Daily Archives: March 24, 2010

A Quick Introduction to Finance, Part I

A recent article over on CPO Agenda on Skills for the Future that summarized the findings from a recent workshop that debated the skills the future would require identified better finance skills as keys to future purchasing success. Since the article simply rambled off a list of terms with no definition, I decided I’d define the basics for you.

Working Capital: is a financial metric which represents the operating liquidity available to a business. It’s calculated as current assets minus current liabilities. Positive working capital is required to ensure that a firm is able to continue its operations. Furthermore, it must have enough cash on hand to satisfy operational expenses and maturing debt.

Current Assets: include inventory, holdings, and accounts receivable.

Current Liabilities: accounts payable, debts, and (due) operational expenses.

A key part of working capital management is:

Cash Management: which aims to ensure that the business always has enough cash-on-hand to meet day-to-day expenses.

For example, let’s say that monthly payroll is 200,000, monthly leases are 50,000, and 100,000 in payables are due within the next 30 days. This says that the business needs 350,000 to meet its expenses this month. This also says that, unless payables are received, if the business only has 400,000 in the bank, then it only has 50,000 available for new investments or initiative. As a result, even if you wanted to buy 100,000 in raw materials to negate the need for your supplier to get financing and reduce total supply chain costs, you couldn’t do so. On the other hand, if the business had 500,000 in the bank, you could, but you wouldn’t necessarily want to unless it was the best use of the business’ cash.

Part of Working Capital Management is making the right decisions when it comes to managing cash. This includes making the right borrowing decisions as well as the right investing decisions. If financing your supplier reduced your total cost of ownership of 300,000 worth of goods by 1%, but a short term loan could generate 6% interest, the short term loan would be the better decision. This is because it would generate 0.06 * 100K or 6K worth of interest as opposed to the 0.01 * 300K or 3K worth of savings. On the other hand, if the financing reduced the total cost of ownership of the goods by 3% and the best interest rate was only 4%, financing the supplier’s raw material buy would be the right choice because 9K worth of savings beats 4K worth of interest any day. This is the type of financial planning that Supply Management professionals need to understand to make the right recommendations, and decisions, for the business as a whole.

Share This on Linked In

Efficient Sourcing In Marketing, Part I

Three years ago CIPS and the IPA came out with their report on Magic and Logic: Re-defining sustainable business practices for agencies, marketing, and procurement in their attempt to change the game and get the sacred cow marketing budget under control. It was an insightful report, as I noted in my two-part series on Magic & Logic (Part I and Part II), and a great first attempt at carving up the sacred cow. Then, two years ago, Efficio entered the game with their paper on The Creative Challenge: Driving Efficiencies in Marketing Procurement. This report, which covered some of the key challenges involved initiating collaboration between marketing and collaboration, as well as some of the typical savings levers that can be used to negotiate savings anywhere from 3% to 50%, provided an 8-step approach to driving efficiencies in Marketing Procurement. As per my posts on The Creative Challenge (Part I and Part II), it was a good starting process and a great second attempt at serving that sacred cow on a platter. Since them, I’ve been waiting for another paper that will complete the trilogy and, hopefully, provide us with the ultimate approach to Marketing Procurement. And while it certainly isn’t the ultimate approach, Booz & Co.’s recent attempt, Efficient Sourcing In Marketing is a good end to the trilogy. As noted in the introduction, the following, all-too-common, scenario speaks volumes about the sourcing side of marketing at large companies. The large retail bank’s approach to buying marketing-related services and materials was typical. On direct marketing efforts, decentralized business units worked with advertising agencies of their choice — agencies usually chosen on the basis of demonstrated capabilities, their understanding of the nuances of the individual businesses, and the personal relationships they had built over time. The relative cost was hard to compare, as each of the bank’s business units negotiated its own agreements with its marketing partners. Pricing was usually project-based, with no standardization from one business unit to another, even when it involved universally used items, such as envelopes, mailing inserts, and postcards, or when units shared the same vendors. By ignoring costs, which can represent a quarter of many companies’ total purchasing outlay, the company is leaving huge sums of money on the table — as much as 40% to 50% in some cases. This can easily mean tens of millions of dollars of savings at many large companies in the CPG, Pharmaceutical, or Automotive sectors that rely heavy on marketing. These savings can be reinvested in more successful campaigns, truly allowing marketing to do more with less when efficient strategic sourcing comes to the table, provided both departments collaborate to an unprecedented degree. This will require adherence to a six-step process, that I’ll address in Part II, but the good news is that the payoff can materialize quickly. Often, merely creating more visibility into a supplier’s relationshipsacross a firm and discussing the level of business with the supplier can elicit more favourable pricing. Furthermore, the appropriate identification of savings target for different types of services can lead to rapid savings. The report gives an example of a CPG company that targeted 8% savings on creative services, 16% savings for less complicated services (that could be done in-house or by lower-cost resources), and a 18% savings through the adopt of a preferred set of enterprise-wide vendors. Overall, the company reduced cost by 42%, saving 10 Million on what was a 25 Million spend! Share This on Linked In