1© 2013
Working Capital Management
It‟s only cash…
2© 2013
Hye Yu
► Hye has over 15 years experience delivering
value creation programs in the energy,
manufacturing, auto an...
3© 2013
Agenda
Sustainable working capital improvement
Working capital performance management
Working Capital Survey
4© 2013
Inventory in terms of number of days of sales/usage
How long will it take to consume the inventory?
People involve...
5© 2013
Culture, Visibility and Control
Establishing the foundations for
sustainable cash flow improvements
• Timely, clea...
6© 2013
Symptoms Of Inefficient Procure To Pay Processes
Frequent payment runs
Early payments
Use of non-standard payment ...
7© 2013
Symptoms Of Inefficient Forecast To Fulfill Processes
Increasing number of slow moving and obsolete items (SLOBs)
...
8© 2013
Symptoms Of Inefficient Order To Cash Processes
Frequent credit holds for customers – inappropriate credit limits
...
9© 2013
Agenda
Sustainable working capital improvement
Working capital performance management
Working Capital Survey
10© 2013
Multilevelperformancemetrics
Executive leadership metrics
► Summary performance / Peer comparison
► Metrics the a...
11© 2013
Accounts Payable Analytics
The base drivers of DPO are simple to understand but the detail in execution requires ...
12© 2013
Inventory Analytics
Inventory is typically the most complex working capital component to impact due to its
comple...
13© 2013
Accounts Receivable Analytics
Breaking DSO into its informative component parts and the key drivers that will dri...
14© 2013
Agenda
Sustainable working capital improvement
Working capital performance management
Working Capital Survey
15© 2013
2012 Working Capital Summary
Working Capital performance gap between the US and Europe narrowed
significantly in ...
16© 2013
Findings For 2012 In The US And Europe
► In comparison with 2011, companies‟ WC performance in 2012 has deteriora...
17© 2013
Wide Variations In WC Performance Across Industries
► WC distinction between cyclical and non-
cyclical industrie...
18© 2013
Large Distribution Of WC Performance Across
Other Regions
► Significant variations in WC performance overall and ...
19© 2013
SMEs‟ C2C Was 26% (Equivalent To 13 Days) Higher Than
That Of Large Companies On A Sales-weighted Basis
Scale pro...
20© 2013
What Are We Seeing?
Companies looking to grow in a cash efficient manner
Passing cash pain „down the chain‟
Compa...
21© 2013
For More Information Go To: Ey.Com/Us/Transactions
Annual Working Capital Management Report 2013
Select Sector re...
22© 2013
Ernst & Young
Assurance | Tax | Transactions | Advisory
About Ernst & Young
Ernst & Young is a global leader in a...
23© 2013
Thank You!
Working Capital Management
It‟s Only Cash…
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Best in Class Working Capital Management - Best Practices for A/R, AP and Inventory Management

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Working Capital represents an internal opportunity to generate cash to fund R&D, buybacks, CAPEX, and M&A that businesses always seem to miss. Understanding how to maximize the initial investment in this internal source of cheap captial to support coprorate initiatives needs a holistic approach to total working capital management. This workshop covers effectively and efficiently improving to reap benefits from an internal cash source from recievables management, inventory and supply chain management, and payables management. Gain an understanding of a holistic approach and framework on Total Capital Management, KPI and baseline measurements strategies to incorporate in planning and forecasting of Working Capital, and best practices in managing Customer to Cash, Forecast to Fulfill, and Procure to Pay.

Speakers:
Hye Yu, Senior Manager, Ernst & Young Working Capital Advisory Services
Henri van der Eerden, Senior Manager, Ernst & Young Working Capital Advisory Services

Presentation delivered at CFO Dimensions 2013 - www.cfodimensions.com
Workshop

Published in: Business, Economy & Finance
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Best in Class Working Capital Management - Best Practices for A/R, AP and Inventory Management

