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2010-11-20




                        Supply Chain and
                   Working Capital Management

                            KTH November 19th 2010




        WCM – Working Capital Management

                   WCM
                   – Definition
                   – Methods and practise
                   – Case

                   WCM and SCM
                   – Focus on how to handle business cycle
                     variations
                   – Capacity issues




© UnitedLog 2009




                                                                     1
2010-11-20




                                                             www.unitedlog.com




                                Hans von Euler
                   Consultant and Trainer in Supply Chain Management


                                   Manufacturing
                                   Retail and distribution
                                   Services
                                   Healthcare




© UnitedLog 2009




                                                             www.unitedlog.com




                            Founded in 2005
                            9 offices on 3 continents
                            Owned by 6th AP Fund and AB Arvid Svensson
                            150 employees




© UnitedLog 2009




                                                                                         2
2010-11-20




      UnitedLog

                                                Supply Chain Management
                                                        & Finance
                                                       Consulting




                                                      Customer




                             Supply Chain                                             Supply Chain
                              Services                                                    Software




© UnitedLog 2009




      UnitedLog – How we improve your supply chain and profitability


                    Reduce your working
                          capital


               • Working Capital Management
               • Financial Solutions


                                                     FLOW OF CAPITAL



                                      FLOW OF
             SUPPLIER                                                                                END CUSTOMER
                                       GOODS
                                                SOURCING    PRODUCTION     DISTRIBUTION


                                                   FLOW OF INFORMATION




                                                    Visibility and cost
                   Reduce your costs and
                                                          control
                    increase your service                                                   Flexibility
                                                  in your inbound and
                           levels
                                                 outbound flow of goods

              •SCM Strategy                     • Control Tower Software           • Outsourcing Services
              • Change Management               • Performance Management


© UnitedLog 2009




                                                                                                                            3
2010-11-20




      Supply Chain Consulting


                                                                              Corporate strategies
                                                                              Organization
                                                                              Development
                                                                              Product and Business
                                                       Strategy               area development



                   Supply/Demand
                   Chain Strategy                                                        Working capital management
                   Sourcing             Supply/Demand               Finance
                                       Chain Management                                  Financial management
                   Production                                                            Transaction Services
                   Distribution




                   We enable increased revenues and unique competiveness through more efficient flow of
                   goods, services, information and financial means.
                   Senior consultants with great experience.
                   Strong in implementation and achieving lasting results.




      Supply Chain Software
             – Control Tower Software

                                                                                  Manages Inbound and Outbound Logistics

                                                                                  In-Sourced or Outsourced Does Not Matter

                                                                                  Goods Flow Control and Operation Tools

                                                                                  Information Flow Control and Operation

                                                                                  Financial Control and Operation Tools

                                                                                  Performance Management Tools

                                                                                  Advanced tendering




© UnitedLog 2009




                                                                                                                                     4
2010-11-20




      Supply Chain Outsourcing Services


                                                  Inbound and Outbound
                                                  Transport Management


                                                  3PL Contracting



                                Supply Chain      Invoice Control
                   CUSTOMER     Outsourcing
                                  Services


                                                  Customs Brokerage



                                                  Logistics Trading




© UnitedLog 2009




                          WCM - Working Capital Management
                                 KTH November 19 2010




                                                                                 5
2010-11-20




        WCM – Working Capital Management

                    WCM
                      – Definition
                      – Methods and practise
                      – Case

                    WCM and SCM
                      – Focus on how to handle business cycle
                        variations
                      – Capacity issues




© UnitedLog 2009




        WCM – Working Capital Management

                   Working Capital is the capital needed in order to
                   finance the ongoing business


                   Working capital is mainly tied up in
                       Cash
                       Inventory
                       Accounts receivable




© UnitedLog 2009




                                                                               6
2010-11-20




The Aim of improving WCM is always to increased Profitability



                   Reducing working capital improves
                   cash flow...

                   ...giving direct results on the profit

                   A successful WCM project is not
                   only a “financial” project but as
                   much a matter of improving
                   operational conditions in the
                   supply chain.




© UnitedLog 2009




       All activities in a WCM and SCM project must be balanced in
       order to achieve increased profitability.



