Many European companies are working hard to solve their “captive cash” problem, improve their cash-to-cash cycle, and manage their financial and supply chain risk across complex markets and supplier agreements. But the two primary approaches they take—supply chain finance and working capital reduction—result in very different supply chain outcomes.
Using supply chain finance or “reverse factoring” to free up cash
Supply chain financing helps firms help their credit-worthy suppliers finance receivables more easily at a more attractive interest rate. Historically funded and managed by a bank, supply chain finance now also employs a battery of technologies/platforms and financial business practices that enable discounting of accounts receivable (A/R) and financing of confirmed accounts payable (A/P).
How effective will a supply chain finance initiative be in your firm's efforts to free up working capital? Your success will depend on elements including the difference between your firm's credit rating and those of your onboarding suppliers, your current and target payment terms, the scope of your onboarding suppliers and the related value stream and the lead time of your approval process.
Furthermore, since electronic companies often have large bills-of-materials (BOM) and many suppliers, supply chain finance initiatives in the electronics sector work best if you seek to do business with mid-sized suppliers. A successful initiative also requires buy-in, alignment and awareness from your treasury, accounting, procurement and IT departments. Likewise, it's important to engage auditors to ensure related savings are accurately recorded on your balance sheet and not re-categorized after the fact as a lump of debt.
Using better inventory policies to better manage working capital
While some firms attempt to accelerate their cash-to-cash cycle by reviewing contracts to extend payment terms or shorten their collection cycles, with inventory a big part of your working capital, it pays to develop stellar inventory policies. How can you determine the best inventory policies to support your working cash reduction goals?
- Strategically segment and assess individual areas to review your inventory management processes and policies as part of an overall supply chain approach. Do you have an internal inventory management process that lets you identify problem areas and take immediate action? If not, you'll want to work with the appropriate internal departments to review your processes around work in progress, finished goods, strategic inventories and even postponement. For example, if procurement's bulk buys are incurring carrying costs that outweigh bulk-purchase benefits, this is an area for immediate improvement. Likewise, poor forecast accuracies may require reviewing safety stock policies and determining how much inventory you need to satisfy the market while maintaining good service levels. A word of caution: If you randomly select a large block of inventory to reduce without a strategy, you company can inadvertently create ripple effects on your total cost to deliver down the road via expedited shipment costs and lost sales.
- Develop a working capital reduction roadmap. Gather a multi-disciplinary team including supply chain, sales, finance, manufacturing and procurement personnel, with oversight for your overall working capital reduction initiative. By developing a clear story about how you can keep or even increase your service to the market without jeopardizing sales—with all parties on the same page—your new working capital reduction program will balance procurement frequency/volume with manufacturing requirements, support optimal inventory levels, improve your forecasts and can provide up to a 20% reduction in working capital within six months.
There are many ways to improve your working capital position. Ultimately, of course, your strategic approach will be the one that best ensures your growth and best future investments.