DAYS PAYABLE OUTSTANDING

Creating a data warehouse to maximize outstanding

accounts payable at Boise, Inc.

Brett Gage, Ed Jensen, WV Meyer, David Green, Andy Diehl November 14, 2014

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Contents Introduction .................................................................................................................................................. 2

Company Background ................................................................................................................................... 2

Relational Database Model ........................................................................................................................... 3

Data Warehouse Star Schema ...................................................................................................................... 4

Project Focus ................................................................................................................................................. 5

Reporting Methods and Views ...................................................................................................................... 9

Additional Questions................................................................................................................................... 11

REFERENCES ................................................................................................................................................ 12

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Introduction For this data project, our team looked at ways to improve Days Payable Outstanding (DPO) for

Boise, Inc., one of top producers of paper products in the nation with its headquarters in Boise, ID. In

this process we acquired a copy of the ERD for the accounts payable database to isolate related foreign

keys to DPO in order to create a set of tables for our data warehouse.

Company Background Boise began as a partner of the forest product industry, with the establishment in 1931 of Boise-

Payette Lumber Company. Boise then acquired a new mill in Wallula, WA in 1958 and started to

produce kraft paper under the name of Boise Cascade.

Over time more acquisitions was made by Boise Cascade purchasing paper mills. The mills still in

operations to this day for Boise Cascade since the acquisition are their International Falls, MN and

Jackson, AL mills. Their expansions of their portfolio included different business sector at one point, but

the paper division stayed their key business driver.

Boise Inc. was established when Boise Cascade was sold off to an investment firm in 2008, which

was driven on strategies of corporate social responsibility – “safe, sustainable manufacturing and

meeting customer needs”. The focus of Boise Inc. paper division remained the same providing

exceptional customer service and operations, under the parent company Packaging Corporation of

America (PCA) after the paper and packaging assets were purchased in 2013.

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Relational Database Model

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Data Warehouse Star Schema

VOUCHER_DIM

PK voucher_id

accounting_dt

post_voucher

business_unit_gl

entered_dt

origin

PYMNT_VCHR_FACT

PK voucher_id

PK acct_id

PK distrib_line_num

PK voucher_line_num

PK vendor_id

PK pymnt_id

business_unit

apid_amt

pymnt_gross_amt

pymnt_dt

due_dt

merchandise_amt

pymnt_message

RECEIVABLES_DIM

PK acct_id

voucher_id

bill_dt_aging

bill_dt_aging_desc

category

category_desc

eff_dt_aging

VENDOR_DIM

PK vendor_id

vendor_name

phys_addr1

phys_addr2

phys_city

phys_state

phys_zip

phys_country

PYMNT_DIM

PK pymnt_id

pyment_id_ref

schedule_id

remit_vendor

pymnt_terms

pymnt_handling_cd

pymnt_status

pymnt_amt

pymnt_rec_dt

DISTRIB_LINE_DIM

PK distrib_line_num

PK voucher_line_num

account

desc

line_nbr_

product

affiliate

dept_id

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Project Focus Our project’s goal was to answer the following questions in relation to Boise Paper Inc.:

What is the DPO for the organization?

Are there specific vendors/suppliers that make up a significant portion of the

variance?

Are there specific business units, operating locations, or business segments

that make up a significant portion of the variance?

Are there specific types of costs that make up a significant portion of the

variance? (Specifically items such as energy costs, or certain chemicals or

other direct materials)

Are discounted payment terms (ex. 2%10N30) being used effectively, or

would following the industry standard be more appropriate?

Can Boise Paper Inc. predict and weed out vendors that will cause a

significant impact on DPO variances prior to doing business with them?

The overall purpose of these questions is to help the company better manage its operating cash

position which is scrutinized by investors and creditors. Without analyzing the data fully, we aren’t able

to answer the questions exactly, but in working with Boise Inc. and understanding the data, we can

provide expected answers to these business questions which will prove why this type of analysis is a

useful tool.

What is the DPO for the industry? The payment terms for the paper manufacturing industry

vary from company to company, depending on their financial situation and the economy at present. We

calculated the DPO for Boise Inc., Domtar, and International Paper which were 30.04, 46.46, and 58.20

respectively (Filings and Forms, 2014).

