optimizing operating working capital (felipe florez-arango)

Felipe A. Florez-Arango

Operating Working Capital


June 5th, 2009

Optimizing Operating Working Capital:

An Increasingly Important Element of Change with an Exponential +$700Bn Cash Opportunity

Structure of Presentation

1. Professional Background

2. Optimizing Operating Working Capital: An Increasingly Important Element of Change with an Exponential +$700Bn Cash Opportunity

Operating Working Capital (WoC): Facts

Defining your Cash Conversion Cycle (CCC) Opportunities

Pursuing your Cash Conversion Cycle (CCC) Opportunities

Myths about Cash Conversion Cycle (CCC)

3. Q&A

4. References, Bibliography and Glossary



The information contained in this presentation is provided for informational purposes only.

While efforts were made to verify the completeness and accuracy of the information contained in this presentation, it is provided “as is”, without warranty of any kind, expressed or implied.

In addition, this information is based on my personal professional experience and I shall not be responsible for any damages arising out of the use of, or otherwise related to, this presentation or any other documentation.

Important Disclaimer





Innovative Finance Executive with a dynamic career providing business planning and decision support leadership in progressively responsible Finance and Accounting roles at the country, region and global levels for Procter & Gamble, General Electric and most recently Novartis Pharma.

Extensive international experience in Latin America, USA, China and Europe. Degree in Business, Masters in Strategic Marketing and an MBA in Leadership and Finance.

During my professional career, I have led key WoC projects including:

Novartis Pharma: Currently leading since kick-off, a Global Project focused on Optimizing Operating Working Capital.

GE Aero Energy: Lead a 6 Sigma Project focused on inventory optimization leading to the lowest inventory level: a) Without business disruptions, b) Improved processes and c) Improved Controls / visibility.

P&G: Lead the Latin America WoC Team. Achievements include lowest regional DSO ever and significant operating and capital cost savings.

Professional Background



Optimizing Operating Working Capital:

An Increasingly Important Element of Change with an Exponential +$700Bn Cash Opportunity

Credit: Is it available ? What is your cost ?

What is your Business Operating WoC Opportunity ?



European Companies can potentially liberate from WoC : ~$610Bn Inventory: ~$220Bn Accounts Receivable: ~$210Bn Accounts Payable: ~$180Bn

U.S.A. Companies can potentially liberate from WoC: ~$770Bn Inventory: ~$300Bn Accounts Receivable: ~$290Bn Accounts Payable: ~$180

Net Operating WoC as % of Sales: Regional View Canada: ~6% Australia/New Zealand: ~10% U.S.A.: ~11% Latin America: ~11% Europe: ~12% Asia: ~13%

Operating WoC: Facts (1)

Cash Conversion Cycle (CCC): Top 25 Companies median at +29.5 days CCC #1: Apple with -45.2 days Accounts Receivable #1: Wal-Mart with +3.5 days Inventory #1: Apple with +8 days Accounts Payable #1: J&J with -142.1 days

Cash Conversion Cycle (CCC): Regional View Canada: +21.9 days Australia/New Zealand: +35.0 days U.S.A.: +38.8 days Latin America: +38.8 days Asia: +44.6 days Europe: +47.3 days

Operating WoC: Facts (2)





Define your Operating WoC Team and Sponsors: Sponsors: CEO and CFO Team: Project Leader

Finance: Head of Financial Planning and Analysis Treasury: Head of Treasury Accounting: Head of Accounting AR/AP Departments: Head of AR and Head of AP Sales: Head of Sales Sourcing: Head of Sourcing Product Supply: Head of Product Supply Critical Internal Customers (ie. Subsidiaries)

Understand your CCC: Inventory: Days Inventory Outstanding (DIO) Accounts Receivable: Days Sales Outstanding (DSO) Accounts Payable: Days Payable Outstanding (DPO)

Understand your CCC Dimensions / Levels: Top 15 Subsidiaries: CCC, DIO, DSO, DPO Top 15 Customers: DSO Top 15 Suppliers: DPO

Defining Your CCC Opportunities: Size of the Prize (1)



Understand your End-To-End Processes: DIO: Product Range Management -> Warehousing & Distribution DSO: Sales & Quote Management -> Cash Application DPO: Planning & Strategy -> Payment

Identify what is the best possible CCC, DIO, DSO and DPO: Internal Trends (ie. where have we been; where are we today) Internal Benchmarks (Subsidiaries, Customers, Suppliers) Industry Benchmark Regional Benchmark Best-In-Class Companies Customer Receivable/Payable Performance Supplier Receivable/Payable Performance

Quantify and Prioritize CCC, DIO, DSO, DPO Improvements in € and/or $

Set and align target levels for upcoming 5 Years (Granularity Yr 1 & 2) Operating WoC: Integral Part of your Strategic Plan

