19th December, India SME Webinar

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The new normal of working capital management

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19th December, India SME Webinar

  1. 1. The New Normal in Working Capital Management #DBSSMEWebinar December 19, 2013 Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.
  2. 2. Topics for today’s webinar Agenda Working Capital: Tapping the multi-billion opportunity in trapped cash Evolving trends in supply chain and working capital management What DBS can do for you: Working Capital Diagnostics and product solutions 2
  3. 3. Cash remains King, especially in India Account Receivables “What will be the greatest challenge to your profitability in 2013?” Maintaining Adequate CashFlow Percent of respondents India 34 28 Hong Kong 32 26 Japan 32 24 China 31 25 Collection of Outstanding invoices 57 56 62 58 Inventory Singapore 37 Australia 36 18 55 Account Payables Indonesia Taiwan 31 35 Based on survey of 1600 companies by Atradius on B2B businesses Source: DBS; Atradius Payments Practices Barometer, Nov 2013 17 21 14 53 52 50 3
  4. 4. However, India has the highest proportion of uncollectable B2B receivables... “Over the last 6 months, what percentage of the total value of your B2B receivables were uncollectable?” Percentage Domestic Japan Australia Foreign 2.1 3.4 3.9 China Taiwan 5.5 4.3 4.4 Indonesia  India uncollectable rate (7.7% domestic/7.2% foreign) highest among all countries surveyed 3.6  Also higher than Americas (5.8%/6.4%) and Europe rate (4.6%/4.2%) 4.4 5.6 Hong Kong 6.1 Singapore 4.4 6.2 India 4.4 6.5 7.7 Avg. = 5.0 7.2  Driven by customers being bankrupt or out of business and/or failure of collection attempts Avg. = 4.9 Source: Atradius Payments Survey (Nov 2013) of 1,670 companies on B2B payments (n=214 in India); DBS 4
  5. 5. ...as well as the largest Days Sales Outstanding “What is your company annual “According to your company's credit average Days Sales policy, when does your DSO level Outstanding?” become a concern?” Days Percentage of respondents who answered "1-30 days longer than payment term“ 1 Australia  Marked increase in average DSO across Asia Pacific from 48 days to 56 days (Nov ’12 to ’13) 38% 45 Hong Kong 51 26% Singapore 51 27% China 53 20% Taiwan 54 19% Japan 55  India average DSO (81 days) largest in survey; 40% more than next largest country (81d vs. 58d for Indonesia) Indonesia India 40% 50% 58 81 26% 1 Other responses were “31-60 days longer”, “61-90 days longer” and “90+ days longer” Source: Atradius Payments Survey (Nov 2013) of 1,670 companies on B2B payments (n=214 in India); DBS  Lack of focus on early warning system in India may have led to increased DSO - Only 26% of India respondents got concerned when payments are 1-30 days late 5
  6. 6. Working Capital Trends Across SME 90 Auto 80 Transport 95 Plastic products 75 Packaging / Printing Hotel/ Resorts 85 Dyes and Pigments 85 175 Irrigation 105 Textile 75 Wood 80 Wheat Milling 123 Plastic Pipe and Fittings 105 Leather 143 Heavy Engineering 95 Electrical Equipments 75 Steel: Pig/Sponge iron 90 Steel Reroller 85 Industrial paper 95 Pharma 75 Machine Tools 65 Hospital 127 Infra-Construction 0 20 40 60 80 100 120 140 160 180 6
  7. 7. We estimate up to $2.7 trillion in “trapped cash” in key Asian Markets USD billions USD 694 Bn USD 2,677 Bn Majority of the “trapped” working capital improvement opportunities are developing countries USD 55 Bn USD 1,874 Bn USD 54 Bn Singapore Hong Kong China South East Asia1 Total Listed Firms ($,Bn) 21 18 333 247 619 Non Listed Firms ($,Bn) 34 36 1541 447 2058 1 South East Asia includes Taiwan, Indonesia and India Source: DBS Research, IHS, Mckinsey 7