                                         The Cornerstones of Logistics


                                                        SERVICE




                                                                  Profit
                                             Profitability =
                                                                  Captal

                                     COSTS                                 CAPITAL




© UnitedLog 2009




                                                                                             7
2010-11-20




              THE IMPORTANCE OF CASH FLOW




© UnitedLog 2009




        Income vs Cash Flow

                                   Income
           Supplier                                        Customer


                      Purchase                 Sales

                      Cost                     Income
                                  Production

                                  Cash Flow

           Supplier                                       Customer


                       Outgoing                Incoming
                       payment                 payment



© UnitedLog 2009




                                                                              8
2010-11-20




        Capital tied up - from Order to Cash


          Suppliers                                                                              Customers


                                               FINISHED PRODUCT




                        Purchasing           Production                            Sales

Capital tied up
                Material from                                     Machine delivered and              Payment from
              supplier delivered                                   customer invoiced                    customer
                                                                                   Customer’s credit time

                         Cash payment                                              Operating margin
                          to supplier
                                                                         Machine placed in finished stock
                                               Machine produced


                                                                           Working Capital tied up
                                                                                                             Time
       Credit time from supplier
© UnitedLog 2009




        Exercise: Calculation of released capital


                   A company has a total sales of
                   180 millions.

                   How much operating capital
                   can be released by having the
                   customer’s payment 3 days
                   earlier?




                     180 millions
                                  = 0,50 x 3 days = 1,5 millions
                      360 days

© UnitedLog 2009




                                                                                                                            9
2010-11-20




        What we want to achieve

   Goods received                                 Invoiced sales


                              Average inventory                Average customer
                                  lead time                      payment time
                                                                                      Days


                     Average time to                     Cash Conversion
                   payment of supplier                     Cycle (CCC)


                                         Cash disbursement                 Cash collection
                                            to supplier                    from customer

                    We want to decrease the lead time in inventory…




© UnitedLog 2009




        What we want to achieve

    Goods received                           Invoiced sales


                      Average inventory                 Average customer
                          lead time                       payment time
                                                                                      Days


                     Average time to              Cash Conversion
                   payment of supplier              Cycle (CCC)


                                         Cash disbursement                 Cash collection
                                            to supplier                    from customer

                    We want to decrease the lead time in inventory…
                   …and decrease the payment time from customers…



© UnitedLog 2009




                                                                                                    10
2010-11-20




        What we want to achieve

    Goods received                                  Invoiced sales


                             Average inventory                     Average customer
                                 lead time                           payment time
                                                                                                  Days


                           Average time to              Cash Conversion
                         payment of supplier              Cycle (CCC)


                                               Cash disbursement                       Cash collection
                                                  to supplier                          from customer

                            We want to decrease the lead time in inventory…
                          …and decrease the payment time from customers…
                             …and increase the payment time to suppliers…
                   ...and thus reduce working capital and the cash conversion cycle !
© UnitedLog 2009




        The main drivers of Cash Flow


                      Income statement             Balance sheet              Balance sheet



                       Operating
                                                   Changes in                Changes in
                         income
                                                 Working capital             Fixed assets
                      (operational)
                                                  (operational)               (strategic)




                                                   Cash flow
© UnitedLog 2009




                                                                                                                11
2010-11-20




        Working Capital Management

                                   Balance Sheet
                                                       Liabilities &
                     Assets                               Equity

                                                          Equity          “Management of
                   Fixed Assets                                           a company’s
                                                        Untaxed           Operating
                                                        Reserves          Capital, e.g. the
                                                                          short-term
                   Inventories                          Long-term         assets &
                                                        Liabilities       liabilities.”


                   Accounts                             Short-term
                   Receivable                           Liabilities

                                                        Accounts
                      Cash
                                                         Payable


© UnitedLog 2009




                    Working Capital Management
                    Focus on non interest bearing items in the Balance sheet




© UnitedLog 2009




                                                                                                     12
2010-11-20




        Operating income vs. Cash Flow


              MSEK
   60000
                                                                                                             Note that good profit
   40000
                                                                                                             does not necessarily
                                                                                                             mean a positive
   20000                                                                                                     Cash Flow

              0

  -20000

  -40000

  -60000
                   Jan   Feb   Mar    Apr       May      Jun    Jul   Aug     Sep       Oct   Nov     Dec

                                       Operating income                       Cash Flow




          A high operating income doesn't mean a company has cash on hand;
  the company can go bankrupt, due to lack of cash, even if the operating income is high.


© UnitedLog 2009




          Working Capital Management
        Value added                                   Product
                                                                                    Sales
                                                                                                                       Credit-
                                                      Development     Marketing               Order      Production    time


                                                                                              Purchase

                                                                                                                      Accounts
                                                                                                         WIP,         Receivable
                                                                                                         Work In
        Value added in the                                                                               Progress
        Balance sheet
                                                                                      Raw material




                                       20
        Cash Flow
                                            0
                                      -20
                                      -40
                                      -60
                                      -80
                                     -100




© UnitedLog 2009




                                                                                                                                            13
2010-11-20




        Every day is important!




