PROFIT PERFORMANCE

PERSPECTIVES
David Giat Business Analytics & Advisory Services

Working Capital Optimization: 11 Lessons for Improving Payables

If youre thinking about working capital, you arent alone. Facing uncertain demand and constrained credit markets, CFOs continue to focus on building and maintaining their companies cash positions. Working capital optimization (WCO) is back, but this isnt your fathers WCO the environment and tools have changed.
Today it is more important than ever to explore the sources of leverage with your suppliers and customers, to use analytical approaches to identify precise opportunities, and to establish processes for managing through sometimes difficult implementations. The basic levers have not changed. While Inventory and Receivables are equally important to the WCO equation, Payables is often more within a companys control and can be extended without making fundamental changes to the business. There are many ways to extend Days Payable Outstanding (DPO). The best strategy is one that nds the right blend between best practices, company culture and the unique needs and requirements of each supplier and purchase category. Whats New About Working Capital Optimization Today? Consolidation among buyers has changed the balance of power in many industries Data availability and accessibility enables more informed negotiations Advanced technology supports analytics that offer actionable insights Strategic sourcing is now mainstream with proven, welldocumented methodology

Lesson 1: One function needs to drive

DPO is part of the Purchase-to-Pay cycle, and although several functions have responsibilities related to DPO, in many companies it isnt clear who has the bottom-line accountability to drive change. A/P Shared Services owns the data needed for analytics and may already understand the opportunities. Purchasing owns the relationships with suppliers. While either Finance or Purchasing can lead, one of them must, and success

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stories exist for both models. For one national bank, two rising stars in Procurement saw the DPO initiative as a career boost that would also help the company through tough times. On the other hand, a global retailers shared services VP saw the DPO initiative as a natural extension of his organizations transformation.

Lesson 2: A CxO should be the sponsor

Because a DPO initiative spans functions, it can devolve into turf wars or die from lack of resources without consistent, high-level support. For one national grocer, it was the CEO who sponsored the initiativesecuring resources, driving decision making, leading steering committee meetings and even meeting with key suppliers. A dedicated project manager, cross-functional teams organized by category, and senior-level participation on the steering committee round out the program structure.

Lesson 3: Break it down by category

The business case and strategy may differ from category to category. Run a pilot of a subset of suppliers to calibrate the approach and build credibility for the program. Consider key metrics other than DPO, and measure the impact on these metrics under a variety of approaches. An aggressive strategy will yield greater DPO improvement but may come at the expense of supplier relations. A less aggressive approach may yield smaller cash benets but will also support other parallel objectives. For example, a CFO may also want to reduce the number of payment terms or implement electronic payments as part of the initiative.

Lesson 4: Form a Purchasing-Finance alliance

Suppliers arent going to accept these changes without pushback. They understand what matters to Purchasing and it usually isnt payment terms. To avoid the Mom vs. Dad tactic, create a training program for all supplier-facing personnel including scripts, FAQs, role-playing and a well-documented escalation process. This preparation provides clear guidance and keeps all internal stakeholders aligned and on-message in their interactions with suppliers.

Lesson 5: Build a purchasing baseline for each supplier

The company doesnt benet if a supplier yields on a terms negotiation then turns around and squeezes the balloon through higher freight fees, longer lead times or less favorable pricing. Over time, this effect can make a DPO initiative become economically neutral. Instead, build a comprehensive purchasing baseline for each supplier that includes all levers of the relationship that affect protabilitythen monitor changes aggressively.

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Lesson 6: Use rigorous analytics to build a case

Explore many sources of internal and external data public company nancials, private company data, industry gossip and internal payment terms across suppliers and categories to construct a compelling, fact-based case for why suppliers should participate. How does your DPO compare to that of your competitors? How do your payment days compare to the suppliers Days Sales Outstanding? How about DPO vs. Days Inventory Outstanding (DIO)?

Lesson 7: Use creative funding and rewards

Without ongoing cooperation from Procurement and Finance to monitor and manage performance with suppliers, the initiative may falter. Yet the functions dont benet equally. While budgets and management objectives should reect the goals of the DPO effort, creative incentives and rewards can make them more tangible to members of your Purchasing team who are not currently measured on working capital. One CPG client gave spot bonuses to individuals based on the amount they saved in negotiations. The CEO also made a point of speaking frequently about the teams and their successes.

Lesson 8: Segment suppliers and tailor the ask

Not all suppliers are created equal. The opportunity will vary based on purchasing category, regional norms, size and relative power in the relationship. These factors determine not only your goal, but your approach and communication strategy. Use benchmarking to set targets for each cluster that maximize suppliers likelihood of participation, stretching them without alienating them. One hard-goods retailer segmented suppliers into 20 different clusters and had a different ask for each cluster.

Lesson 9: Proactively and professionally manage the message

Suppliers may get political. The message coming from all levels of the organizationfrom the A/P clerk to Purchasing to the Account Manager to the CEO needs to be consistent, and able to withstand press scrutiny. One mass retailer framed the ask to highlight the benet of lower prices for the consumer. So when the supplier involved the media, the retailers customer-oriented message fared well.

Lesson 10: Implement through two pay cycles before declaring victory
Changes take time to ow through the supplier stakeholders. You may have reached agreement in principle with the sales rep, but that wont necessarily prevent the suppliers A/R clerk from calling expecting an overdue payment. Or, maybe the A/R clerk understands the new terms but the sales rep seems to have forgotten. Keep detailed records to avert misunderstandings and guard against having changes unravel.

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Lesson 11: Monitor payment terms at least annually
Remember the squeeze the balloon problem? Suppliers may revert to old habits, and you stand to give back the ground youve won. Include terms in annual supplier relationship reviews, and monitor the suppliers company-wide terms compliance with a spend analytics tool. Efforts to improve working capital can present many challenges and pitfalls. Following these lessons learned can help you produce and maintain hard fought gains.
REPRESENTATIVE Blanket increased terms Standardize increased terms by category Balance payable and inventory cycles Benchmark vs. supplier receiveable days by category

Negotiate longer terms from supplier Decrease accounts receivable balance

Working Capital Optimization

Increase accounts payable balance Consolidate best terms by supplier Decrease inventory balance Increase payment oat

Across company divisions/geographies Across supplier divisions/geographies Increase check oat Reduce check mailing frequency

For more information on how PRGX can help you, contact: advisory@prgx.com

About PRGX Business Analytics & Advisory Services

Finance, Procurement and Merchandising executives regularly require outside help to identify and realize prot improvement opportunities. Our Business Analytics and Advisory services combine data analytics, deep functional expertise in Finance, Procurement and Merchandising, and a practical hands-on approach to help clients improve their operating margins. We help senior nance, procurement and merchandising executives optimize working capital, reduce the cost of goods procured, transform the nance function and improve corporate performance. Headquartered in Atlanta, Georgia, PRGX is publicly traded on NASDAQ under the symbol PRGX. For more information go to www.prgx.com PRGX Corporate Headquarters 600 Galleria Parkway, Suite 100 Atlanta, GA 30339 Phone: 1-877-TRY-PRGX (1-877-879-7749)
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