  8. 8. SMEs require intense focus on Cash conversion cycle, due to many competing products and limited cash / credit available SME OPERATOR EXAMPLES … and many products competing for it Limited working capital stock … Selection process by leading operator for distributors Number of distributors 205 Stores in low-end micromarkets typically sell a broad range of goods 107 31 67 Total applicants Insufficient Unable to Approved working meet other distributors capital criteria Days of inventory stock carried by SME for leading operator % of outlets <1 day 67 1 day 16 >2 days Total Competing telecom products 17 To ensure that their products are adequately stocked, operators must offer: ▪Attractive ROI ▪Quick stock turnover Most retailers need to be restocked on a daily basis Other products, e.g., fast-moving consumer goods In addition, credit systems are risky as many small shops will disappear very fast 100 8
  9. 9. Unlocking this trapped capital requires intimate understanding of business model and supply chain… AP Inventory AR High Tech Short life cycles, Seasonality, long supply lead times FMCG Promotions, SKU complexity and last mile distribution Retail Multichannel, large product range, supplier management SME Tight resources, Cash constraints, industry diversity How to optimize Working Capital to grow revenue and profitability? 9
  10. 10. …and how step-changes in supply chain are evolving and driving changes in working capital management The “classic” supply chain trends will remain important … … but a “New Normal” must be mastered to win globalization 1 channel innovation commodity scarcity 2 last mile efficiency 3 consumer differentiation offshoring 4 talent scarcity automation 5 green supply chains supply management 6 volatility inventory 7 near shoring 10
  11. 11. 1 Channel innovation 11
  12. 12. 1 e-commerce sales is booming across Asia B2C market size in major Asian countries (USD Billions ) +45% p.a. 11 22 34 45 10 11 12 13 +7% p.a. 58 73 14 15 36 39 42 45 48 51 10 11 12 13 14 15 2 2 14 15 +7% p.a. 17 19 20 10 11 12 22 +26% p.a. 23 25 1 13 14 15 1 1 1 10 11 12 13 Key insight / question: • Lean out operations, prior to capitalizing on rapid growth • Is your business prepared for the shift to ecommerce? 12 Source: Euromonitor
  13. 13. 1 e-commerce adds complexity to the supply chain Average number of SKUs to be sold 700,000 30,000 Key insight / question: • Significant challenge of managing inventory level and % of product returns • How robust are your inventory management systems? Source: McKinsey 13
  14. 14. 1 … putting pressure on distribution and logistics networks … … and overloaded local logistics providers Complex multi layered distribution networks … Medium scale manufacturer s 60-70% Truckers all overload. They cannot make money even with 2 times overloading, so everyone overloads at least 2.5 to 3 times –Operations manager, 3PL provider Distributor(s) Use 3PL 30-40% 40-50% 20-30% Wholesaler(s) 20-30% Top retailers with fair trade terms and low credit risks Modern trade retailers Retailers outside tier 1 cities Key insight: • Complexity in operations driven and differs increases in lower tier cities Source: McKinsey 14
  15. 15. 1 … and creating innovative ways to reach last mile Nestlé's supermarket boat sits docked at the Port of Belem It will be a service to the population of the Amazon, who has streets and avenues in the form of rivers. It is a project aligned with our concept of Regionalization, based on the different profiles of consumers, where we deal with each region as a different area. Clerks work inside Nestle SA's supermarket boat - Ivan Zurita, Nestle Brazil President Source: Press 15
  16. 16. FMCG Case example: How 1 company runs 5 supply 1 chains Digital retailer Digital shopper 90 % Hypermarket, Retail & departmental stores On Time Product availability Drugstores, beauty specialist Distributor 99 % Speed (Replenishment order lead time) 21 days 24hrs Choice (Range/Complexity) STD Customized Promotional intensity High Low Demand Volatility/Predictability High Low Key insight: • Use segmentation to beat supply chain complexity 16
  17. 17. 3 consumer differentiation 17
  18. 18. Data has gone from being highly macro … We burn 1,800 calories per day 18
  19. 19. … to very customised He burns 1,438 calories per day Weekly Overview Typical 108 Cal You 319 Cal 531 Cal 742 Cal 954 Cal 1165 Cal 1377 Cal 1588 Cal 1800 Cal You burned an average of Your activity level is rated You are in the 1438 cal/day Lightly active 2011 Cal 84th percentile from activity this week of all men 25-35 years who are overweight 19