DPO varies between 30 and 60 days. The closer to the DPO are to 30 days the better the

relations with suppliers will be and chances of discounts on the bill for prompt payment. The importance

of maintaining good supplier relations ensures a dependable stream of supplies being delivered, and

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could lead to extension of payment days in the future when needed. With prompt payments it could

leave the business in trouble for not having the money to pay the bills due to late receiving’s from

customers, and might lead to borrowing more money. This could also leave the business with less

working capital and cash flow to expand the business operations. With a DPO closer to 60 day a vice

versa effect occurs.

What is the DPO for the company? The current DPO for Boise Inc. is 30.039 days

($387,854,000/(3,486,108,000/270) calculated from the financial statements for Boise Inc. period from

January through September 2014). But the real question is what does that mean and how can

management make an impact to it? The number is simply a calculation of the ending accounts payable

balance divided by the cost of sales divided by the number of days in the period you are calculating

(Days Payable Outstanding - DPO, 2014). It requires an in depth analysis to determine what that DPO

calculation means and, more importantly, how to change it to positively impact your business.

Are there specific suppliers or vendors that make up that difference of company DPO and

industry standard DPO? Are discount terms being used effectively? These two questions correlate

closely together as each supplier sets their own payment terms and discounts. Most likely there are

going to be several vendors that offer discount rates to pay bills quickly. A discount rate of one to two

percent is very typical if invoices are paid within ten days of invoice issuance. The question for

management to answer is, what discount rate is required for the company to want to pay early? Is one

percent enough, is two percent enough? If it is, knowing those vendors who offer an early pay discount

would be beneficial if the company has the ability to purchase more products from them and less from

vendors who don’t provide a discount. On the other hand, it would be good to know what vendors allow

payment terms of longer periods of time such as 45 days or longer. If the company wants to extend its

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DPO calculation number, utilizing more vendors with longer payables terms would be beneficial.

Without analyzing these factors, the business leaders can’t manage the DPO calculation very effectively.

Are there specific business units, operating locations, or business segments that make up a

significant portion of the variance? Most likely there are. Boise Inc. is comprised of two major

segments, a paper manufacturing segment and a packaging segment. The paper segment manufactures

cut-sheet paper as you would use in every day printing, as well as specialty papers. The packaging

segment makes cardboard containers of varying sizes for business-to-business customers. In 2012, the

paper segment of the business underwent a process in which they required all of their vendors to offer

payment terms of net 45 days, 1% discount on net 30 days, or 2% discount on net 10 days. This was an

attempt to manage their DPO better. The change was difficult to implement because several vendors did

not offer those specific terms and did not want to be forced to do so. There was a lot of pushback and

some vendors did not comply. Today, there is not a system in place to help identify those vendors,

however, per policy vendors are supposed to be using those terms for the paper segment. In analyzing

DPO by segments, expectations would be that the paper segment has a longer DPO than the packaging

segment because of the business rules applied to the paper segment.

Are there specific types of costs that make up a significant portion of the variance? Energy

costs are one example of cost category that would greatly affect the DPO of the company. Energy costs

are paid monthly and have strict penalties for late fees. The bill for one month of service for one location

is often in the multi-million dollar range. Consulting and contract work on the other hand must be

completed and the work must be inspected and approved prior to paying the bill. While the terms on

these invoices may be 30 to 45 days, it may take much longer to inspect the work and pay the bill.

Currently there is no analysis by cost type and what effect it has on DPO.

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Can Boise Paper Inc. predict and weed out vendors that will cause a significant impact on DPO

variances prior to doing business with them? This is the most important question of this project. In

moving through to the second phase of the project, this question could be re-phrased as: How can Boise

Inc better manage its operating cash flow by looking at DPO variances? This question would encompass

the previous question and more. Going through the other questions, cases have been made on why

analyzing the various areas would help make better decisions about DPO. In addition, it is likely that by

studying the data Boise Inc. can determine what types of vendors will be able to offer the best payment

terms for their business. This would require more in-depth analysis than their accounts payable data

alone could provide, but by looking at problem vendors, those causing unfavorable variances, they can

look at statistics of those vendors such as size, annual revenue, ownership, location etc. Knowing these

factors will help guide the purchasing departments to know what to watch out for in the future when

selecting a vendor to do business with.

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Reporting Methods and Views There would be multiple forms of reporting to provide the most useful information for decision

making to management. The first tool would be a dashboard which would be updated from the data

warehouse on a monthly basis. An example of a dashboard for this situation is shown below.

