Working capital management

By Hugh Williams, Managing Director of Hughenden Consulting  
In 25 years of consulting with manufacturing-intensive businesses of all size, I have witnessed the staggering financial gains that can be achieved by successfully managing Working Capital. What is far more staggering though is how few companies actually bother to undertake this properly.  Because it requires an executive sponsor who can mediate across a range of operational and financial functions, it's the CFO who has the best chance to lead this effort and make it work. Unfortunately for many of them Working Capital management, which calls for complex planning skills, falls outside many CFOs 'comfort zones' and as a result, their businesses miss a giant opportunity to improve profits.

 
Global economic importance
Today, due to fragile global economies, I argue that finding efficiency savings through better Working Capital management is not just important to businesses, but has vital macro- and micro-economic consequences.  This is one way, for example, businesses can help prevent the 'W' shaped recession, which happens in part when they start to cut more jobs in order to meet short-term benchmarks, which consequently lowers aggregate consumer spending.

Almost every business we encounter has some initiative to better manage Working Capital because they cannot fund their businesses in the same way as they did in the past.  Credit is either too difficult to get or much more expensive than before.  Most have taken short term measures to stem the flow of cash (paying suppliers more slowly, getting money in faster from customers, and indeed cutting jobs) but these measures are running out of steam and are bad for long-term business relationships and for the wider economy..
 
The low-hanging fruit
Most Working Capital management initiatives that we see now focus on Finance wanting to get its hands on the cash tied up in Finished Goods stock and anywhere else that they have significant inventories and who can blame them? However, CFOs need to bear in mind that excess stock is just a symptom of poor internal policies, silo-based behaviour, cross-functional mistrust, and blind risk-taking.  So getting out the big scissors to cut stock will not stop it from coming back.  Yet it will unwittingly create significant supply chain problems for the business.  These will far outweigh the temporary savings that have just been made.
 
We have seen massive shortages of supply (lost sales) because businesses have cut people (for People, read Capacity); poor customer service and product availability (lost sales) because stocks have been cut blindly; badly controlled New Product Introduction (lost sales, obsolete stocks) because Demand and Supply (supply chain) planning is poor.
 
Conflicting KPIs are the greatest enemy of successful Integrated Business Planning (IBP).  In most companies management gives each departmental silo in the business a target to achieve that, it is hoped, will drive the business towards its goal.  Dr Eli Goldratt, author of "The Goal", once said, "The sum of the local optimums does not equal the global optimum".  There are examples almost everywhere where businesses still think this is the way to manage and it usually doesn't work.  "A fair day's work for a fair day's pay," they argue.  Yes, but only to produce something customer wants today, not at some point in the future.  That's why we have so much stock!
 
Finding the high-hanging fruit
If CFOs want better working capital management, they must step forward to lead end-to-end supply chain management, and not just issue unrealistic dictates - or worse still, wait to count the cost.   They must understand, embrace and drive forward IBP and really get involved in the Value or Supply Chain rather than marginalising this as some kind of 'trucks' and 'sheds' logistics planning to delegate downstream.  
 
Today, IBP depends on purging the silo mentality and removing departmental KPIs that are local optimums.  Sales and Operations, for example, work at cross-purposes in too many companies and become adversaries this needs to stop.  These should be replaced by performance measures and drivers that make everyone work together towards the same end.  These measures will beat a path to what I call "the high hanging fruit".  We all know the fruit at the top is the best and juiciest, but it also the hardest to get to.
 
If I've learned one thing over the years it's that executive sponsorship is essential.  CFOs, supported by their CEOs, must lead the culture change that accompanies integrated planning efforts visibly, vocally and physically.  They cannot afford to pay lip service to this, otherwise they will rank alongside those many companies who have tried and failed because top management was not fully engaged.  It is a long road that will take patience and persistence and continued investment, probably over a few years.  In the first 12 months, you can just about get the process up and running.  But those who have done this successfully will tell you they had not realised the potential size of the prize until they got to the top of the tree.  The fruit up there is indeed much juicer than the stuff down low that everyone else is picking.