  1. 1. 1© 2013 Working Capital Management It‟s only cash…
  2. 2. 2© 2013 Hye Yu ► Hye has over 15 years experience delivering value creation programs in the energy, manufacturing, auto and health sectors. ► Hye is the Order to Cash (OTC) methodology leader for EY globally. ► Prior to EY Hye held a number of senior operations and strategy roles at Weatherford International, a multi-national energy services company. She was most recently Director of Business Process with responsibility for leading cash flow, cost reduction and asset utilization initiatives globally ► Previously Hye led large scale working capital improvement programs at REL and Hackett, delivering over $1B in cash flow benefits to clients worldwide. Henri van der Eerden ► Henri has over 20 years experience in both industry and consulting across several continents working with multinational clients focusing on liberating cash flow from operations through improved working capital, reduced costs and increased service quality. ► He is responsible for project delivery and thought leadership and has lead complex engagements focused on working capital management, supply chain management, system design and optimization, strategic planning and M&A integration. ► He has worked across a broad spectrum of industries including automotive, capital goods, chemicals, consumer durables, consumer staples, materials and transportation. EY Working Capital Advisory Services
  3. 3. 3© 2013 Agenda Sustainable working capital improvement Working capital performance management Working Capital Survey
  4. 4. 4© 2013 Inventory in terms of number of days of sales/usage How long will it take to consume the inventory? People involved Typical drivers • Sales/marketing • Customer service • Manufacturing • Supply Chain • Distribution • Inventory policies • Poor forecast accuracy • Inflated lead-times • Low cost sourcing Average time a receivable remains on the balance sheet, measured as the number of days sales represented by the AR balance How long does it takes to get paid? • Sales • Customer service • Credit • Collections • Payment terms • Timeliness of invoice issuance • Collection effectiveness • Issues that cause late payment Value of the creditor balance in terms of number of average days of purchases How long does it take to pay? • Payment terms • Payment triggers • Payment clock • Payment methods Value of the NWC in terms of number of average days of sales How many days of sales do we carry as working capital to run the business? • Purchasing • Finance • CEO/COO &CFO Days of inventory outstanding (DIO) Days of payables outstanding (DPO) Days of working capital / Cash to Cash Cycle (DWC / CCC) + - = DefinitionPerformance metrics • Priority of cash culture • Organizational incentives • Management metrics / scoreboards Sustainable Working Capital Improvement Requires Cross Functional Focus On Operational Cash Improvement Levers Days of sales outstanding (DSO)
  5. 5. 5© 2013 Culture, Visibility and Control Establishing the foundations for sustainable cash flow improvements • Timely, clear and precise management reporting, including focused KPIs • Clearly aligned targets and incentives, across all functions • Clear roles and responsibilities and ownership of cash flow • Accurate cash flow forecasting Tactical Short term measures to achieve short term needs Operational Embedding changes in operational processes and commercial arrangements to optimize cash Structural Measures which impact organizational working capital needs (through market, product , partnering or radical redesign) Other Cash Elements Increase cash generation via improved efficiencies including balance sheet cleansing and releasing trapped cash • Tax including transfer pricing with tax efficient supply chain • Phasing of capital expenditure • Cross-border cash strategies, including repatriation of cash • Cash leakage Working Capital Management Cash Improvement Initiatives Can Be Categorized As Tactical, Operational And Structural Cash elements within a business Critical success factors 1. Communicate the importance Make working capital improvement important to management and communicate benefits to the business 2. Integrate with other priorities Embed cash objectives into other key change initiatives, both existing and new 3. Measure and improve Establish baseline reporting and metrics early on in the program 4. Operational change plans Engage with the business units across all levels of the organization 5. Sustainable changes Focus on sustainable changes and not just on short term fixes
  6. 6. 6© 2013 Symptoms Of Inefficient Procure To Pay Processes Frequent payment runs Early payments Use of non-standard payment terms Use of not approved suppliers Multiple payment terms for the same supplier Credit sanctions by suppliers – delivery hold, cash on delivery terms Key actions to address symptoms Segment your supply base – core vs. non-core and extend payment terms to Net 60 days for non-core suppliers Rationalize your payment runs – once a week or less frequent
  7. 7. 7© 2013 Symptoms Of Inefficient Forecast To Fulfill Processes Increasing number of slow moving and obsolete items (SLOBs) Lead times that do not reflect reality Use of non-statistical safety stock parameters Lack of differentiated customer service requirements Limited forecast accuracy Product complexity, e.g. high number of SKU‟s Slow supply chain response to market changes Key actions to address symptoms Calculate target inventory levels using statistical methods Focus on underlying drivers of inventory such as minimum order quantities (MOQs) and lead times
  8. 8. 8© 2013 Symptoms Of Inefficient Order To Cash Processes Frequent credit holds for customers – inappropriate credit limits Increasing balance of past due receivables – Ageing Increasing levels of bad debt Increase in disputes, i.e. customers‟ billing complaints Use of non-standard payment terms High volume of short payments High volume of exceptions in cash application process Key actions to address symptoms Segment your customer base and develop segment specific collection strategies Use all available information to set customer credit limits – external and internal
  9. 9. 9© 2013 Agenda Sustainable working capital improvement Working capital performance management Working Capital Survey