                    With a 10% margin on
                   sold products you need
                    to sell 100 products to
                       finance 10 unsold
                     products in inventory.




© UnitedLog 2009




             Experience of Working Capital Management


                          Based on previous conducted WCM projects; 5 -10% of sales are
                          identified as a potential reduction of working capital
                          Activities amounting to 50 % of the identified potential is normally
                          released within 6 -12 month after the workshop.
                          The same methodology can be applied in all business sectors


                                 Where the “Cash” improvements normally occur:
                                 Accounts                Delivery                                                Accounts
                      Purchase               Order                   Production   Distribution     Invoicing
                                 payable                 precision                                               receivables




                        Procurement                  Production and Distribution                 Sales Process
                        (Suppliers)                  (Stock)                                     (Accounts
                          20-30 %                            40-60 %                             Receivables)
                                                                                                   20-30 %

© UnitedLog 2009




                                                                                                                                      14
2010-11-20




        Use for released working capital

                   Increase the cash buffer                         Investments in marketing

                   Repayment of loans                               Investments in competence
                                                                    development
                   Investments in property and
                   machines                                         Investments in research and
                                                                    development, incl. new
                   Acquisitions                                     products and services

                   Dividends to shareholders                        To keep our shareholders
                                                                    pleased and willing to invest in
                   To be able to seize business                     our business by giving
                   opportunities                                    dividends


                                                       ”Cash is King”
© UnitedLog 2009




                      Working Capital Management

                                Sales process                               Production process
                                •    Credit Management                      •   Product development
                                •    Offer & Contracts                      •   Delivery precision
                                •    Order                                  •   Inventory
                                •    Invoicing                              •   Planning
                                •    Accounts Receivable                    •   Production
                                •    Incoming payments                      •   Finished goods & distribution

                                                            Working
                                                             Capital
                                                           Management
                            Liquidity Management
                            •       Bank accounts                       Purchase process
                            •       Financing                           •       Evaluation of suppliers
                            •       Borrowing                           •       Purchase agreements
                            •       Currency management                 •       Distribution
                            •       Liquidity planning                  •       Approval of supplier
                            •       Salaries                                    invoices
                            •       VAT and other taxes                 •       Outgoing payments




© UnitedLog 2009




                                                                                                                       15
2010-11-20




        All activities are important!


                                                 I can enforce      I can push for
                                                  freeze time         reduction in
                                                                    finished stock
                        I can charge
                       penalty interest                                              I will never pay
                                                                                     before due date



                       I can                                                            I can invoice on
                    introduce                                                           Friday instead of
                   direct debit                                                             Monday




© UnitedLog 2009




                                                  WCM and SCM
                                          - controlling in business cycle changes




                                                                                                                   16
2010-11-20




              Challenging times

                   The finance crisis and the recession
                   that followed left many companies to
                   face quite new challenges that had to
                   be dealt with rapidly.

                   Focusing on efficiency in every aspect
                   of manufacturing, distribution and
                   supply have a potential in reducing the
                   imposition of company profit.

                   Working capital does often hide
                   substantially potentials.

                   Focusing on capacity- and utilization
                   issues will be of highest strategic
                   importance to very many companies.




© UnitedLog 2009




              CAPACITY – HOW MUCH WILL BE NEEDED AND WHEN?




© UnitedLog 2009




                                                                    17
2010-11-20




              CAPACITY PLANNING




© UnitedLog 2009




        Capacity planning



        Planning vs Control                             Perspective:



                   Planning     - making up the route     Longer




                   Controlling - adjust to reality        Shorter




© UnitedLog 2009




                                                                              18
2010-11-20




              CAPACITY– DEFINITION




© UnitedLog 2009




        Capacity
                                Controlling           Planning
                               Short perspective    Long perspective
                                 Daily, weekly      Monthly, quarterly

                   People

                               Fine tuning         Changes in takt,
                   Machines                        investments


                   Materials




© UnitedLog 2009




                                                                                19
2010-11-20




        ”Fine tuning” – daily control


                       Make the best of things

                       Within the rules..




© UnitedLog 2009




        Capacity Planning – long term

                   Create new conditions

                   Secure the new levels – higher or lower.

                   Reducing

                   Increasing

                   Continuing in unchanged takt

                   Investments




                              It is in the Capacity Plan the decisions are taken
                                           on investments in the flow

© UnitedLog 2009




                                                                                          20
2010-11-20




        Capacity Planning


                   Planning is made on different levels
                   – Overall, budget
                   – Overall continuously
                   – Capacity, utilization rate
                   – Operational level




© UnitedLog 2009




              ”THEORY”




© UnitedLog 2009




                                                                 21
2010-11-20




          The Bucket theorem




© UnitedLog 2009




        Capacity plan
           Capacity section:..................


