Working Capital Optimisation · PwC London School of Mines 2019 06/06/19 4 …but not all working...

London School of Mines

6 June 2019

Working Capital Optimisation

PwC

London School of Mines 2019 06/06/19

2

PwC specialist Working Capital practice

• Dedicated team of experienced Working Capital practitioners

• We are operators not re-sprayed accountants

• 75 dedicated practitioners across Europe

• Strong implementation focus at operational level

• Hands-on approach to accelerate progress

• Focus on working with people to deliver change

• We have worked with over 400 companies to improve NWC

• We have delivered more than €31bn of cash benefits

• Sustainable benefits typically represent of 5-10% of revenue

1 Specialist Practice

2 Realisation Focus

3 Track Record

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Our Mine 2019 survey shows improvements in ROCE and Net operating cash flows of Top 40 players…

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…but not all working capital levers have improved over the recent past – and additional opportunities exist.

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Working Capital is the cheapest source of cash.

Trade AP

Inventory

Trade AR

Capex

Equity

Debt and

Borrowing

Divestment

Securitisation

Third Party Financing

Fixed Assets

Financial

Investments

Dividends from holding

Tax Strategies

CashWorking

Capital

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Top 40 players: The trend since 2015 shows that difference between top and low performers is becoming narrower

Note: Source: PwC Analysis; Top 40 Metals & Mining players; NWC days calculated as: ((Debtors + Inventory – Creditors)/Sales )* 365

1 day of improvement in NWC is worth:

Small Company: £1.5m

Midsize Company: £12m

Large Company: £44m

• The trend since 2015 shows that

difference between top and low

performers is becoming narrower

• Top performance is still widely

driven by the large players

• The median performance shows a

steady deterioration in net working

capital position since 2015£

• Upper quartile performance has

deteriorated significantly since

2016.

20

24

31

46

7

1

11

30

45 44

46

56

9 8

15

48

-

10

20

30

40

50

60

2015 2016 2017 2018

Net Working Capital Days Trend

Median Upper Quartile Lower Quartile Weighted Average

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Top 40 players: Top performers have reduced their DSO in the last two years.

• The average DSO performance

largely tracks the median with DSO

reducing over the last year

• Top performers have been

consistently reducing their DSO in

the last two years.

• The lower performers have seen a

significant decrease in DSO from

2017 to 2018.

30

33 33 32

21

25

22

20

43

49

53

46

32

38 37

35

-

10

20

30

40

50

60

2015 2016 2017 2018

DSO Trend


Note: Source: PwC Analysis; Top 40 Metals & Mining players; DSO calculated as: (Debtors/Sales )* 365

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Top 40 players: DPO has been reducing across the Top 40 in recent years.

44 46

44

38

29 29 26

25

61

69

65

58

51

59

51

48

-

10

20

30

40

50

60

70

80

2015 2016 2017 2018

DPO Trend

Median Lower Quartile Upper Quartile Weighted Average

• Top performers and the larger

players have seen reductions in

their DPO in recent years.

• The median performance has been

seen a sizeable reduction from

2017 to 2018.

• The lower quartile performance has

gradually decreased over the last 4

years

Note: Source: PwC Analysis; Top 40 Metals & Mining players; DPO calculated as: (Creditors/Sales )* 365

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Top 40 players: DIO increased significantly across all performers in the last year.

• DIO increased for both the median

and weighted average performance

in 2018.

• The larger players have lower

inventory levels than the median.