Defining Your CCC Opportunities: Size of the Prize (2)



Pursuing your CCC Opportunities: Key Pillars

Leading Operating WoC MetricsIncremental Free Cash Flow

Rep

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KP

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Cap

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Tra

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Com

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Cha

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Man

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Leading Practice Processes Clear Roles, Responsibilities & Accountabilities

Ince

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Pursuing your CCC Opportunities: Suggested Approach

• Inventory of Opportunities• Aligned Detailed Action Plan

•Action Items•Responsible•Due Date•Timing Impact (Q.Win/L.Term)•Resources/Costs•Benefit/Costs: Cash Flow, P/L

Scoping, Analysis & Action Plan

• Delivery of the aligned detailed action plan & benefits

• Lessons Learned

• Results

Implementation

Cash Conversion Cycle

Improvement Approach

RCA

Solution

Track

C

O

N

T

I

N

U

O

U

S

Processes

Data

Tools

Know How

R & Roles

Deliverables Deliverables

TARGET

CCC, DIO, DSO, DPO: € and / or $ Cash Flow Released

I

M

P

R

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V

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Pursuing your CCC Opportunities: Tracking (Example)

It is what it is. The benchmark is not reliable.

Accounts Receivable: We cannot improve or influence DSO… we will lose sales. We can improve terms but it will cost us a lot of money. Our processes are perfect. Zero Overdue as % of Sales is not achievable… cost of doing business.

Accounts Payable: We cannot improve it… we are already paying late all the time. Our suppliers will increase prices if we extend terms.

Inventory: Reducing Inventory will increase Out of Stocks and impact sales. If we have issues, the problem is at the factory.

Myths About CCC



Thank you for your time

Q&AFelipe A. Florez-Arango




Felipe Flore-ArangoCFO Mature Products, Global Business UnitCash Flow Optimization, Global Project LeaderNovartis Pharma [email protected]

Bernhard [email protected]

Robert SmidDirectorErnst & [email protected]

Gordon BivensDirector, eLearningThe Accounts Payable Network / The Accounts Receivable [email protected]

References



E&Y: All Tied Up ? Annual Working Capital Survey 2008 The Accounts Payable Network: www.TAPN.com The Accounts Receivable Network: www.TARN.com REL/CFO: Global Working Capital Insight 2007 Cash Flow Metric, Cash Conversion Efficiency Europe - 2008 Cash Masters Scorecard Europe - 2008: Working Capital Survey Europe - 2008: Working Capital Scorecard Europe - 2007: Working Capital Scorecard U.S.A.– 2008 Cash Masters Scorecard Canada - 2008: Working Capital Survey Latin America - 2008: Working Capital Survey Asia – 2008 APAC: Working Capital Survey Asia – 2007 Cash Masters Scorecard Asia – 2008 Cash Masters Scorecard Australia/New Zealand – 2008 Working Capital Survey

Bibliography

Glossary (1): Cash Conversion Cycle - CCC

CCC expresses the length of time (days), that it takes for a company to convert resource inputs into cash flows.

- CCC looks at the amount of time needed to sell inventory, the amount of time needed to collect receivables and the length of time the company is afforded to pay its bills without incurring penalties

- CCC attempts to measure the amount of time each net input dollar is tied up in the production and sales process before it is converted into cash through sales to customers:

+ Days Inventory Outstanding (DIO)

+ Days Sales Outstanding (DSO)

– Days Payable Outstanding (DPO)

= Cash Conversion Cycle (CCC)Felipe A. Florez-Arango


Glossary (2): Days Inventory Outstanding; Days Sales Outstanding

Days Inventory Outstanding (DIO) is a measure of the average number of days that a company has in inventory including raw materials, work in progress and finished goods

- High DIO number shows that a company has significant amount of inventory… usually negative trend.

- Low DIO number shows that a company has a low amount of inventory… usually positive trend.

- Best-in-class DIO is achieved when just-in-time is in place.

Days Sales Outstanding (DSO) is a measure of the average number of days that a company takes to collect revenue after a sale has been made.

- Low DSO number means that it takes a company fewer days to collect its accounts receivable… usually very positive trend.

- High DSO number shows that a company is selling its product to customers on credit and taking longer to collect money… usually very negative trend.



Glossary (3): Days Payable Outstanding

Days Payable Outstanding (DPO) is a measure of the average number of days that a company takes to pay it’s trade creditors.

- High DPO number shows that a company is taking longer time to pay it’s creditors… usually positive trend.

- Low DPO number means that it takes a company few days to pay it’s trade creditors… usually negative trend.



optimizing operating working capital (felipe florez-arango)

Documents

operating working capital

days ccc

working capital woc

days felipe

operating woc team

net operating woc

significant operating

days cash conversion