                                                     Opening
                                                      values
                                                               Jan   Feb   Mar   Apr   May   June Target

Sales                           budget                         50    70    85    65    70    80     420

                                 actual                        40    60    60    70    65    65     360

Inventory                       budget                         270   260   250   240   230   220    220

                                 actual               280      300   300   300   290   285   280    280
                                budget                         40    60    75    55    60    70     360
Production                   (forecast adjusted)

                                ”actual"                       60    60    60    60    60    60     360
                             (production friendly)




© UnitedLog 2009




                                                                                                                  22
2010-11-20




        Capacity Planning



                   The closer to market, the quicker
                   reaction to changes.


                   The closer to market, the later you can
                   take decisions - and the better you
                   know what has to be done.




© UnitedLog 2009




        Capacity Planning




                       The quicker you react to changes less
                       adjustments are needed


                       The more often you react and act the smaller
                       adjustments each time.




                                     Making change work and
                                      Making work change

© UnitedLog 2009




                                                                             23
2010-11-20




             Planning processes

                   There are several planning levels but the two most
                   important once are:

                   Capacity planning
                   (the whole factory or a segment)

                   Order planning
                   (Which items, products components or materials shall be
                   ordered internally or externally? When and How Much?




              Two completely different levels of planning



© UnitedLog 2009                                      Projektnamn etc




  Planning and Control
                                                    Pull-principal
                                                            BUDGET
                                                                                                                    Market
                                                             Capacity                                              forecasts
           Capacity decision                                 planning                   Monthly/Quarterly

                                                            Frames

                                                             ORDER
                                                             planning                      Weekly
           Order decision Purchasing
                                                            Materials
                                                            clearance                      Weekly
                                   Materials
                                   call-off             Manufacturing                                   Customer
                                                        order                              Weekly         order
                                                                                           Daily el


                                                             Shop floor
                                                              planning
                                                                                            Daily



                        Supplier                                                                            Customer
© UnitedLog 2009                               48             © Establish/ 20/11/2010




                                                                                                                                      24
2010-11-20




        Planning processes – Capacity planning


                   Capacity planning is made on a high level:

                         The decisions include accumulated flows and groups of items and
                         products rather than individual items.

                         The decisions gives a frame for the detailed decisions on order- and
                         shop floor planning levels.

                         The decisions have consequences for the future and are often
                         strategically based.

                         The decisions are therefore taken on highest management level.




                   What takt must we have for the coming period?


© UnitedLog 2009                                    Projektnamn etc




        Planning processes – Order planning

                    A group of items compete of the available capacity. Order
                    planning answers the key issues:


                          Which of the items shall be released for production now?

                          How much shall be ordered?

                          The ordered item and quantity shall be delivered one lead time
                          later. When is that?




                            To what shall we use the Capacity ?



© UnitedLog 2009                                    Projektnamn etc




                                                                                                       25
2010-11-20




              THE SUPPLIER




© UnitedLog 2009




        MRP planning example
            Weeek      31    32    33    34    35    36     37     38     39     40     41     42     43     44    45    46   47   48
             2007
          Demand we    43    57    92
            week                         108                       Programme
              29       38    59     93   106   112
              30       41    58     94   108   114   111
              31       23    56     90   100   109   118     122
              32       -15    36    96   105   109   118     122   121
              33       -35   -22    74   105   113   118     111   121    114    119
              34             -57   -16   107   108   119     112   123    112    119     115
              35                   -73    2     96   113     112   112    112    118     114    116
              36                         -71   -17   100     106   110    113    119     116    116   117
              37                               -88    -19     98   103     94    116     111    103   114    111
              38                                     -107    -14   103    100    118    109    105    116    111   115
              39                                            -121    -7    107    110     103   106    116    111   115   115
              40                                                   -128    13    107     105     88   118    112   115   115 112
              41                                                          -115    -11     95     85     90   113   113   112 112 114
              42                                                                 -126     -8   101     86     73
              43                                                                        -134     13    78     67
              44                                                                               -121    -12
              45                                                                                      -133
              46
              47
              48

        Decided        38    58    90    105 113 119 112 110 94 118 103 88    90 1238 100%
         Actual        23    36    74    107 96 100 98 103 107 107 95 101 78 1125 91%
   Ordered omponents   43    57    92    108 112 111 122 121 114 119 114 116 114 1343 119%



© UnitedLog 2009




                                                                                                                                               26
2010-11-20




           Include all strategic actors in the Total flow

                   Variations increase and get worse up streams

                   Secure key suppliers capacity by including the in your own capacity
                   planning process.

