Optimizing Working Capital fast and innovative levers · 200325_Optimizing Working Capital in times...

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March 2020

Optimizing Working Capital fast and innovative levers

_Optimizing Working Capital in times of COVID-19_released.pptx

Purpose of this document

Firstly, Corona COVID-19 is a crisis of epic dimensions. Monitoring, containingand mitigating the effects of the corona virus are top priorities for everyone.Timely and decisive actions by health authorities, regulatory and supervisoryauthorities can help contain the virus outbreak and offset the impact of thepandemic.

Medical doctors, nurses and health professionals are doing everything tosupport us. So are sectors of everyday life like food-retail or connected logisticsto support us with everything that we need daily.

This paper is aimed to support business leaders and clients of h&z tooptimize and reduce working capital and release cash in the short-term.


Depreciation

and

Armotisation

OtherSales Net IncomeInterestCOGS SG&A Potential

Divestments

WorkingCapital

Liquidity

potential

In times of COVID-19 and a looming recession, releasing cash is a priority

§ Reduce spend

§ Reduce obsolescence

§ Reduce reserves/write-offs

§ Reduce warehousing & distribution costs

§ Reduce transportation costs

§ Decrease receivables§ Decrease inventories§ Increase payables

§ Improve capacity utilization

§ Improve sales efficiency

§ Reduce transaction processing costs

§ Increase standardization and automation

§ Lower cost of borrowing

§ Lower borrowing requirements

§ Reduce cost of capital

§ Improve access to credit facilities

Working Capital is the “cheapest source” of cash

ILLUSTRATIVE


Working capital as a source of cash

Failing to react will lead to losses. Working capital can partly compensate missing cash

CostsSales Net Income

Potential Divestments

WorkingCapital

Full liquidity potential

Released WorknigCapital

Sales Cost Potential Divestments

Loss Income after

working capital

release

Working capital

Full liquidity potential

Pre-Crisis cash flow view “In-Crisis” cash flow view

Decreases by 50% Disproportional reduction in

cost due to reduced material cost / “Kurzarbeit” etc.

Cash released from Working Capital

Tied up cash

Addressing working capital optimization as another source of cash to reduce impact from missing sales and on-going costs

ILLUSTRATIVE


47

42

57

Working capital potentials

The current crisis offers a potential to reduce working capital of up to 30%

Total DSO DIO DPO [days]

32

35

38

58

52

68

+10% +5-20% ? -10%

Risks without actions:

Extend for selected suppliers in exchange to keep price and business

Stop buying raw materials (align to demand)

“Smart Stop” production to reduce inflow of finished goods

Extend payment to +10 days and guarantee business

Link to price negotiations

20

12

During the Crisis (no actions taken)

Before COVID-19 Crisis

After actions are taken

32

Immediate Crisis Actions (selected)

Plus Working capital optimization levers

+0-10% - 15% +10-20%

increases since customers pay later

Up tp – 30%

Increases due to missing demandor:Decrease due to supply issues

stay the same or decrease since suppliers ask for earlier payment

See details of levers on following pages

DSO = Days Sales Outstanding, DIO = Days Inventory on Hand, DPO = Days Payables Outstanding. See last page for calculation baseline


Best in class working capital (days)

Comparing an industry sector to best in class companies gives a first indication of potential target levels (pre-crisis)

Total DSO DIO DPO [days]

26

41

59

23

7

92

32

52

47

18

32

49

21

54

44

63

18

51

54

10

11

31

22

43

53

47

48

67

21

74

104

148

109

49

130

83

82

93

56

58

68

50

20

60

336

-44

-37

-32

-32

-26

-20

-8

-3

15

20

29

37

55

58

Semiconductors & EquipmentDialog Semiconductor Plc

Household & Personal CareUnilever NV

ChemicalsLinde AG

Wireless TelecommunicationsVEON Ltd.

Marine ShippingA.P. Møller-Mærsk A/S

Office Equipment & SuppliesCimpress NV

Construction and EngineeringHochtief AG

Automotive Parts & AftermarketFaurecia SA

Oil & GasOMV AG

Railroads & TruckingVTG AG

MetalConstellium NV

MachineryPicanol NV

Telecommunications EquipmentTomTom NV

Aerospace and DefenseBAE Systems Plc

Industrial ConglomeratesThyssenKrupp AG

-247

Prior to Corona Crisis

Source: EU Working Capital survey 2018. See last page for calculation baseline


Major levers

To address working capital improvements four major levers need to be addressed

Culture and Transformation

Digital

Process

Commercial

Commercial§ Understand all terms in place § Contract analysis to identify value pockets § Link negotiations to current economic environment and

other cost reduction initiatives – e.g. 90 days payment terms in exchange of business continuity

1

Processes § Validate levers along processes and identify short term

actions (see our check-list) § Challenge individual process steps aiming to reduce

working capital and maximize cash flow impact § Adjust processes, organisation and systems accordingly

2

Digital§ Assess the impact of digital solution and tools § Many tools can be set-up in the short term and will deliver

an impact immediately

3

Culture and Transformation§ Ensure accountability for working capital management § Involve top managers (from a monitoring perspective)

4

1

2

3

4


Payables: Levers

A number of short term accounts payables levers can be pulled to free up cash DSODIODPO

Levers (selected) Potential (%) *Scope Effort

Conservative Aggressive Source: h&z Analysis

Payment Terms

Process

Digital

BOT-steered (RPA) sourcing including automatically tender and supplier selection based on price and terms

Tender platform (incl. eAuctions) for all materials and unstructured market information with integrated analytics

Contract analytics – identification and validation of existing contract terms vs. beneficial standard terms