• The upper quartile performers show

relatively stable DIO levels in recent

years until a sharp increase in 2018

33

37 35

59

22 21 24

43

49

45

53

73

28 28 29

60

-

10

20

30

40

50

60

70

80

2015 2016 2017 2018

DIO Trend


Note: Source: PwC Analysis; Top 40 Metals & Mining players; DIO calculated as: (Inventory/Sales )* 365

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NWC days performance varies significantly across the Top 40, with median performance at 46 days

114 107

98 95

90 83

77 67

62 57 56 56 56 56

55 54 53

50 48

47 46 46 45

44 43

42 38 37

36 36 35

31 30

29 29

26 22

19 8 7

0 (10)

(60)

(80) (60) (40) (20) - 20 40 60 80 100 120 140

JFE Holdings, Inc. (TSE:5411)

Hyundai Steel Company (KOSE:A004020)

China Minmetals Corporation

Mitsubishi Materials Corporation (TSE:5711)

POSCO (KOSE:A005490)

Nucor Corporation (NYSE:NUE)

Freeport-McMoRan Inc. (NYSE:FCX)

Kobe Steel, Ltd. (TSE:5406)

Norsk Hydro ASA (OB:NHY)

thyssenkrupp AG (XTRA:TKA)

Lower Quartile

China Nonferrous Metal Mining (Group) Co.,Ltd.

Baoshan Iron & Steel Co., Ltd. (SHSE:600019)

China Baowu Steel Group Corporation Limited

Nippon Steel Corporation (TSE:5401)

ArcelorMittal (ENXTAM:MT)

China National Gold Group Corporation

Tata Steel Limited (BSE:500470)

Angang Steel Company Limited (SEHK:347)

Shaanxi Non-ferrous Metals Holding Group Co., Ltd.

Jiangxi Copper Corporation Limited

Median

Jiangxi Provincial State-owned Enterprise Assets Operation (Holdings) Co., Ltd.

Anshan Iron and Steel Group Co., Ltd.

Anglo American plc (LSE:AAL)

China Aluminum Group Limited

Vale S.A. (BOVESPA:VALE3)

Jiangxi Copper Company Limited (SEHK:358)

Hindalco Industries Limited (BSE:500440)

Glencore plc (LSE:GLEN)

Zijin Mining Group Company Limited (SEHK:2899)

Hunan Valin Iron & Steel Group Co., Ltd.

Upper Quartile

Aluminum Corporation of China Limited (SEHK:2600)

TongLing Nonferrous Metals Group Holding Co., Ltd.

Jinchuan Group Co., Ltd.

Rio Tinto Group (LSE:RIO)

Jiangsu Shagang Group Co., Ltd.

Shougang Group Co., Ltd

BHP Group (ASX:BHP)

Shaanxi Dongling Industry and Trade Group Co., Ltd.

Shandong Iron & Steel Group Co., Ltd

Hbis Company Limited (SZSE:000709)

NWC Days Benchmark 2018

Note: Source: PwC Analysis; Top 40 Metals & Mining players; NWC days calculated as: ((Debtors + Inventory – Creditors)/Sales )* 365

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DSO performance ranges from 20 days (upper quartile) to over 80 days for the Top 40

84 83

70 63

58 57

54 52

50 49

46 46 46

40 39 39

36 34 34

33 32 32 32

31 28

27 27

27 26

24 21

20 20

19 19

16 16

16 14

10 8 8

3

- 10 20 30 40 50 60 70 80 90











Lower Quartile











Median







BHP Group (ASX:BHP)




Upper Quartile











DSO benchmark 2018

Note: Source: PwC Analysis; Top 40 Metals & Mining players; DSO calculated as: (Debtors/Sales )* 365

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DPO performance ranges from 25 days (lower quartile) to 58 days (upper quartile) for the Top 40

167 119

112 106

100 95

84 67

66 59

58 58

55 55

50 50

48 45

44 43

38 38 37 37

33 32

31 31

29 28

27 25 25 24

22 21 20 20

19 18 17 16

11

- 20 40 60 80 100 120 140 160 180











Upper Quartile





BHP Group (ASX:BHP)






Median











Lower Quartile











DPO benchmark 2018

Note: Source: PwC Analysis; Top 40 Metals & Mining players; DPO calculated as: (Creditors/Sales )* 365