                   Develop new coordinative routines

                   Big variations upstream means late reaction to changed demands
                   down streams



                        All actors shall react to the same signal!


© UnitedLog 2009




              SCANIA




© UnitedLog 2009




                                                                                                27
2010-11-20




                                                                                                                                5
        Scania Capacity Planning Process                                                                                        5

     The process of the ”Planning Tour. It´s made monthly and with a 12 month window

                   Week1                                                  Week 2          Wednesday
                                                      Friday                                                  Friday at 14.00
                   after the turn of                                                      at 13.00
                   the month

                    Data from the Distributors
                    Statistics of vehicles
                    registered                                                                                  Takt decision
                    Analyses – financial,                                                                         Meeting
                    marketing, etc.
                    Forecasts, ratings and                                                                          Cross
                    evaluations                                Levelling the Capacity                               functional
                                                                                              Production &
                                    Marketing Dept.                                                                 meeting
                                                                                              Sourcing Dept
                                                                                                                    chaired by
                                       Volume plan,                       Edition                                   MD
                                                                                              Production
                                       Demand                              no. #              Capacity-
                                                                                              /Takt Plan

                                                          Consequences on Deliveries
                                                      Capacity levelling and component
                               Market dept.                                                   Production capacity Plan/
                                                      restrictions can influence delivery
                               decision on Volume                                             Takt Plan
                                                      dates. The suggested plan is mutually
                               plan                                                           Suggestion on how volume
                                                      developed until agreement . Several
                                                      editions can occurs during the          Plan can be realized
                                                      process.

© UnitedLog 2009                                            20/11/2010 © 2008 Establish




                          Scania

                                 Frequent planning

                                 Standardised and clear process!

                                 Secured and simple routines to prepare for the
                                 takt decision.

                                 Capacity planning meeting, Takt meeting, is a
                                 decision meeting – all discussions on forecasts,
                                 productions conditions etc. Must be closed in the
                                 preparatory process.

                                 The only one that can take the final takt decision
                                 is the MD.




© UnitedLog 2009




                                                                                                                                           28
2010-11-20




        Capacity planning - summary

                   The same issues in recession and boom.

                   The better you function in boom periods the better prepared with
                   working routines when business turns down.

                   The closer to market, the quicker reaction to changes.


                   The closer to market, the later you can take decisions - and the
                   better you know what has to be done.

                   The quicker you react to changes less adjustments are needed.




© UnitedLog 2009




        Capacity planning - summary

                    Make it often!

                    React and act rapidly!

                    Simple routines and rules

                    Clear decisions every time

                    Simple and obvious connections to
                    every day operations




                                Make it often and simple !

© UnitedLog 2009




                                                                                             29
2010-11-20




        WCM and SCM

                   Different basic focus

                   The same actions and tools

                   Same demands on the process of change

                   The same goals




                                Increased Profitability !



© UnitedLog 2009




                               Thank You for
                                 listening !




© UnitedLog 2009




                                                                   30

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Supply chain management and working capital

