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Cash on the table: consumer products working capital opportunities - EY - Global

Cash on the table

Consumer products working capital opportunities

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CP companies may identify further opportunities for improvement by examining the practices of leading class performers within and across industry segments.

So much progress in spite of so many challenges deserves praise. But CP companies cannot afford to slip back into complacency. The nature of the challenges in the industry — globalization, consolidation, commodity risk, heightened competition — are ongoing and call for continuous vigilance, improvement and innovation in WC management.

Sizable working capital opportunities

Variations in working capital performance between segments and between individual companies within each segment point to significant potential for improvement.

A high-level benchmarking analysis suggests that the leading 20 consumer products companies have between US$16 billion and US$33 billion unnecessarily captive in working capital processes.

In practice, experience across many working capital projects in varying industries and geographies shows that a dedicated focus on working capital management can deliver results at or above these levels.

The analysis compares the performance of the working capital components of each company with that of the average (low estimate) and the upper quartile (high estimate) of its peer group within its region. For the 20 companies in question, this equates to between 2.6% and 5.3% of sales.

The spread of performance for the industry has remained almost unchanged since 2002. The opportunity is distributed across the whole range of working capital components, with half coming from payables and one-quarter each from receivables and inventory.

WC cash opportunity per segment, 2010

  Cash opportunity
  Value (US$b) % WC scope % sales
  Average Upper quartile Average Upper quartile Average Upper quartile
Brewing 2.1 3.7 8% 15% 2.6% 4.6%
F&B 8.3 18.0 10% 22% 2.6% 5.6%
HPC 5.8 11.7 9% 18% 2.6% 5.2%
Total 16.3 33.4 9% 19% 2.6% 5.3%

Source: EY analysis, based on publicly available financial statements

Pursuing greater focus and innovation

Faced with so many challenges and amid evidence that improvement is available, the CP industry must respond.

Some of the principal initiatives and approaches that distinguish leading companies from the average include:

  • Focus on the details
    In an industry where leaders are focusing more closely on working capital basics, those who do not will likely lose ground. No doubt, many of the shifts in industry DSO/DPO relationships are the result of proactive moves by those on the forefront.

    Paying attention to detail is critical.

    Often a procurement director will work hard to negotiate payment conditions with a major supplier, perhaps achieving 60-day terms, but in some cases giving away much of the benefit by agreeing large minimum order quantities. And then the business accounts payable department may continue to pay in 30 or 45 days, because the system has not been updated to reflect the director's work.

    In addition, while consumer products companies are often reticent to confront major retailers about contract compliance, today's conditions demand adherence to agreed terms.

    Another area to explore is rebate arrangements with any given retailer. Today's point-of-sale technology provides retailers with timely and detailed data, which are often used to claim rebates through netting earlier than contractually allowed.

  • Explore new financing models
    An example of a new finance model is the credit facilities being created by certain retailers on behalf of suppliers. A retailer establishes a facility with a given bank. A supplier can then use a verified bill of sale to draw on its receivables.

    If the terms are 90 days, the supplier can wait the full interval for the full payment. But if it needs financing earlier, the bank discounts the receivables appropriately. Such factoring not only provides a supplier with more reliable and predictable cash flow, but also serves as an added source of financing for the retailer.

  • Pursue collaborative procurement
    Consumer products companies are teaming up with one another to consolidate procurement and logistics. One of the first such parings, between two major beverage companies, is said to be delivering savings of around US$1 billion per year.

    Such collaboration will of course require a relatively non-competing partner as well as great trust, but the model is already proving successful.

  • Get closer to retailers
    Greater working capital benefits stem from closer collaboration with retailers. Leaders in this area take steps such as dispatching personnel to the very aisles of retailers with the goal of optimizing product placement and replenishment.

    Such a move, it is generally noted, provides benefits to both the retailer and the consumer products firm.

    The most successful consumer products companies will be those that develop a privileged and collaborative relationship with key retailers.

  • Optimize inventories and production runs
    With globalizing supply chains comes greater complexity but also greater opportunity for optimization. Consumer products firms should take a hard look at manufacturing, supply and replenishment patterns to drive greater efficiency.

    At the same time, the consumer products industry has long understood that the clearer its line of sight into demand, the more optimized its operations. To the extent this information is in turn shared with the supply chain at large, benefits to the broader value chain increase.

    While some companies in certain sectors have made progress, much more can be gained from closer collaboration and information sharing with retailers.

  • Re-engineer products
    Consumer products companies are re-engineering products to derive savings. Even a minor product innovation, for example, reducing its size, can pare materials, production, packaging, shipping and inventory costs.

    Similarly, many are simplifying their product footprints. By reducing the total number of stock keeping units (SKUs), suppliers can achieve greater scale and efficiency.

  • Identify further working capital opportunities
    Consumer products companies should take advantage of the rapidly changing industry and market conditions not only to enhance their overall working capital performance, but also to identify further opportunities for improvement by examining the practices of leading performers within their segments, but also within other consumer products segments and other industries.

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