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DIO performance ranges from 43 days (upper quartile) to 73 days (lower quartile) for Top 40

133 100

93 93

88 86 86

81 77

74 73 73

73 70

67 66

65 64

62 61

59 59 59 59

54 50 49

47 47

46 45

44 43

41 38

37 37

35 34

31 31

29 18

- 20 40 60 80 100 120 140











Lower Quartile











Median











Upper Quartile







BHP Group (ASX:BHP)




DIO benchmark 2018

Note: Source: PwC Analysis; Top 40 Metals & Mining players; DIO calculated as: (Inventory/Sales )* 365

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Challenges of working capital optimisation: 1.Working Capital management is often misunderstood!

Perception

Is purely a finance issue

Is a balance sheet item

Is improved only with securitisation or systems

implementation

Has a negative impact on customer service (collect

early, push product out and pay late)

Generates little benefit

Reality

Is a mainly operational issue

Impacts P&L

Is improved with new policies, processes and

metrics

Improves customer service (pay, deliver and collect

according to negotiated terms)

Is one of the fastest ways to enhance shareholder

value

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Challenges of working capital optimisation: 2.Process improvement is often complex in the detail and driven by the shop floor

Physical Supply Chain

Financial Supply Chain

Order To

Cash

Cash Collection

Ord

er M

an

ag

emen

t

Procureto

Pay

Payment

Rec

eiv

ing

&

Ev

alu

ati

ng

Cross functional: Sustainable improvements are complex and require an operational and cross functional approach

Shielding: Working Capital is used inappropriately as buffer for sales and service

Complexity: Improvements impact interrelated processes and locations

Execution discipline: Improvements are dependent on operational quality on the ‘shop floor’

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Challenges of working capital optimisation: 3.Lack of visibility of underlying performance and often competing targets

Total working capital

performance

Headline –

Management

focus

Support –

Operational

focus

Receivables

management

– headline KPIs

Inventory

management

– headline KPIs

Payables

management

– headline KPIs

Receivables

management

– operational

reporting

Inventory

management

– operational

reporting

Payables

management

– operational

reporting

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Challenges of working capital optimisation: 4.Appropriate KPI’s need to be set to optimise working capital

1st level -Selected working capital KPIs to

be monitored and tracked on a

monthly basis

Net working capital as % of sales

Creditor days (DPO – days payables outstanding)

Inventory days(DIO – days inventory outstanding)

Debtor days(DSO – days receivables outstanding)

2nd level –Range of working capital KPIs

that can be used to monitor and

track progress against selected

working capital improvement

activities

Weighted average

terms

Weighted average

days to payStock turn

Forecast

accuracy% overdue

Weighted average

days to collect

Early/late payments Spend per termQuality On Time In

FullProduct availability Receivables aging

Disputed receivables

value

Terms by supplierAccounts payable

valueOrder Fill Rate

Production Capacity

UtilisationReceivables value

Weighted average

terms

Spend by supplier% EDI/ scanned

invoicesStock Location Perfect Order Metric

Sales per payment

term

Collections

performance per

customer

Payment run profile% of spend on pre-

defined settle dates

Supplier Delivery

PerformanceForecast bias Billing delays Held/released orders

Payment performance

per supplierInvoice booking delay Supplier lead times Customer lead times

Customer

segmentationCredit notes

Amount of blocked

payments

Contracted terms

leakage

Raw materials on

stock for more than

30 days

Finished goods on

stock for more than

30 days

Collections vs target …

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Challenges of working capital optimisation: 5.There is no one silver bullet

1. Commercial terms

• Understand all terms which are in place

• Match terms with size and nature of contract

• Establish “preferred term” based on best practices

• Develop ‘model’ to use in negotiations and term adoption

2. Process optimization

• Develop an understanding of each process

• Walk-through testing and process optimization

• Challenge individual steps of processes with the aim of 0ptimising

full processes with regards to WCM

3. Compliance and monitoring• Data analysis to measure compliance with terms

• Root-causes analysis to recognize points of non-compliance

• Evaluation of changes needed to ensure compliance and valuation of potential cash impact

• Establish relevant working capital management KPIs

4. Cash culture and management

• Cash and WC part of performance measurement

• Accountability and responsibility for WCM perf. and mgmt.

