Monthly Archives: June 2009

Could Incentives Improve Your Working Capital by 5%?

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A recent article in the Financial Times noted that big companies in the US and Europe have up to 1 Trillion in cash tied up in working capital, a number that represents roughly 6% of their revenue. Freeing up 83% of that would go a long way to reducing the financial pressure on many of these companies … and Ernst & Young, who recently surveyed 2,000 companies with respect to working capital improvements in 2008, believe that these companies can take a structured approach to improving working capital and improve their liquidity by 83% (by reducing the amount of cash tied up in working capital from 6% of their revenue to 1%).

The primary piece of advice given is that companies change their bonus schemes to reward improvements in cash performance. I think it makes sense. Sales pros perform best when their commission structure allows them to make progressively more with each sale. Procurement pros perform best when their compensation increases with real cost savings. So why shouldn’t supply chain and finance pros perform best when they are rewarded based on

optimal cash performance (which greatly decreases the cost of capital)?

Become a Financial Superstar with The Receivables Exchange

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The Receivables Exchange, which bill themselves as the world’s first electronic marketplace for trading accounts receivable, simply put, allows businesses to sell their receivables to a global network of institutional investors through an auction (with an eBay-like “buy it now” option) and access working capital in as little as one (1) day. The model, which has been covered by a large number of leading publications (including BusinessWeek, Forbes, and Inc.) is very successful with 99% of all auctions completing and more than 90% closing through the buy-out option, sometimes in as little as thirty seconds!

So why should you care as a Procurement Professional?

In these troubled times, it’s your job to do everything you can to save the business money … and helping finance, who are probably just going to the local bank and accepting the (higher) rates offered on operating credit lines, save money on working capital counts. If you need 2,000,0000 of working capital for the next 30 days while waiting for payments to come in and you take a loan at 2.5% when you could sell your receivables (as an asset-based sale) at 1.5%, that’s 20,000 in financing payments you don’t need to be making. If you have to do it every month, that’s 240,000 of instant savings. And we all know that the financing terms can be much more onerous than just 2.5% for many small and mid-sized companies today, meaning that this can be a million dollar plus savings opportunity for many mid-sized businesses.

Not only can you point out this solution to your finance team, which is probably spending 2.7% of working capital unnecessarily on an annual basis, but you can use your procurement and customer expertise to let them know which receivables would be the most attractive to third party financiers and which receivables would command the best rates. This would go a long way to helping traditional finance managers, that probably see you as the “L” in “P&L” (as astutely noted by Mr. Guth on the VMO blog), understand the cost-savings potential of your department when your expertise is applied throughout the organization.

Furthermore, it’s also your job to keep tabs on the financial health of your suppliers and help your strategic suppliers out so that they are there to help you in the future. If you know that they are in need of more working capital, and you’re not in a position to pay them early (at a fair discount), you can point them to The Receivables Exchange and even help them with the on-boarding and due-diligence process.

So how does The Receivables Exchange work?

Unlike traditional factoring, which generally costs more and places much more onerous restrictions on your financing, The Receivables Exchange is completely anonymous, your customers are not notified that your receivables have been sold (unless you want them to be notified — which means there is no impact to a customer’s AP department) with a 100% transparent fee structure, that is free from restrictive covenants. You bundle one or more invoices for auction, define the minimum advance you require and the maximum transaction fee you’ll pay (for a 30 day advance), your optimal “buy it now” financing requirements, the auction start time (usually “now”), and the auction length (3+ days). Then 30+ buying organizations, which represent 15 Billion in A/R buying power, bid on your receivables and, if the requirements are reasonable, a few days later (1-10 depending on how long the auction takes to close and transfer time requirements), you have cash in your bank account. Then, when your customer pays your invoice(s), the advance, along with the lending fee, is paid to the buyer, a small transaction fee (that is typically between 30 and 60 basis points and determined by your z-score) is retained by The Receivables Exchange, and the remaining funds go into your bank account.