  20. 20. Granularity is key to growth - customer needs differ by region and city CHINA EXAMPLE Jingjinji is most concerned about product safety Jingjinji cluster Shandong cluster Shanghai cluster Shenzhen cluster Shandong prefers Chinese brands and has high brand loyalty Shanghai prefers well-known brands, especially foreign brands Shenzhen is least concerned about product safety Source: McKinsey Insights China 20
  21. 21. LG is building products from the ground up to meet local Indian needs INDIA EXAMPLE Indian need LG’s response • Low literacy in rural areas; English not understood • People use television to listen to music • Menu in local languages • 2,000-watt speakers and powerful bass • Most Indians prefer large vegetable compartments • Indian spices discolor refrigerators • Small freezers, since frozen food is not as common in India • Bright colors • Scarcity of water in India means automatic machines not as effective • Large-capacity semiautomatic washing machines to suit Indian families • Traditional cooking; new to cook in microwave ovens • One-touch “Indian Menu” • Recipes for cooking Indian food in microwaves Source: Press search; McKinsey analysis 21
  22. 22. 6 Volatility 22
  23. 23. 6 Increased risk post 2008 increased importance of working capital focus May 2010 – Gulf of Mexico Major oil spill affected the ocean traffic and seafood industry April 2010 – Iceland Volcanic eruption stopped air traffic Jan 2009 – Russia Shuts off all gas supplies to Europe Sep 2008 – USA Lehman Brothers filed Ch.11 starting the global economic crisis Mar 2011 – Japan Major earthquake and tsunami hurt all major supply chains Feb 2010 – Haiti Earthquake shutdown all commercial activity Jan 2010 – China FTA between Asian nations removes tariffs on 90% of goods Jun 2009 – Honduras Major political crisis affected most businesses Mar 2010 – Chile Supply disruptions in pulp cause prices to reach near all-time high Jan 2009 – Iceland Government and banking system collapsed 2009 – S.E. Asia Ocean transportation capacity shortage leads to price spikes April 2010 – Greece Major economic crisis dramatically reduced the value of Euro Nov 2009 – Dubai Economic crisis hit the world economies and major currencies 23
  24. 24. 6 In addition, unforeseeable risks have increased in frequency and intensity Value stream Probability of steel price change Before 2000 2000 After 2005 > -20 -10 -5 -2 0 2 5 10 20 Monthly price change (percent) Source: McKinsey Agile Operations 24
  25. 25. Best practice: Design to volatility- Standardization and spec optimization enable players to lower DIO and A/R Common architectures across product lines … Arrangemen t of engine components Cable harness structure • • • • • Joint components across the family models Define packaging zones Determine arrangement of components Define requirements on component strategies Systematically optimize number of variants Optimize system across package space … reduces working capital and risk across the value chain Reduces working capital: • Less product lines to manage result in less buffer stock and inventory • Reduction in the number of suppliers allows better management of A/P, resulting risk is to be managed Reduces risk across the value chain: • Reduced risk exposure (less raw materials to take care of) • Volume bundling • Improved sourcing and supplier management 25