• Involvement of top mgmt. (from a monitoring perspective)

04

Cash culture and management

03

Compliance and monitoring

02

Process optimization

01

Commercial

terms

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Challenges of working capital optimisation: 5.Making it happen is all about people & change management, which needs resources and time

The change strategy will help determine:

• What change activities are required eg. organisation design, skills

development, etc.

• For which stakeholders

• When and how they will be delivered

Organisation Design

• Reporting structure

• Roles

• Performance measures

• Workgroups

Change Vision

• Develop change vision

• Change impact and readiness assessment

• Define best fit change approach and

strategy

1Leadership Focus

• Create leadership resolve

• Build leadership change skills

• Enhance leadership team

working

4

Performance and Reward

• Performance management and

reward framework

• Recognition programme

2 Culture Transformation

• Organisational values

• Behaviours and working

practices

5

Skills and Knowledge

• Needs analysis

• Learning intervention

• Coaching and development

Stakeholder Engagement

• Build teams and manage

stakeholders

• Communicate

• Transfer knowledge and skills

3 6

Change

Vision

Leadership

Focus

Organisation

Design

Culture

Transformation

Stakeholder

Engagement

Skills and

Knowledge

Performance

and RewardRealising

value through

behavioural and

organisational

change

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Challenges of working capital optimisation: 6.Maximising technology and adopting digitisation

1. Gain

Control

• Inventory Re-balancing

• Optimize Payment Terms

• Establish Payment Integrity

• Manage Exceptions

• Focus Metrics to Drive

• Attention and Behaviors

• Tactical Segmentation

2. Modify

Methods

• Best Practice Processes and

Policies

• Exception Root Cause

Elimination

• Extended Enterprise Initiatives

• Strategic Procurement

• Strategic Segmentation

• Holistic WCM Metric Dashboard

3. ImplementNew Models

• Shared Services

• Outsourcing

• E-Enabled Extend Enterprises

• Strategic Asset Tradeoffs

• Strategic Joint Ventures

• Demand-Driven Business Model

Quick Wins Sustainable Results

…Digitilisation and

Connectivity

• Dynamic Reporting

• Trade Finance

• Artificial Intelligence

• Process Mining

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Challenges of working capital optimisation: 6.Maximising technology and adopting digitisation

3D printing in automotive: Daimler AG increases spare-parts offer

Production of spare-

parts for vintage cars

Global Logistics Center:

1,1 Mio. sqm capacity

with 420.000 different

spare-parts on request

from screws to engines.

Dynamic ‘real-time’ Working Capital Reporting on Ipad

Working Capital Reporting Dashboard with operational KPIs, with over 1bn data lines, 30

linked systems / interfaces, showing realtime performance on portable devices / Ipads

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Best Practices: Order-to-Cash

Category Actions Typical mining industry best practice

Billing

Invoice process optimization• Automatic cross checking to master file• Invoices produced automatically once the billing trigger has been met

Increase billing frequency • Invoices despatched electronically and upon shipment of products

Credit payment terms negotiation

Introduce group terms • Global terms policy implemented with deviation approvals process• Long terms with specific Industry players / sectors (e.g. OEM automotive)• Metals exchange and counterparts payment terms

Early payments Offer discounts & rebates • System based cost v benefit assessment of offering early settlement discounts

Credit limit setting Credit limit restrictions • Credit limits optimised to encourage more frequent settlement & ordering

Collections & cash allocations

Proactive collections • Customer service focussed proactive account management

Dispute management Escalation & resolutions • Clear escalation framework with workflow driven surfacing and follow up of disputes