  • 1. 2010-11-20 Supply Chain and Working Capital Management KTH November 19th 2010 WCM – Working Capital Management WCM – Definition – Methods and practise – Case WCM and SCM – Focus on how to handle business cycle variations – Capacity issues © UnitedLog 2009 1
  • 2. 2010-11-20 www.unitedlog.com Hans von Euler Consultant and Trainer in Supply Chain Management Manufacturing Retail and distribution Services Healthcare © UnitedLog 2009 www.unitedlog.com Founded in 2005 9 offices on 3 continents Owned by 6th AP Fund and AB Arvid Svensson 150 employees © UnitedLog 2009 2
  • 3. 2010-11-20 UnitedLog Supply Chain Management & Finance Consulting Customer Supply Chain Supply Chain Services Software © UnitedLog 2009 UnitedLog – How we improve your supply chain and profitability Reduce your working capital • Working Capital Management • Financial Solutions FLOW OF CAPITAL FLOW OF SUPPLIER END CUSTOMER GOODS SOURCING PRODUCTION DISTRIBUTION FLOW OF INFORMATION Visibility and cost Reduce your costs and control increase your service Flexibility in your inbound and levels outbound flow of goods •SCM Strategy • Control Tower Software • Outsourcing Services • Change Management • Performance Management © UnitedLog 2009 3
  • 4. 2010-11-20 Supply Chain Consulting Corporate strategies Organization Development Product and Business Strategy area development Supply/Demand Chain Strategy Working capital management Sourcing Supply/Demand Finance Chain Management Financial management Production Transaction Services Distribution We enable increased revenues and unique competiveness through more efficient flow of goods, services, information and financial means. Senior consultants with great experience. Strong in implementation and achieving lasting results. Supply Chain Software – Control Tower Software Manages Inbound and Outbound Logistics In-Sourced or Outsourced Does Not Matter Goods Flow Control and Operation Tools Information Flow Control and Operation Financial Control and Operation Tools Performance Management Tools Advanced tendering © UnitedLog 2009 4
  • 5. 2010-11-20 Supply Chain Outsourcing Services Inbound and Outbound Transport Management 3PL Contracting Supply Chain Invoice Control CUSTOMER Outsourcing Services Customs Brokerage Logistics Trading © UnitedLog 2009 WCM - Working Capital Management KTH November 19 2010 5
  • 6. 2010-11-20 WCM – Working Capital Management WCM – Definition – Methods and practise – Case WCM and SCM – Focus on how to handle business cycle variations – Capacity issues © UnitedLog 2009 WCM – Working Capital Management Working Capital is the capital needed in order to finance the ongoing business Working capital is mainly tied up in Cash Inventory Accounts receivable © UnitedLog 2009 6
  • 7. 2010-11-20 The Aim of improving WCM is always to increased Profitability Reducing working capital improves cash flow... ...giving direct results on the profit A successful WCM project is not only a “financial” project but as much a matter of improving operational conditions in the supply chain. © UnitedLog 2009 All activities in a WCM and SCM project must be balanced in order to achieve increased profitability. The Cornerstones of Logistics SERVICE Profit Profitability = Captal COSTS CAPITAL © UnitedLog 2009 7
  • 8. 2010-11-20 THE IMPORTANCE OF CASH FLOW © UnitedLog 2009 Income vs Cash Flow Income Supplier Customer Purchase Sales Cost Income Production Cash Flow Supplier Customer Outgoing Incoming payment payment © UnitedLog 2009 8
  • 9. 2010-11-20 Capital tied up - from Order to Cash Suppliers Customers FINISHED PRODUCT Purchasing Production Sales Capital tied up Material from Machine delivered and Payment from supplier delivered customer invoiced customer Customer’s credit time Cash payment Operating margin to supplier Machine placed in finished stock Machine produced Working Capital tied up Time Credit time from supplier © UnitedLog 2009 Exercise: Calculation of released capital A company has a total sales of 180 millions. How much operating capital can be released by having the customer’s payment 3 days earlier? 180 millions = 0,50 x 3 days = 1,5 millions 360 days © UnitedLog 2009 9
  • 10. 2010-11-20 What we want to achieve Goods received Invoiced sales Average inventory Average customer lead time payment time Days Average time to Cash Conversion payment of supplier Cycle (CCC) Cash disbursement Cash collection to supplier from customer We want to decrease the lead time in inventory… © UnitedLog 2009 What we want to achieve Goods received Invoiced sales Average inventory Average customer lead time payment time Days Average time to Cash Conversion payment of supplier Cycle (CCC) Cash disbursement Cash collection to supplier from customer We want to decrease the lead time in inventory… …and decrease the payment time from customers… © UnitedLog 2009 10
  • 11. 2010-11-20 What we want to achieve Goods received Invoiced sales Average inventory Average customer lead time payment time Days Average time to Cash Conversion payment of supplier Cycle (CCC) Cash disbursement Cash collection to supplier from customer We want to decrease the lead time in inventory… …and decrease the payment time from customers… …and increase the payment time to suppliers… ...and thus reduce working capital and the cash conversion cycle ! © UnitedLog 2009 The main drivers of Cash Flow Income statement Balance sheet Balance sheet Operating Changes in Changes in income Working capital Fixed assets (operational) (operational) (strategic) Cash flow © UnitedLog 2009 11