  26. 26. Best practice: Working Capital benchmarking and data analytics to improve cash-conversion cycle SME EXAMPLE Footwear Industry Benchmark1 Working Capital Ratio Benefit Lowest Top Quartile Median Highest Client DSO $5m 246 days 4 days 31 days46 days 47 days Median Lowest Top Quartile DIO 0 days 38 days $1m DP O 77 days days 78 769 days Median Top Quartile Lowest Highest $1m Client 0 days 9 days Lowest CC C 35 days 55 days 129 days Highest Top Quartile Median 41 days 90days 106 days • [Client] lags behind industry benchmark in terms of receivable days • Opportunity for [Client] to aggressively target receivables while managing transition to new supplier and reduce CCC $7m Client -12 days • [Client]2 better than industry median in DIO, despite inherited stock Highest Client Observations2 809 days 1 Footwear industry benchmarks based on FY12 financials of 54 companies from Bloomberg database 2 Client ratios based on 5 months data (1 cycle) Note: DSO: Days Sales Outstanding; DIO Days Inventory Outstanding; DPO Days Payables Outstanding; CCC Cash Conversion Cycle Source: Bloomberg; Client data; DBS Working Capital team 26
  27. 27. DBS has embarked on a transformation journey to add more value to our clients How a CFO thinks … … adding value to our clients … in-depth understanding of what keeps the CFO awake at night … being trusted advisers of our clients … deep We provide working capital benchmarking and diagnostics industry expertise …Understanding clients Working Capital levers and providing value adding advise 27
  28. 28. We developed a suite of working capital tools to help you unlock trapped cash... Analysis 1 2 3 A/P Supplier segment analysis 4 Early “payments pocket” analysis 5 Purchase order analysis 6 A/R Time to payment clusters 7 Time to payment DSO analysis by BU 8 Inventory Inventory to revenue analysis Lead time analysis 28
  29. 29. …underpinned by comprehensive review across working capital drivers… 21 days reducing in Cash Conversion Cycle Increase/ Decrease Cash Conversion Cycle, (days) 90 -21d 91 86 WC360 DSO down by 24% and DPO up by 23% Current WC After DBS Value Levers Solution 70 DSO 49 24% 81 39 48 0% 23% 201 0 11 201 2 Target achieve d 1.1B SGD Cash Flow freed up 2012 ROCE: 26.2% Potential freed up working capital, $ 1,130 million Decrease in Receivables USD 793 Mn 2,317 337 793 Change Capital Employed USD 1,130 Mn 2012 Improved ROCE : 27.27% 3,447 Cash at current position A R A P Inv Cash available at target position Operational Levers Increase in Payable USD 337 Mn 0 Impact 107 bpp increase in ROCE WC analyses 81 DIO DPO 37 29
  30. 30. … and in-depth analytics By customer analysis shows average DSO for company to be higher than industry benchmark WC360 Retail SME client example Days of Sales Outstanding Days 400 250 200 150 100 WC analyses 350 300 Av DSO: 58 days 0 10 20 30 40 50 60 70 80 90 100 270 280 290 300 Size of account USD ‘000 193 201 Total 58 29 137 Operational Levers Average 42 DSO Industry benchmark DSO Impact on WC, USD ‘000 Impact 50 0 30
  31. 31. DBS Working Capital Diagnostics: Working to be your Asian bank of choice What is DBS Working Capital Diagnostics? How does this work? DBS proprietary suite of tools and recommendations to help you free up cash by optimising your working capital!  Compare cash conversion cycle time against industry benchmarks  Review detailed analysis of Receivables, Payables, and Inventory days performance  Bespoke analytics and actionable report DBS will partner with you to develop actionable analytics  Simple: Fill up a template with working capital data (e.g., invoices) and participate in initial kick-off session  Actionable: DBS will data-mine receivables, payables and inventory data to distill specific recommendations  Confidential: All data shared kept in strict confidence 31
  32. 32. What we need from you What we need from you Required support Description of tasks Resources Est. time spend ▪ Data extraction/ collection to fill in the ▪ 1 financial ▪ 1-2 days templates to conduct working capital analyses (e.g. AR/AP/Inventory/overall company profile) ▪ Resource/s allocated to the diagnostics (e.g. person in charge during working sessions to discuss preliminary analyses and findings, answering queries) ▪ Treasurer/ CFO time to conduct survey analyst ▪ 1 person (can be the same as previous) ▪ 1 hour session, once a week ▪ Treasurer/ CFO ▪ 1-2 hours for Maturity Assessment along the 3 dimensions (AR/AP/Inventory) What next? Contact your DBS representative for more information 32
  33. 33. THANK YOU! Follow us @DBSBankIndia 33

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