And it’s a sellers market right now. The exchange currently has buying power that is four times it’s current throughput with a number of Receivables Buyers still waiting in the wings to take advantage of the great supply chain financing opportunities that are being passed up by banks and other traditional lenders. The only downside is that the platform is currently limited to US-Headquartered sellers. You can list international receivables on the exchange, including receivables due to international units, but you currently have to be operating, and headquartered, in the US to take advantage of the exchange. When you consider that you can significantly decrease DSO at a very low cost of capital, compress CCC, and increase ROE in a matter of minutes once you are registered (as the auction environment has been optimized for the sale of receivables and the process of uploading your invoice and due diligence documents, bundling for auction, and defining your minimum and optimal terms has been streamlined to only take a few minutes, on average) and download their Adobe Air client, it presents a great opportunity for any company that needs to improve their working capital situation.

For additional information, you can contact Paul Hoeper ( directly.

A Few More Ways to Go Green and Save Cost and Energy

Last fall, Industry Week ran a good article on getting the green light that outlined some good ways to go green and save green at the end of the article that I haven’t covered yet, and in one case, even thought about before. Cutting right to the chase:

  • Install Alternate Power Units (APUs) in Private fleets

    for heaters, air conditioners, etc. in sleeper units. This can cut engine idling time by up to 80%.

  • Efficiently Route and Load Transportation
    Reduce out of route and empty miles, increase cube utilization, and emphasize multi-stop shipments.
  • Near-Source Air-Intensive Components
    If you receive plastic bottles or packaging in un-blown, test-tube format, blow them into shape on-site, reducing the number of truckloads required to deliver the bottles or packing to the plant by up to 90%.

For more ideas, see the article.

Building Better Links in Your High-Tech Supply Chains

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An article from late last year in the McKinsey Quarterly on building better links in high-tech supply chains did a great job of summarizing the roadblocks to collaboration in today’s high-tech supply chains and of providing great advice for building better bridges across your supply chain.

When you get down to the nitty-gritty, the following roadblocks are almost universally present in under-performing supply chains:

  • Partner complexity and churn

    Supply chain partners often change as product designs and specifications evolve.

  • Siloed forecasts

    Manufacturing, Sales and Marketing, and Product Development often keep, and modify, their own copies of the forecast separately.

  • Poor data quality

    OEM forecasts, which set broad targets across a number of product lines, aren’t typically granular enough to be useful to partners.

  • The spiral of mistrust

    Executives often believe that they must guard information on their business plans and processes, even from partners.

However, with a little work, they can be removed. The advice given in the McKinsey article is good.

  • Sledgehammer the Silos

    Everyone needs to work off of the same plans and forecasts.

  • Trust is Tantamount

    Very little is truly so confidential that it can’t be shared with (strategic) supply chain partners. For example, point-of-sale, customer forecasts, and primary market data will soon be public knowledge anyway (a supplier could walk in and see your product in a store, access public import/export records, and do a survey to see where most of your product ends up), so why not share the information up front? Confidential designs beyond the subassembly they’re building are one thing, forecasts are another.

  • Share

    Why should your partners use their own separate distribution networks with overlapping inventory hubs and logistics systems, which only increases costs for everyone? These assets can, and often should, be shared … and this will reduce costs for all parties.

  • Collaborate

    Undertake joint product development, at least on the components your partner is responsible for. After all, they’re the true experts and given the freedom to come up with a design that conforms to a few parameters might save you a bundle of cash. Look at what Tata Motors did. You could do that to.

How Can You Save If You Don’t Consider All Your Options?

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A recent article on the Procurement Leaders Network had a very shocking statistic: only 52% of businesses look at customs duties as a potential area for cost savings (according to a recent research survey by Deloitte). Considering that misclassifications alone cause most companies to overpay duties by 7% to 11%, this presents a substantial savings opportunity for any company that imports more than ten million dollars a year. Furthermore, better utilization of Free Trade Agreements can often significantly reduce, if not eliminate, duties on millions of dollars of merchandise. Many companies have doubled and tripled their free trade duty savings (and saved millions of dollars) just through FTA management. And then there’s Free Trade Zones that can save you even more! With a little Trade Visibility, you can save a lot of money. So why aren’t you?