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Which Way for Working Capital
Statement of Confidentiality and Usage Restrictions
This document contains trade secrets and other information that is company sensitive, proprietary, and confidential, the disclosure of which would provide a competitive advantage to others. As a result, the reproduction, copying, or
redistribution of this document or the contents contained herein, in whole or in part, for any purpose is strictly prohibited without the prior written consent of REL. © 2011 The Hackett Group, Inc. All rights reserved. World-Class Defined and
Enabled.
Daniel Windaus
Senior Director &
Head of Private Equity Advisory,
REL Europe
+44 7919 016116
Page 3
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
REL is the only global consulting firm dedicated exclusivelyto Working Capital management
Specialists in Working Capital focused exclusively on
three critical end-to-end processes:– Forecast-to-Fulfill (Inventory)
– Customer-to-Cash (Receivables)
– Source-to-Settle (Payables)
Unmatched 30 year track record
More than 400 working capital engagements
Project experience in more than 60 countries
10 offices across America, Asia and Europe
Unique implementation focus and capability
More than >25bn released NWC in the last 10 years
Page 4
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
REL has delivered Working Capital improvements across many industries for over 400 clients
Page 5
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
REL is the most published firm on Working Capital Management
Managing NWC during the recovery
2011 Working Capital Survey
The shift in gravity towards
Developing Markets
Page 7
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Page 8
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
REL 2011 Europe Working Capital SurveyRevenue and EBIT trend suggests the European economy is recovering
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010
Revenue €4,725 B €5,200 B €5,555 B €6,126 B €5,368 B €6,165 B
EBIT €535 B €593 B €647 B €650 B €507 B €659 B
€ B
€100 B
€200 B
€300 B
€400 B
€500 B
€600 B
€700 B
€B
€1,000B
€2,000B
€3,000B
€4,000B
€5,000B
€6,000B
€7,000BRevenue EBIT
Page 9
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
REL 2011 Europe Working Capital SurveyDWC improves by 5.9% 2010 versus 2009 achieving a new 5 year low
46.5
45.3
46.1
44.2
45.6
42.9
42 Days
43 Days
44 Days
45 Days
46 Days
47 Days
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010
Day
s W
ork
ing
Cap
ital
5.9%3.2%
4.0%1.7%
2.6%
Page 10
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
In 2010 the Working Capital improvement is driven by the asset side
DWC DSO DIO
Days Working Capital
2008 20102009
44.2
45.6
42.9
5.9%3.2%
Days Sales Outstanding
2008 20102009
50.8
53.8
52.2
6.1% 3.0%
Days Inventory On Hand
2008 20102009
37.0
38.8
37.6
4.9% 2.9%
Page 11
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Who contributed to the DSO improvement? 59% of industries and 49.7% of companies improved their DSO performance 2010 versus 2009
DSO
€107 B
€108 B
€118 B
€121 B
€159 B
€190 B
€206 B
€212 B
€258 B
€792 B
Chemicals
Multi-Utilities
Pharmaceuticals
Construction and Engineering
Metals and Mining
Electric Utilities
Food Products
Food and Staples Retailing
Automobiles
Oil, Gas and Consumable Fuels
EU 1000 - DSO Improvers By Industry and Revenue
9%
10%
12%
8%
16%
12%
9%
19%
17%
10%
Chemicals
Multi-Utilities
Pharmaceuticals
Construction and Engineering
Metals and Mining
Electric Utilities
Food Products
Food and Staples Retailing
Automobiles
Oil, Gas and Consumable Fuels
EU 1000 - DSO Improvers Average YOY% Improvement - By Industry
23%
7%
6%
6%
5%
5%
3%
3%
3%
3%
% Improvers Revenue
65%
Page 12
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Who contributed to the DIO improvement? 53% of industries and 51.2% of companies improved their DIO performance 2010 versus 2009
DIO
€105 B
€115 B
€123 B
€128 B
€180 B
€188 B
€204 B
€293 B
€342 B
€714 B
Food and Staples Retailing
Food Products
Machinery
Construction and Engineering
Multi-Utilities
Pharmaceuticals
Metals and Mining
Automobiles
Electric Utilities
Oil, Gas and Consumable Fuels
EU 1000 - DIO Improvers By Industry and Revenue
4%
14%
13%
15%
21%
14%
15%
12%
14%
21%
Food and Staples Retailing
Food Products
Machinery
Construction and Engineering
Multi-Utilities
Pharmaceuticals
Metals and Mining
Automobiles
Electric Utilities
Oil, Gas and Consumable Fuels
EU 1000 - DIO Improvers Average YOY% Improvement - By Industry
21%
10%
8%
6%
5%
5%
4%
4%
3%
3%
% Improvers Revenue
69%
Page 13
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Challenges during the Recovery
Fleeting Attention Striking the Balance
Customer
Risk
Terms
Risk
Inventory
Commitments
Low
cost of
Borrowing
Revenue
FocusJob Done?
