Financial supply chain debate participants
| Executive summary
- Definitions of optimal working capital are widely variable, depending on sector and the balance between procurement, logistics and treasury
In larger companies, logistics and treasury are coming closer to each other in maximizing working capital while developing supply chain efficiencies
Banks and other outside specialists are of growing importance not just in supplying funds and liquidity but in assisting in the complex process of managing of commercial strategies. However, corporates now demand clear added value
Outsourcing of production and manufacturing to third parties is a growing trend that is adding to the complexity of supply chain management, increasing the importance of outside advice |
JL, J&W Associates Let’s start with working capital. Corporates are trying to optimize this, but what is optimal working capital?
MK, Philips Defining optimal working capital is difficult. The theoretical answer might be that it is the minimum net operating capital (NOC) that you can achieve, measured by earnings before income or tax, or profit, such that you don’t destroy value, measured by earnings before income or tax, or profit, for the company. But who owns working capital, who’s driving it and why in a company is often not clear.
RD, Citi Optimal working capital is very hard to define with a broad-brush approach, given that companies are to a large extent different from one another. However, one could say it really boils down to the optimization of a company’s cash conversion cycle within the context of its reality, namely, its relationship and position of strength vis-à-vis its customers and suppliers. It’s also dependent on its products and business model. For example, manufacturers are different from service companies, which in turn do not have the same structure as technology companies, and so on.
PR, HSBC It’s difficult to define optimal working capital as an equation or a set of metrics that an organization can work against because different sets of people have differing parameters. A CFO may have ideas around optimizing working capital and cashflow, but those underneath him may have conflicting issues, depending on whether they’re logistics, procurement, or the treasurer. For example, you appease the CFO and the treasurer by having great cashflow, but you’re starting to erode value with a procurement officer who sees his unit price creep up because he’s had to trade off some of that discounting process for an extended payment period.
SJ, SCF Capital One size doesn’t fit all, and every company is going to be different. There are some generic measures such as DPO/DSO [days payable outstanding/days sales outstanding], for example, but there’s no one single definition. It comes down to having an understanding of the end-to-end supply chain and its multiple layers. You have to start looking at how to optimize the whole chain rather than looking at a single organizational level.
JL, J&W Associates Sarah has made the obvious leap from working capital to the supply chain. Is that where companies are focusing in order to achieve optimal working capital? Lionel?
LT, RBS I agree that no single formula fits all but the larger companies we speak to have similar generic drivers towards maximizing working capital and supply chain efficiencies. I’m finding that in the more go-ahead corporates, procurement and treasury are coming closer together; the relationship is not there yet (in some companies we have had to introduce them to each other) but there’s certainly movement towards maximizing the supplier relationships to retain goodwill but at the same time getting the cost of goods reduced.
MK, Philips Does it work as a partnership or does it work as a confrontation? A procurement officer is going to be very happy if he achieves 75-day payment terms, whereas treasury is going to be looking at the cost of doing that.
The treasury is one of the only areas in a corporate that is concerned with the time value of money, and they notice when things are askew. Most procurement officers will think on an accounting basis, which is often marking things at par, so they don’t mind if things are 100 days, 180 days. It’s a payable for them. Having optimal drivers is the best way to drive optimal working capital inside a company and treasury should help police this process.
RD, Citi Many companies we speak to are indeed focusing their working capital optimization efforts upstream via the procurement channel. Others are more focused on the downstream (sales and distribution) part of the equation. Very few have really brought it all together. Much has to do with the inherent conflicts that could exist between the goals of finance and procurement or finance and sales functions.
KD, CCE Working capital can be described as the management of your cash inflows and outflows, which has in essence always been part of the treasurer’s responsibilities. In other words, working capital management is trying to retain your cash as long as possible by ensuring longest-possible payment terms to your suppliers, shortest possible-payment terms to your customers, and reducing the inventories balance as much as possible. Alternatively, finding a financing solution that is cheaper or at least equivalent in cost to the cost of the funds of cash trapped in working capital.
DC, ABN Amro The challenge is that you have to engage procurement and understand more of a company’s work flow and supply chain management before you can design and deploy financing solutions. You also have to be able and willing to expand your scope as a bank to go into tier 1, tier 2, tier 3 supplier relationships. We do this in partnership with corporates. Initially it’s an advisory-type dialogue rather than a traditional bank/client direct selling approach.
PR, HSBC I would define financial supply chain management a little more broadly. Improving working capital across the chain and reducing the cost of finance to the buyer and the supplier base are the main priorities. It is about looking at all of the finance-related costs along that chain. It’s also about the management of risk and information across the chain – the exchanging of purchase orders and the invoices, and then improving the efficiency of these processes and reducing costs for buyers and suppliers and the banks themselves. The combination of the CFO, the procurement officer and the treasurer is making banks work a lot harder for their money both in terms of breadth and depth of services and the margins offered to both the buyer and their supply base.