1. Working Capital Management Managing Liquidity in Supply Chain Anand Subramaniam

4. WCM - Definition

5. Working Capital Management (WCM) Inventory Management Debtors Management Creditors Management Working Capital Management Consolidate supplier base to maximise purchasing and payment efficiency Unlock cash tied in stocks, reduce SKU’s, review product profitability, demand forecasting Improve Debtors & Credit Control WCM can deliver significant business benefits in a relatively short period of time, where idle capital can be effectively & efficiently utilised

7. WCM – Challenges, Policies Determinants, & Trade-offs

10. WCM - Policies Higher Profits / Higher Risk Lower Profits / Lower Risk Trade-off Between Profitability and Risk Shorter than Industry Average Longer than Industry Average Operating and Cash Cycles With Short-term Debt With Long-term Debt and Equity How Current Assets are Financed Lower than Industry Average Higher than Industry Average Current Ratio Low High Levels of Current Assets Aggressive Conservative Working Capital Policy

11. WCM – Conservative Policy Less short-term debt payments to meet. With upward-sloping yield curve, interest costs are higher. Equity costs are normally higher Less Short-term Debt /Greater Long-term Liabilities and Equities Won’t miss a potentially profitable sale. Greater cost of financing and possibly more write-offs. Higher Level of Accounts Receivable Fewer Stock-outs Higher carrying costs and higher obsolescence Higher Level of Inventory Less Risk Because Cash is Readily Available Liquid assets earn lower returns than less liquid assets Higher Level of Cash and Marketable Securities Less Risk Lower Return Impact Lowers Profitability and Risk (Vice-versa for Aggressive Policy)

14. WCM – Objectives

18. Firm’s WC – Requirement Amount Current Assets (i) Stock of Raw Materials ( for ….month’s consumption) ----- (ii)Work-in-progress (for…months) (a) Raw Materials ----- (b) Direct Labour ----- (c) Overheads ----- (iii) Stock of Finished Goods ( for …month’s sales) (a) Raw Materials ----- (b) Direct Labour ----- (c) Overheads ----- (iv) Sundry Debtors ( for …month’s sales) (a) Raw Materials ----- (b) Direct Labour ----- (c) Overheads ----- (v) Payments in Advance (if any) ----- (iv) Balance of Cash for daily expenses ----- (vii)Any other item ----- Less : Current Liabilities (i) Creditors (For….. Month’s Purchases) ----- (ii) Lag in payment of expenses ----- (iii) Any other ----- WORKING CAPITAL ( CA – CL ) Add : Provision / Margin for Contingencies ----- Net Working Capital Required XXX

19. WCM – AR, Credit Policy, Inventory

22. WCM – Forecast & Optimisation

25. Supply Chain Management (SCM)

27. Supply Chain Operations Manufacturing Distribution Dock/ Retail DC Sales Channel Component Assembly Material Suppliers International Transport Outbound End User

28. Material & Financial Flow Receive Goods and Invoice Send Payment Reconcile and Account Send Purchase Order Credit Application Negotiate Sales Terms Select Supplier and Goods Source Suppliers Supply Chain of the Buyer Receive Order Produce Goods Manage Inventory Distribute Goods Material Supply Chain Supply Chain of the Seller Material Supply Chain Evaluate Credit Reconcile Settle & Pay Issue Invoice Forecast Cash Finance Working Capital Resolve Disputes Financial Supply Chain

29. SC Performance – Return on Assets

30. Supply Chain Management - Drivers

31. SCM - Drivers Improve customer service Improve order management corporate Growth Improve asset use Improve demand planning Improve warehouse/distribution activities Accelerate “cash to cash” cycle Supplier/Supply base management Strengthen partnerships Regulatory compliance

32. SCM Metrics - Impact on Profit & Loss and Balance Sheet

35. Profit, Operation & Cash Conversion Cycle

36. Operating Cycle An operating cycle is the average time it takes to convert an investment in inventory back into cash. Purchases Inventory Credit sales Accounts receivable Cash collection Purchases Inventory Cash sales Cash Sale Credit Sale

37. Profit Cycle Assets Profit Capital Equity Assets Generate cash flows & Profit Increased cash flow & profitability raises value of shareholder equity Increased equity provides capital to fund new opportunities Increased capital provides fund to purchase assets

38. Working Capital Time Line Day a. Inventory ordered in anticipation of future sales. Day b. Inventory received. Day c. Inventory sold on credit. Day d. Accounts payable due and paid. Day e. Accounts receivable collected. Cash conversion period T ime required to convert paid-for inventories and accounts receivable into cash.

39. Cash Conversion Cycle Purchase Inventory Pay for Inventory Collect Receivables Operating Cycle Inventory Conversion Period Receivables Collection Period Payables Deferral Period Cash Conversion Cycle Sell Inventory on Credit

40. Cash Conversion Cycle (Contd.)

41. Formulae

43. SCM & WCM - Framework

44. SCM & WCM Framework Financing (e.g. lines of credit, term loans) Risk Management (e.g. insurance, bonding) Compliance Management (e.g. SOX, customs, security) Connectivity (e.g. technology platforms) Cash & Working Capital Mgmt. Other Services (e.g. consulting, education, trade promotion) Supplier Supply Chain Plan / Invest (Long-term Capital) Sell & Negotiate Supply Chain Risk Mgmt. Outbound Logistics Invoicing Collection Production (Production Financing) Buyer Supply Chain Plan / Invest (Long-term Capital) Source & Procure Supply Chain Risk Mgmt. Inbound Logistics Invoice Processing Payment Production (Production Financing)

45. Managing WC in Supply Chain Design Order & Materials Planning Procurement Manu-facturing Preassembly Assembly Packing & Shipping Sales After-market Services Reduce, parts complexity & releases Optimise Procurement / Purchasing Reduce Lead Times & WIP Optimise product testing Reduce Finished Goods Reduce Inventory Optimise Procurement / Purchasing Reduce Lead Times & WIP Reduce Finished Goods Reduce Inventory Source: Boston Consulting Group, EDC. May 2008 Buyer / Supplier collaboration seeks to accelerate cash flow and eliminate cost from the supply chain Modify Payment Terms Optimise Payment Processes Revise delivery and warehousing Modify Payment Terms Optimise Payment Processes Modify Payment Terms Optimise Payment Processes Revise delivery and warehousing Modify Payment Terms Optimise Payment Processes

46. SCM & WCM Value Creation

47. Profitable Growth & Value Creation Profitable Growth Working Capital Efficiency Tax Minimisation Fixed Capital Efficiency Cost Minimisation Value Time

48. Maximise Value Value Revenue Cost Fixed Assets Working Capital Fiscal Volume Channel management Brand building Price Service bundle Market Intelligence Loyalty Customer Intimacy SCE excellence (warehousing / distribution) Waste reduction Operational effectiveness Conversion to opportunity cost Utilisation Market capacity Contract manufacturing (inc cost impact) Network strategy Strategic Relationship Cycle time Tax efficiency Treasury planning / hedging

49. Further Information