial burden during such a long cash cycle. Could it be possible to "offset" the financial burden of this materials warehouse, the company would significantly relief its balance sheet and allocate the financial resources thus released to profitable activities.

The solution exists and takes the name of Inventory Finance: specialized operators buy the assets and hold the property during transportation and storage, thus optimizing the receivables and trade payables of the transferring company, which no longer has to keep these assets on its balance sheet while remaining still able to physically use them for its production processes. Once the finished products are sold, the lenders are repaid for the loan. Otherwise, they can prove ownership of the financed assets and sell them to recover the capital.

The blockchain-based Inventory Finance solution is based on a software platform that issues digital proprietary certificates (called "tokens") of the assets financed by the financial operators. The winery therefore has funds to purchase the production assets (plants, agricultural materials, barrels) experiencing a cash outflow only at the end of the sales cycle. Lenders can claim a non-repayment by presenting the tokens in their possession, the redemption of which is legally recognized and accepted.

Furthermore, in some more advanced solutions (e.g. IBM in Asia with Mahindra Finance; Supply@ME from The Avantgarde Group in Italy) the platform architecture leverages the potential of blockchain to "track" the use of the financed assets now represented by tokens. The lot of the sold bottles of wine can be associated with the goods used for production. That is, the tokens. Therefore, the lender may decide to delay the redemption of the loan, and instead benefit from the value of the sale of the lot to which the tokens in its possession are associated. Therefore, the lender has two options: to immediately redeem the loan by returning the tokens in possession; or to collect the portion of the proceeds from the sale of the wine to which the token is associated, postponing the redemption of the loan to a later date.

The list of use cases identified by the companies joining the Community NdT continues with examples that will be described in subsequent articles.