  • 12. 2010-11-20 Working Capital Management Balance Sheet Liabilities & Assets Equity Equity “Management of Fixed Assets a company’s Untaxed Operating Reserves Capital, e.g. the short-term Inventories Long-term assets & Liabilities liabilities.” Accounts Short-term Receivable Liabilities Accounts Cash Payable © UnitedLog 2009 Working Capital Management Focus on non interest bearing items in the Balance sheet © UnitedLog 2009 12
  • 13. 2010-11-20 Operating income vs. Cash Flow MSEK 60000 Note that good profit 40000 does not necessarily mean a positive 20000 Cash Flow 0 -20000 -40000 -60000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Operating income Cash Flow A high operating income doesn't mean a company has cash on hand; the company can go bankrupt, due to lack of cash, even if the operating income is high. © UnitedLog 2009 Working Capital Management Value added Product Sales Credit- Development Marketing Order Production time Purchase Accounts WIP, Receivable Work In Value added in the Progress Balance sheet Raw material 20 Cash Flow 0 -20 -40 -60 -80 -100 © UnitedLog 2009 13
  • 14. 2010-11-20 Every day is important! With a 10% margin on sold products you need to sell 100 products to finance 10 unsold products in inventory. © UnitedLog 2009 Experience of Working Capital Management Based on previous conducted WCM projects; 5 -10% of sales are identified as a potential reduction of working capital Activities amounting to 50 % of the identified potential is normally released within 6 -12 month after the workshop. The same methodology can be applied in all business sectors Where the “Cash” improvements normally occur: Accounts Delivery Accounts Purchase Order Production Distribution Invoicing payable precision receivables Procurement Production and Distribution Sales Process (Suppliers) (Stock) (Accounts 20-30 % 40-60 % Receivables) 20-30 % © UnitedLog 2009 14
  • 15. 2010-11-20 Use for released working capital Increase the cash buffer Investments in marketing Repayment of loans Investments in competence development Investments in property and machines Investments in research and development, incl. new Acquisitions products and services Dividends to shareholders To keep our shareholders pleased and willing to invest in To be able to seize business our business by giving opportunities dividends ”Cash is King” © UnitedLog 2009 Working Capital Management Sales process Production process • Credit Management • Product development • Offer & Contracts • Delivery precision • Order • Inventory • Invoicing • Planning • Accounts Receivable • Production • Incoming payments • Finished goods & distribution Working Capital Management Liquidity Management • Bank accounts Purchase process • Financing • Evaluation of suppliers • Borrowing • Purchase agreements • Currency management • Distribution • Liquidity planning • Approval of supplier • Salaries invoices • VAT and other taxes • Outgoing payments © UnitedLog 2009 15
  • 16. 2010-11-20 All activities are important! I can enforce I can push for freeze time reduction in finished stock I can charge penalty interest I will never pay before due date I can I can invoice on introduce Friday instead of direct debit Monday © UnitedLog 2009 WCM and SCM - controlling in business cycle changes 16
  • 17. 2010-11-20 Challenging times The finance crisis and the recession that followed left many companies to face quite new challenges that had to be dealt with rapidly. Focusing on efficiency in every aspect of manufacturing, distribution and supply have a potential in reducing the imposition of company profit. Working capital does often hide substantially potentials. Focusing on capacity- and utilization issues will be of highest strategic importance to very many companies. © UnitedLog 2009 CAPACITY – HOW MUCH WILL BE NEEDED AND WHEN? © UnitedLog 2009 17
  • 18. 2010-11-20 CAPACITY PLANNING © UnitedLog 2009 Capacity planning Planning vs Control Perspective: Planning - making up the route Longer Controlling - adjust to reality Shorter © UnitedLog 2009 18
  • 19. 2010-11-20 CAPACITY– DEFINITION © UnitedLog 2009 Capacity Controlling Planning Short perspective Long perspective Daily, weekly Monthly, quarterly People Fine tuning Changes in takt, Machines investments Materials © UnitedLog 2009 19
  • 20. 2010-11-20 ”Fine tuning” – daily control Make the best of things Within the rules.. © UnitedLog 2009 Capacity Planning – long term Create new conditions Secure the new levels – higher or lower. Reducing Increasing Continuing in unchanged takt Investments It is in the Capacity Plan the decisions are taken on investments in the flow © UnitedLog 2009 20
  • 21. 2010-11-20 Capacity Planning Planning is made on different levels – Overall, budget – Overall continuously – Capacity, utilization rate – Operational level © UnitedLog 2009 ”THEORY” © UnitedLog 2009 21
  • 22. 2010-11-20 The Bucket theorem © UnitedLog 2009 Capacity plan Capacity section:.................. Opening values Jan Feb Mar Apr May June Target Sales budget 50 70 85 65 70 80 420 actual 40 60 60 70 65 65 360 Inventory budget 270 260 250 240 230 220 220 actual 280 300 300 300 290 285 280 280 budget 40 60 75 55 60 70 360 Production (forecast adjusted) ”actual" 60 60 60 60 60 60 360 (production friendly) © UnitedLog 2009 22