Increase discipline in manual changes

Reduce number of payment runs to one / week

Establish claim process to actively delay goods received

Establish guidelines for payables / KPIs

Segment suppliers and align terms accordingly

Renegotiate terms with suppliers: Extend payment terms to 90 days where possible in exchange for business continuity

Switch to ex-post payment (vs. ex-ante)

All materials

All materials

Standardized mat.Orders < 80k€

All materials

TWC 5%3% 8%

EBITDA

Use Case

Use Case

Use Case

Use Case

9%4% 5%TWC

EBITDA

5%

EBITDA

2%TWC 7%

2%

Realized in less than 6-8 weeks

Payables


Inventory: Levers

Despite inventory being traditionally slower in reduction. There are a number of short term actions that can show immediate effects

DSODIODPO

Levers (selected) Potential (m€)Scope Effort

Conservative Aggressive

Source: h&z Analysis

RawMaterials

Finished Goods

Digital

Reduce safety stocks through, SAP Parameter Optimization based on the h&z inventory Optimizer (SAP Plug In)

Demand Analytics to improve planning input and better react to upswing

Scenario planning and what-if simulation

S&OP and scenario-based decisions

Clean out stock with high reach

Daily inventory control with immediate corrective actions

Regional Supply Chain Planning to take benefit of improved Demand analytics and scenario-based planning

Stop goods inflow and manage according to demand

Reduce call off quantities

Supply network and consolidate stock

All materials

All materials

All materials

Product Portfolio Optimization – review cost of storing goods vs. margin impact

17% 25%8%

EBITDA

TWC

5% 15%

EBITDA

TWC 20%

15%8%TWC 7%

EBITDA


Inventory


DSODIODPO

Levers (selected) Potential (m€)Scope Effort

Conservative Aggressive

Source: h&z Analysis

Renegotiate terms (limited option in current economic situation)

Dynamic Discounting for time-based scaling of the cash discount to accelerate payment (Cost-effective alternative to factoring)

Analyse payment discipline at granular level and uncover process bottleneck

Automatic debit payments for larger accounts

Align Payment terms to production strategy (MTS, MTO, ETO), where e.g. ETO requires upfront payment

Segment customers and adjust pricing strategy accordingly

Reduce Incorrect invoices < 1,5% of total

Extend terms based on customer‘s financial situation and off-set with factoring

Sales order split per delivery instead of customer order

Larger accounts

Larger accounts

Daily dunning, send digital and postal invoice on day of Goods Issue

TWC 5%

EBITDA

Receivables Levers

Receivables should be touched with care. Primary goal is to secure business continuity and support customer sales

Payment Terms

Process

Digital

MTO, ETO

All

-

80%70%TWC

EBITDAImpact of factoring, and connected cost

TWC

EBITDA

3%


Receivables


Overall approach

The validation of value pockets can be conducted in a 2 week timeframe in three virtual workshops

Prepare Conduct working capital potential sessions Decision proposal

2 weeks

Virtualkick-off

Payables Inventory Receivables

2 virtual sessions per area

Virtual session #1 (3 hrs):

§ Introduction & Overview§ Current situation and set-up § Understand levers § Discuss potentials § Narrow down scope

DecisionNext steps

Virtual session #2 (2 hrs):

§ Review measure sheets § Identify fast actions § Prioritization § Roadmap to generate cash

§ Collect background information

§ Prepare virtual review sequence

§ Collect required data

§ Consolidation of results § Bottom up validation of

potentials § Cash roadmap § Decision proposal § Support for realization


Transformation approach

Not only innovative levers will deliver results, but the human side of the transformation needs to be addressed as well

Innovative LeversHOW

WHAT

WHY

Leadership Commitment

Hands-on Transformation

Our approach to transformation has been distinguished by our clients with the

Hidden Champion Award in Transformation.


In times of Corona, circumstances are changing fast – we adapt our way of working with the same pace and work with our clients fully virtual and effective

§ Due to Corona we are right now working with all our clients in virtual teams

§ And it works very well!§ We work with state of the art

collaboration tools, e.g. MS Sharepoint, MS Teams, Skype for Business, Trello, Jira, Klaxoon, Alfresco

§ We are used to agile working formats and virtual work – 1/3 of our consultants are certified Scrum Masters

Proven methods and concept for virtual working


Summary and next steps

You focus on daily businessWe focus on the near term future and optimizing working capital

We are ready to support you to navigate through the current crisis

Senior Experts with true Hands-on mentality are ready to start

We can be compensated based on savings generatedDetails to be discussed

Please contact us


Appendix

Appendix: Explanation on Calculation and Abbreviation

Days Sales Outstanding (DSO) = Accounts Receivable/(One day revenue) – Year-end trade receivables net of allowance for doubtful accounts, divided by one day of average revenue– A decrease in DSO represents an improvement, an increase a deterioration

Days Inventory Outstanding (DIO) = Inventory/(One Day Cost of Goods Sold (COGS))– Year-end inventory balance divided by average days COGS– A decrease is an improvement, an increase a deterioration

Days Payables Outstanding (DPO) = Accounts Payable/(One Day COGS)– Year-end trade accounts payable balance divided by average days COGS– An increase in DPO represents an improvement, a decrease a deterioration

Total Working Capital (TWC) = (DSO + DIO – DPO) – Year-end DSO + DIO - DPO performance (in days as calculated above)– The lower the number of days, the better

© Copyright h&z Unternehmensberatung AG, 2020

h&z Unternehmensberatung AGNeuturmstraße 5 | D-80331 München

+49 89 242969-0 | h&z Management Consulting

www.huz.de

Thomas Mrozek | Partner

+49 89 242969 - 832 | [email protected]

Alexander Götte | Head of Digitalization

+49 (0)172 88 19 040 | Alexander.Gö[email protected]

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