Page 14
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Working capital management is all about trade-offs and is as necessary in a recovery as it is in a recession….
Forecasting Lead TimesOrder
QuantitiesPurchase
CostCustomer
Service
Product
RangePayment
Terms
Cash, Cost, Service & Risk
Cost
Order Quantity
Inventory
Service Level
Terms
Risk
Cost
Terms
Page 15
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
BRICKM Overview
The shift in gravity towards
Developing Markets
• Contributed 1/3 of world GDP growth over the last 10 years
• Trend expected to regain momentum and continue
Page 16
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Notwithstanding the economic correction of 2009, EU businesses have significant and increasing trade exposure to BRICMK economies
0
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009
Exports to Russia Exports to ChinaExports to India Exports to BrazilExports to Mexico Exports to S Korea
0
100
200
300
400
500
600
700
800
2005 2006 2007 2008 2009
Imports to Russia Imports to ChinaImports to India Imports to BrazilImports to Mexico Imports to S Korea
What does this mean for Net Working Capital of European businesses ?
Page 17
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Across the BRICMK, Total Working Capital consumption is in line with that of European based companies
52
3637
44
38
51
4343
IndiaRussiaBrazilBRICMKEU China Mexico
+1(+2%)
-6(-14%)
-5(-12%)
0(0%)
DW
C
North Korea
Page 18
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Sourcing from Emerging markets is typically focussed on price rather than cash advantage, potentially impacting European DPOs
50
42
32
42
32
56
42
5247
Mexico
DSO
Russia
DSO
Republic
of Korea
DSO
-20
BRICM
K DSO
Brazil
DSO
EU
DSO
India
DSO
China
DSO
-10-10
(-19%)-20
EU
DPO
+$168bn
+40%
EU Imports from
BRICMK markets, 2005
v 2009
+$6.7bn
+23%
+$4 bn
+34%
+$12bn
+50%
+$103bn
+53%
+$2.5bn
+23%
$3.24bn
+8%
Page 19
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Five year development in BRICMK DSO
42
44
39
42 42 42
37 Days
38 Days
39 Days
40 Days
41 Days
42 Days
43 Days
44 Days
45 Days
2005 2006 2007 2008 2009 2010
Page 20
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Days Payables are still lower in BRICMK, but China and India are flexing their muscles
33
40
4650
21
3838
4752
India DPORussia DPOBrazil DPOBRICMK
DPO
EU DPOEU DSO China DPO Mexico DPO
+3 -1-26-9
(-19%)
North
Korea DPO
+$96bn
+43%
EU Exports to BRICMK
markets, 2005 vs 2009
+$9.5bn
+48%
+$20bn
+29%
+$11bn
+44%
+$49bn
+77%
+$1bn
+4%
+$5bn
+20%
Page 21
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Five year development in BRICMK DPO
38
40
36
38
38 39
34 Days
35 Days
36 Days
37 Days
38 Days
39 Days
40 Days
2005 2006 2007 2008 2009 2010
Page 22
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Supply Chain Challenges Inventory Challenges Risk Challenge
Increased exposure to BRICMKs results in NWC challenges
Uncertainty
Increased NWC
Buffers
• Longer lead times
• Decreased reaction potential
• Longer times to deliver (transit)
• Increase to cover uncertain
demand patterns
• Increase in Safety stock
• Potential increase in SLOBS
• Ability to forecast
• Political Risk (Middle East)
• Infrastructure Risk (power
cuts, Road closures – India)
• Currency
Page 23
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
Strategies to address the NWC challenge
•
• Bridging the terms gap
• Bills of Exchange
• Move to open account with normal terms – why be different
• Understand any government legislation
• Partnership approach
• Regular communications
• Understand the culture
Supplier Communi-
cation
Payment Terms
Inventory Management
Supply Chain Financing • Rebalance flexibility and
safety stock triggers
• Balance cost of transport
with cost of inventory
• Minimise order cycle times
using electronic scheduling
• Use bonded warehouses
Page 24
© 2011 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.
BRICKM Overview
Country by Country
Customisation
Unifying
Process
Principals
Process
Fragmentation