Daily Archives: September 16, 2010

Working Capital Improvement: What the “Smart Kids” Do

Today’s guest post is from Sudy Bharadwaj, ex-analyst extraordinaire of the Aberdeen Group, former VP of MindFlow, former CMO of Informance, and, most recently, a star at Inovis.

Analyzing data from CFO Magazine’s “Working Capital Scorecard” (Part I and Part II), and reviewing case studies around the web as well as several interviews, reveals several themes, or habits, common to top performers. Perhaps the most compelling is a holistic view of the business process, change management and technologies deployed.

Business Process

Organizations can simplify the “bookends” of their enterprise business processes and focus on the order-to-cash (DSO — days sales outstanding) and source-to-settle (DPO — days payables outstanding; includes the procure-to-pay) processes. Simply put, focus on your customer processes and your supplier processes to improve these metrics. For DIO (days inventory outstanding), certainly internal processes need to be reviewed (for some enterprises, the manufacturing/production process). However, each external process connects into the manufacturing process, therefore, once optimizing each process has been successful, then organizations can optimize joint processes for further efficiencies. An example of optimizing joint business processes can be connecting your customers to your inventory, thus enabling faster moving inventory, and reducing the need for DIO. Similarly, on the supply-side, provide your suppliers visibility into your inventory and manufacturing requirements and enable the suppliers to replenish the inventory based on services levels.

Change Management

Some organizations are basing performance bonuses on working capital improvement, thus tying personal income to this specific business metric — a smart strategy. Organizations need to continue to think smarter. In several successful working capital initiatives, the sweeping organizational change is making the team pro-active vs. reactive. On the customer side, for example, some organizations (poor performers) do not realize a customer invoice is late until it is past due. By the time the collections team is aware of a specific delay in payment, they are too late — this payment from the customer may not happen for another 60 days. This can be referred to be as a reactive process. Organizations at the top-levels of working capital performance improve DSO by reviewing invoices prior to sending them to the customer. The review goes beyond just formatting and syntax to determine if the invoice matches a customer’s purchase order. In the event the invoice does not match, the collections team is notified and corrective action can be taken before the customer sees the error. By viewing collections within the order-to-cash process as a proactive process, successful enterprises transform the collections team and thus reduce time-to-receipt (payment).

Leverage various technologies

Technology can be double-edged sword. If an enterprise automates the process of manually generating invoices, and the invoices are incorrect 10% of the time, then automating causes the error to happen much faster. Key sets of technologies to leverage are a combination of automation, business process management (BPM) and a workflow-based system. Automation can come in numerous forms from a variety of vendors — from infrastructure providers, B2B integration providers, and providers of e-procurement and e-invoicing solutions to automate the various processes affecting DPO/DSO. Some of these technologies also support varying degrees of BPM, or a stand-alone BPM technology may be deployed, depending on the level of analysis required to analyze any information sent to customers/suppliers. Once such analysis is complete, the workflow-based system can be utilized to route any potential issues to proper personal within the organization.

Conclusion

The high performers in working capital, as measured by days working capital (DWC), improve the DWC by being pro-active vs. re-active in the various business processes which can directly impact this metric and it’s sub-metrics (DPO/DIO/DSO). However, the improvement is not accomplished by just addressing a single facet — process, technology or people, the improvement occurs by addresses all three facets simultaneously. Addressing all three facets enables the proactive management of the business processes, which contribute to improvement of working capital.

Thanks, Sudy.

Share This on Linked In

The Strategic Sourcing Debate, Part II (Who’s Right)

In Part I, we noted how Dalip Raheja of The Mpower Group decided to stir the global hornet’s nest last month by declaring that Strategic Sourcing is Dead and that The Sourcing Emperor Has No Clothes. This was quickly picked up across the supply management blog-sphere and resulted in powerful reactions from a number of prominent bloggers, including most of the heavyweights.

So who is right? Did Jason Busch (of Spend Matters) get it right when he insisted that “Strategic Sourcing Ain’t Dead, Regardless of What the Naysayers Suggest?” How about Robert A. Rudzki (of Greybeard Advisors and author of Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise) who focussed on “Returning the “Strategic” to Strategic Sourcing” (on Spend Matters)? Or Tim Cummins’ (who leads the IACCM) who lamented The Death Of Procurement: Nightmare or Nirvana?Then there was Steve Hall (of the Procurement Leaders Blog) who lamented on the “Rumours of the Death of Strategic Sourcing”, Dave Henshall (of Purchasing Practice) who addressed Procurement 2.0 – and Other Labels, Josh Dials (of Iasta) who said it’s time to ‘Put “Strategic” Back into your Strategic Sourcing’ (on eSourcing Forum), Joe Payne (of Source One Management Services) who shouted that “Strategic Sourcing Lives On!” (on the Strategic Sourceror),  and William Dorn (of Source One Management Services) who ranted that “Strategic Sourcing is Alive and Kicking”.

Only one person got it right. It wasn’t the Spend Matters prophet, Jason, the Greybeard Advisor, Bob, or the global contracting king, Tim. It wasn’t practice leaders Dave Henshall, William Dorn, or Dalip Raheja. It wasn’t Iasta’s newest blogger, Josh Dials, and it wasn’t the Procurement Leader advocate Steve Hall either. That’s right, it was:

Joe Payne. Source One’s Director of Strategic Sourcing, the cub among the lions, who rarely speaks up (and posts maybe twice a month) was the only who got it right. While everyone was arguing alive-vs-dead, cost-vs-value, fixed-vs-variable, etc. Joe was the only one who hit the nail on the head with his hammer by pointing out the one key fact that makes the whole debate moot:

At most companies, the concept of strategic sourcing hasn’t even been born yet. As Geoffrey Moore would say, strategic sourcing has yet to cross the chasm. This is true not only in the mid-market, which has just started to tune into sourcing and e-Sourcing, but, as Joe points out, at a large number of Billion-dollar multi-nationals as well. Even today, in 2010, strategic sourcing is still only being used at the leaders and innovators, which is never more than 20% of the market, and often not more than 10%. (This is clarified by the fact that the vast majority of companies still don’t use true spend analysis or decision optimization, the only technologies that allow you to strategically select the categories with the largest opportunities and analyze not only the total cost, but the total value of a proposed award, and the only two technologies proven to deliver double-digit returns, on average, every time they are used, with 11% for true spend analysis and 12% for decision optimization.)

This isn’t to say that the other contestants, and the heavyweights in particular, didn’t make some good points, as most of them did, but that many of them missed the key point. (Furthermore, just about everyone got something wrong too.) An idea can’t die before it’s born, and while you can argue that the continual evolution that is required as the organization gains maturity implies a continual death of ideas (until the original idea is barely recognizable), it also implies a continual rebirth of ideas.

So how did the other contestants fare?

I’ll let you know in Part III.

Share This on Linked In