  10. 10. 10© 2013 Multilevelperformancemetrics Executive leadership metrics ► Summary performance / Peer comparison ► Metrics the analyst communities use Functional / Regional Metrics ► Bridges drivers based metrics to executive ones ► Capture trade-off value delivered ► Quantify mix change impact Driver Based Metrics ► Focused on measuring specific performance ► Values performance gaps ► Are insightful to functional leaders ► Are relevant to staff External Analysis Product / Region / Sales Mix 1 2 3 Metrics Need To Be Insightful And Relevant To Specific Functions To Drive The Desired Behavior 10
  11. 11. 11© 2013 Accounts Payable Analytics The base drivers of DPO are simple to understand but the detail in execution requires spend categorization to maximize opportunities 1111 Salient Metrics Competing Objectives ► WA terms ► Spend on discount terms ► Influenceable spend ► Percent disbursements on PO ► % Triggered on invoice date ► WA days to pay ► Early payments # / $ ► WA days to pay ► Earned discounts missed Terms Sourcing / Finance Trigger Sourcing / Finance Frequency Finance DiscountTerms FlexibilityDTP FlexibilityDTP DPO – Days payable outstanding WA – Weighted average DTP – Days to pay DPO Externally Viewed
  12. 12. 12© 2013 Inventory Analytics Inventory is typically the most complex working capital component to impact due to its complexity, but also lends itself more to continuous improvement 12 Salient Metrics Competing Objectives ► Forecast accuracy ► Active SKUs, # phase in/out ► Schedule stability ► Planning cycle time ► Supplier on time delivery ► Production to plan ► Open work orders ► Cycle count accuracy ► Item fill rate ► On time in full ► Receiving cycle time DIO Externally Viewed Product Range Sales / Mkt / Mfg Planning / SC Sourcing Operations Mfg / Logistics Fulfillment Customer Service Inventory Turns Products / Complexity Batch SizeCash Cash Plant utilization Fill RatesCash DIO – Days inventory outstanding
  13. 13. 13© 2013 Accounts Receivable Analytics Breaking DSO into its informative component parts and the key drivers that will drive optimal performance 13 Salient Metrics Competing Objectives ► Customer WA terms ► Best possible DSO ► Days to bill ► Billing quality ► WA days to collect ► WA days delinquent ► Invoice to identification ► Identification to resolution ► Resolution to closure DSO Externally Viewed Contractual Terms Sales / Finance Mgmt Billing Finance Collections Finance Dispute Management Cross-functional SalesCash CostDTB CostDTC Efficiency Cash / Service DSO – Days sales outstanding DTC – Days to collect DTB – Days to bill WA – Weighted average
  14. 14. 14© 2013 Agenda Sustainable working capital improvement Working capital performance management Working Capital Survey
  15. 15. 15© 2013 2012 Working Capital Summary Working Capital performance gap between the US and Europe narrowed significantly in 2012 with Europe regaining almost twice the amount of ground it lost in the previous year (outperforming the US by 6% after having underperformed by 3%) The working capital performance gap between large companies vs. small, medium companies (greater or less than $1B in annual revenue) has narrowed Leading performers have continued to make major strides in improving WC management by taking a number of steps (e.g., streamlining their supply chains, managing payment terms, collaborating more closely with each of their partners in their extended enterprise, enhancing their risk management policies) Many poorer-performing companies still fail to address the “root and branch” aspects of WC policies, processes and metrics as they tend to focus on short term actions rather than more substantial and sustainable operational and structural changes
  16. 16. 16© 2013 Findings For 2012 In The US And Europe ► In comparison with 2011, companies‟ WC performance in 2012 has deteriorated in US but improved in Europe, the reverse of what happened in 2011 ► For Europe, improvement in C2C arose from lower DSO and DIO, partly offset by lower DPO ► In the US, DSO and DIO deteriorated while DPO was slightly up % Change Region Metric 2012 2012/2011 2011/2010 US DSO 38.5 1% -3% DIO 30.2 3% -2% DPO 31.0 2% -3% C2C 37.7 2% -3% Europe DSO 50.0 -4% -1% DIO 33.6 -2% 1% DPO 44.4 -3% -1% C2C 39.2 -4% 0%
  17. 17. 17© 2013 Wide Variations In WC Performance Across Industries ► WC distinction between cyclical and non- cyclical industries was more pronounced than in 2011 ► For the automotive industry, 2012 was characterized by sharply diverging trends in automotive production between regions (up 17% in the US and down 6% in Europe from their levels of 2011). Against this difficult background, automotive suppliers in the US reporting significantly higher C2C, while their European peers still managed to reduce C2C
  18. 18. 18© 2013 Large Distribution Of WC Performance Across Other Regions ► Significant variations in WC performance overall and for each metric across six other main regions and countries Excludes metals & mining and oil & gas industries
  19. 19. 19© 2013 SMEs‟ C2C Was 26% (Equivalent To 13 Days) Higher Than That Of Large Companies On A Sales-weighted Basis Scale provides greater opportunities to negotiate favorable payment terms with customers and suppliers However, SMEs scored slightly better than their larger counterparts in inventory management. Perhaps because: Larger companies are more likely to sell outside their home region, potentially giving rise to longer lead times and excess safety stocks Increased outsourcing are more widespread among large companies
  20. 20. 20© 2013 What Are We Seeing? Companies looking to grow in a cash efficient manner Passing cash pain „down the chain‟ Companies looking for greater return from their cost reduction efforts Shared Service Centers Outsourcing arrangements Challenges associated with globalization Sales growth opportunities Manufacturing capacity Sourced product Supply interruptions Companies wanting new metrics around cash Working capital Cash flow forecasting
  21. 21. 21© 2013 For More Information Go To: Ey.Com/Us/Transactions Annual Working Capital Management Report 2013 Select Sector reports
  22. 22. 22© 2013 Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. © 2013 Ernst & Young LLP. All Rights Reserved. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.
  23. 23. 23© 2013 Thank You! Working Capital Management It‟s Only Cash…

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