Days Payable Outstanding (View By Segment) For the Month Ending: 10/31/14

Total Company D.P.O. Paper Segment packaging Segment

Days Days Days

0

0

0

10 10 10

15 15 15

20 20 20

30 30 30

45 45 45

50 50 50

60 60 60

Data fields that this dashboard can track include:

Overall DPO for the company as a whole. This is what is reported to credit agencies, banks, and

on financial statements, and is a key driver for many business metrics and decisions.

DPO by segment. Boise Paper Inc. is comprised of two major business segments. Knowing the

DPO for each will help determine sources of variation in overall company DPO.

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DPO by cost category. There are a few cost categories that would largely impact overall

company DPO. Viewing these categories individually would help business leaders understand

factors that affect the overall DPO. Specific categories include:

o Energy Costs. These costs include most ‘utilities’ types of costs including power bills and

natural gas bills. These are high costs that are generally paid on a monthly basis with 30

day terms. Because the costs are high it is important to ensure they aren’t being paid

prior to 30 days, but it is also important that they aren’t paid late because stiff penalties

may be incurred, and can be very expensive. The DPO for these costs should be tightly

centered around 30 days.

o Chemical Costs. The DPO on chemical costs are generally longer than most other kinds

of materials. In general, a large amount of chemicals, often times train cars full, are

available on site and ready for use. Because of the large quantities purchased, Boise Inc.

can negotiate better payment terms than other cost categories such as net 45 rather

than net 30.

o Capital Spending. Capital projects often require long period of time to complete, even

up to multiple years. Many projects require consulting or other outside labor that must

be completed and approved, to ensure work was done properly, prior to payment. As

this is the case, a longer DPO in the capital spending cost category than other categories

is typical.

Another form of reporting would be adhoc reports at management’s discretion. After looking at the

DPO dashboard they may wish to investigate variances and anomalies in DPO. The following items

would be available:

Outlying Vendors. This report would show a list of vendors that met a certain payable amount

threshold (such as $50,000 or higher) that are in the top 10% highest DPO bracket. This report

would help determine vendors that may require payment terms negotiation in order to bring

their billings to a more appropriate standard.

Days Sales Outstanding Report(s). While not a large part of this project, the company may want

to research their own Days Sales Outstanding to see when cash flows are expected to come into

the company. Reviewing DPO in large part is to help the company better manage their cash

flows and knowing when their receivables are coming due matched with when their payables

are going out will help make that determination.

Expected Spending. Not all of the outgoing payments that will occur within the next 30, 60, 90,

or even 120 days will be reflected in the accounts payables system. It would be very useful to

know if there are large expected payments coming due that need to be accounted for. Such

items may include annual maintenance contracts, legal fees, annual health insurance premiums,

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or tax payments made to various entities. These items would be found in the budget system(s)

of the company.

Current Cash Balance/Statement of Cash Flows. To meet the requirements of paying bills on

time a company must have the required amount of cash on hand to do so. This report would

show the current cash balance on a daily basis which is mandatory to determine if the company

has enough cash to pay current liabilities, or if the company requires outside financing and how

much if necessary.

Additional Questions

What vendors DPO aligns with our goal/industry best practice?

o This requires our first question to be answered. We can use the Payment table to pull

this information for each vendor.

Who are the most valuable accounts?

o This will be calculated from the payment table by finding the amount spent each year by

a vendor

Are there any high value vendors that align with our DPO goal?

o If yes, how can we better serve them?

Are there any low-value vendors that do not align with our DPO goal?

o If yes, would it be better to focus our efforts elsewhere?

These questions can help us discover what vendors are our best customers based on a combination of

their account value, and how they align with the industry standard for DPO. If they are an outlier, we

could attempt to modify the terms of our contract to match industry standard. If they refuse, and are

not a valuable account, we could consider not renewing the contract and taking our product elsewhere.

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REFERENCES Days Payable Outstanding – DPO. (2014). Investopedia. Retrieved 11/12/14 from:

http://www.investopedia.com/terms/d/dpo.asp Filings and Forms. (2014). US Securities and Exchange Commission. Retrieved 11/12/14 from:

http://www.sec.gov/edgar.shtml#.VGPlx3ktCUk