  • 23. 2010-11-20 Capacity Planning The closer to market, the quicker reaction to changes. The closer to market, the later you can take decisions - and the better you know what has to be done. © UnitedLog 2009 Capacity Planning The quicker you react to changes less adjustments are needed The more often you react and act the smaller adjustments each time. Making change work and Making work change © UnitedLog 2009 23
  • 24. 2010-11-20 Planning processes There are several planning levels but the two most important once are: Capacity planning (the whole factory or a segment) Order planning (Which items, products components or materials shall be ordered internally or externally? When and How Much? Two completely different levels of planning © UnitedLog 2009 Projektnamn etc Planning and Control Pull-principal BUDGET Market Capacity forecasts Capacity decision planning Monthly/Quarterly Frames ORDER planning Weekly Order decision Purchasing Materials clearance Weekly Materials call-off Manufacturing Customer order Weekly order Daily el Shop floor planning Daily Supplier Customer © UnitedLog 2009 48 © Establish/ 20/11/2010 24
  • 25. 2010-11-20 Planning processes – Capacity planning Capacity planning is made on a high level: The decisions include accumulated flows and groups of items and products rather than individual items. The decisions gives a frame for the detailed decisions on order- and shop floor planning levels. The decisions have consequences for the future and are often strategically based. The decisions are therefore taken on highest management level. What takt must we have for the coming period? © UnitedLog 2009 Projektnamn etc Planning processes – Order planning A group of items compete of the available capacity. Order planning answers the key issues: Which of the items shall be released for production now? How much shall be ordered? The ordered item and quantity shall be delivered one lead time later. When is that? To what shall we use the Capacity ? © UnitedLog 2009 Projektnamn etc 25
  • 26. 2010-11-20 THE SUPPLIER © UnitedLog 2009 MRP planning example Weeek 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 2007 Demand we 43 57 92 week 108 Programme 29 38 59 93 106 112 30 41 58 94 108 114 111 31 23 56 90 100 109 118 122 32 -15 36 96 105 109 118 122 121 33 -35 -22 74 105 113 118 111 121 114 119 34 -57 -16 107 108 119 112 123 112 119 115 35 -73 2 96 113 112 112 112 118 114 116 36 -71 -17 100 106 110 113 119 116 116 117 37 -88 -19 98 103 94 116 111 103 114 111 38 -107 -14 103 100 118 109 105 116 111 115 39 -121 -7 107 110 103 106 116 111 115 115 40 -128 13 107 105 88 118 112 115 115 112 41 -115 -11 95 85 90 113 113 112 112 114 42 -126 -8 101 86 73 43 -134 13 78 67 44 -121 -12 45 -133 46 47 48 Decided 38 58 90 105 113 119 112 110 94 118 103 88 90 1238 100% Actual 23 36 74 107 96 100 98 103 107 107 95 101 78 1125 91% Ordered omponents 43 57 92 108 112 111 122 121 114 119 114 116 114 1343 119% © UnitedLog 2009 26
  • 27. 2010-11-20 Include all strategic actors in the Total flow Variations increase and get worse up streams Secure key suppliers capacity by including the in your own capacity planning process. Develop new coordinative routines Big variations upstream means late reaction to changed demands down streams All actors shall react to the same signal! © UnitedLog 2009 SCANIA © UnitedLog 2009 27
  • 28. 2010-11-20 5 Scania Capacity Planning Process 5 The process of the ”Planning Tour. It´s made monthly and with a 12 month window Week1 Week 2 Wednesday Friday Friday at 14.00 after the turn of at 13.00 the month Data from the Distributors Statistics of vehicles registered Takt decision Analyses – financial, Meeting marketing, etc. Forecasts, ratings and Cross evaluations Levelling the Capacity functional Production & Marketing Dept. meeting Sourcing Dept chaired by Volume plan, Edition MD Production Demand no. # Capacity- /Takt Plan Consequences on Deliveries Capacity levelling and component Market dept. Production capacity Plan/ restrictions can influence delivery decision on Volume Takt Plan dates. The suggested plan is mutually plan Suggestion on how volume developed until agreement . Several editions can occurs during the Plan can be realized process. © UnitedLog 2009 20/11/2010 © 2008 Establish Scania Frequent planning Standardised and clear process! Secured and simple routines to prepare for the takt decision. Capacity planning meeting, Takt meeting, is a decision meeting – all discussions on forecasts, productions conditions etc. Must be closed in the preparatory process. The only one that can take the final takt decision is the MD. © UnitedLog 2009 28
  • 29. 2010-11-20 Capacity planning - summary The same issues in recession and boom. The better you function in boom periods the better prepared with working routines when business turns down. The closer to market, the quicker reaction to changes. The closer to market, the later you can take decisions - and the better you know what has to be done. The quicker you react to changes less adjustments are needed. © UnitedLog 2009 Capacity planning - summary Make it often! React and act rapidly! Simple routines and rules Clear decisions every time Simple and obvious connections to every day operations Make it often and simple ! © UnitedLog 2009 29
  • 30. 2010-11-20 WCM and SCM Different basic focus The same actions and tools Same demands on the process of change The same goals Increased Profitability ! © UnitedLog 2009 Thank You for listening ! © UnitedLog 2009 30