1

2

3

4

5

6

7

Order-to-Cash levers - illustrative example

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Best Practices: Procure-to-Pay


Payment terms

Payment term renegotiations

• Group standards and targets are pre-defined, communicated to buyers and reviewed annually• Terms are harmonized by main supplier group (spare parts, machinery, construction, consumables e.g. explosives)

and supplier payment terms are reviewed and benchmarked internally & externally• Payment terms reflect supplier size, profitability, lead times and inventory holding periods• Negotiations are pre-planned and information packs prepared for buyers• On-going monitoring and enforcement• Conscious management of a cash strapped supply chain and trade-off / management of any terms extension with

other factors like SCF facilities, ratings impact etc.

Payment processes

Legitimate blocking of payment (delivery issues)

• Automated 3-way matching provides immediate and accurate identification of issues• Integrated systems provide visibility of delivery issues and invoice errors to AP team• Controls are in place to ensure master data is maintained and accurately reflects contracts• EOM payment runs minimize early payments and optimize payment cycle• Payment clock is optimized through e-invoicing

Legitimate blocking of payment (invoice errors)

Alignment of payment term master data

Elimination of early payments

Evaluation of payment terms vs. discounts

Optimization of bank runs

Procure-to-Pay levers - illustrative example

1

2

3

4

5

6

7

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Best Practices: Forecast-to-Fulfil


Fundamentals

Optimise S&OP process

• Fundamental levers are to be optimized continuously

• Strategic improvements are best done once per year

• These activities generally should be completed before the

annual budget/planning process so effects can be

incorporated into the budget

• These activities require multi-functional teams and

inputs/alignment

• Balancing inventory levels and service-level goals over

a large assortment of stock-keeping units (SKUs) while

taking demand and supply volatility (incl. uncertainty

over work force availability, market insights etc.)

• Operational data must be continuously tracked to

monitor progress and improve decision making, e.g.:

• Inventory levels,

• Forecast accuracy

• Service levels

• Write-off’s

• RM DIO

• SF goods DIO

Reduce range/complexity

Strategic improvements

Set stocking policies

Reduce and prevent SLOB

Manage consignments

Operational improvements

Optimise safety stocks • Spare parts optimisation using tools that can detect and

anticipate needs (e.g. on pumps if they are going to break

soon that allows to better stock manage), and a focus on

spares management of strategic, critical, insurance and

fast moving

• Spare parts consolidation and management across mine

shafts

• Predictive maintenance cycles, predictive mine planning

and equipment monitoring

Spare parts management

Maintenance

Forecast-to-Fulfil levers - illustrative example

1

2

3

4

5

6

7

8

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How finance can make a difference

• Implementing the right and

consistent KPIs

• Cascaded down the organisation

and along the process chain

• Monitoring performance

• Rules, Targets & Incentivise

• Creating Awareness

• Retaining management attention

• Facilitate the sharing of best

practices & tools

• Encourage change management

• Support the activists

Creating Transparency Creating a Cash Culture Facilitate Best PracticeI. II. III.

HQ

BU BU BU

WC

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How we can support you

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Working Capital Management - Bio

Simon Boehme,

Director, Working Capital

Mobile: +44 (0) 7809 755 658

Email: [email protected]

Simon is a key member of PwC’s dedicated Working

Capital Network and has led working capital projects across

the globe and across a variety of industries (business

services, chemicals, engineering, Oil & Gas, manufacturing)

with the objective to assess current performance, identify

opportunities for improvement and recommendations to

achieve this, as well as supporting management in the

design and realisation of improvement opportunities.

Simon is one of the key authors of the European Working

Capital Study, an annual PwC publication analysing the

trends within the working capital management for Europe’s

largest listed companies.

Working Capital Optimisation · PwC London School of Mines 2019 06/06/19 4 …but not all working...

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Transcript of Working Capital Optimisation · PwC London School of Mines 2019 06/06/19 4 …but not all working...