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Working Capital Optimization Increase Cash Flow in the New Economy

May 2010

Nari Viswanathan

Working Capital Optimization: Increase Cash Flow in the New Economy Page 2

© 2010 Aberdeen Group. Telephone: 617 854 5200

Executive Summary Research Benchmark

Aberdeen’s Research Benchmarks provide an in-depth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations

In 2010, 83% of 115 surveyed companies are citing Working Capital Optimization (WCO) as a high priority which indicates an increased focus on this topic due to the challenging economy. Aberdeen's 2008 WCO benchmark report, Working Capital Optimization: Finance and Supply Chain Strategies for Today’s Business Environment, showed that for 65% of respondents WCO was a high priority at the time. The top driver compelling companies to focus on WCO in 2008 and this year is the pressure by financial stakeholders to improve working capital metrics (reported by 66% in 2008 and 60% in 2010). This benchmark report explores the top strategies and tactics adopted by companies to increase cash flow in this tough new economy.

Best-in-Class Performance Aberdeen used the following three key performance criteria to distinguish Best-in-Class companies:

• Average cash conversion cycle: 21 days "While it has been true that the recessionary situation has resulted in credit availability reductions, we have actually shifted our focus on operating expenses to a capital expense project. The reason for this is that our processes are highly manual and can benefit from automation. We are investing in a Transportation Management System, a Warehouse Management System and Warehouse Automation. We expect significant reduction in days of inventory through this initiative."

~ Director of Supply Chain,

Food/Beverage Manufacturer

• Return on working capital: 43%

• Perfect order fulfillment (your organization's average customer service level - i.e. on-time and complete to the customer's requested date): 97%

Competitive Maturity Assessment Survey results show that the firms enjoying Best-in-Class performance shared several common characteristics, including:

• Best-in-Class companies are more than twice as likely as Laggards to have online visibility into shipments and in-transit inventory

• Best-in Class companies are more than twice as likely as Laggards to have online visibility into financial supply chain events (e.g. invoice / PO / payment status)

• Best-in-Class companies are 25% as likely as Industry Average companies to have a cross-functional team to manage working capital improvements including finance

Required Actions In addition to the specific recommendations in Chapter Three of this report, to achieve Best-in-Class performance, companies must:

• Establish an early payment discount with suppliers

• Set up online visibility into financial supply chain events

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© 2010 Aberdeen Group. Telephone: 617 854 5200 www.aberdeen.com Fax: 617 723 7897

Table of Contents Executive Summary....................................................................................................... 2

Best-in-Class Performance..................................................................................... 2 Competitive Maturity Assessment....................................................................... 2 Required Actions...................................................................................................... 2

Chapter One: Benchmarking the Best-in-Class.................................................... 4 Business Context ..................................................................................................... 4 The Maturity Class Framework............................................................................ 4 The Best-in-Class PACE Model ............................................................................ 5 Best-in-Class Strategies........................................................................................... 6

Chapter Two: Benchmarking Requirements for Success................................... 9 Competitive Assessment......................................................................................10

Chapter Three: Required Actions .........................................................................16 Laggard Steps to Success......................................................................................16 Industry Average Steps to Success ....................................................................16 Best-in-Class Steps to Success ............................................................................17

Appendix A: Research Methodology.....................................................................18 Appendix B: Related Aberdeen Research............................................................20

Figures Figure 1: Key Pressures for Improving Working Capital Optimization ........... 4 Figure 2: Best-in-Class Strategies Compared with Industry Average and Laggards ........................................................................................................................... 6 Figure 3: Best-in-Class Supply Chain Strategies Compared with Industry Average and Laggards................................................................................................... 7 Figure 4: Percent of Suppliers Participating in Early Payment Discount Programs ......................................................................................................................... 8 Figure 5: Technology Enablers in Use and Planned to be Implemented within 12 Months .....................................................................................................................15

Tables Table 1: Top Performers Earn Best-in-Class Status.............................................. 5 Table 2: The Best-in-Class PACE Framework ....................................................... 5 Table 3: The Competitive Framework...................................................................11 Table 4: The PACE Framework Key ......................................................................19 Table 5: The Competitive Framework Key ..........................................................19 Table 6: The Relationship Between PACE and the Competitive Framework.........................................................................................................................................19



Chapter One: Benchmarking the Best-in-Class

Business Context Fast Facts

√ Eighty-three percent (83%) of respondents indicate that working capital optimization is a high-priority for their organization

√ Financial stakeholder pressure to maintain good financial metrics is the top pressure driving WCO initiatives (60%)

Aberdeen’s 2008 benchmark report on Working Capital Optimization (WCO) showed that for 65% of respondents WCO was a high priority at the time. This year in 2010, 83% of companies are citing WCO as a high priority. The top driver compelling companies to focus on WCO in 2008 this year is the pressure by financial stakeholders to improve working capital metrics (reported by 66% in 2008 and 60% in 2010). This year, however, the shortage of working capital to support basic operations is the number two pressure compared to inventory- and business-expansion-related pressures that were predominant in 2008.

Aberdeen Group's current study of the working capital optimization practices of 115 companies shows that businesses are responding to tighter financial conditions (Figure 1) with a focus on short-term internal strategies of extending Days Payable Outstanding (DPOs) and reducing Days Sales Outstanding (DSOs), and with a primary focus on strategically optimizing inventory as part of working capital initiatives (66%).

Figure 1: Key Pressures for Improving Working Capital Optimization

10%

15%

34%

58%

66%

0% 10% 20% 30% 40% 50% 60% 70%

More effectively investcash short-term

More effectively useshort-term financing

Increase Days PayableOutstanding (DPO)

Shorten Days SalesOutstanding (DSO)

Reduce inventory

Percent of Respondents, n=115

10%

15%

34%

58%

66%

0% 10% 20% 30% 40% 50% 60% 70%

More effectively investcash short-term


Increase Days PayableOutstanding (DPO)


Reduce inventory

Percent of Respondents, n=115 Source: Aberdeen Group, May 2010

The Maturity Class Framework Aberdeen Group used the following performance metrics to identify the Best-in-Class companies in working capital management:

• Cash conversion cycle (absolute, in days)

• Perfect order fulfillment


http://www.aberdeen.com/summary/report/benchmark/3996-RA-working-capital-optimization.asp



• Return on working capital

Table 1: Top Performers Earn Best-in-Class Status

Definition of Maturity Class Mean Class Performance

Best-in-Class: Top 20%

of aggregate performance scorers

Average cash conversion cycle: 21 days Return on working capital: 43% Perfect order fulfillment (your organization's average customer service level - i.e. on-time and complete to the customer's requested date): 97%

Industry Average: Middle 50% of aggregate

performance scorers


Laggard: Bottom 30% of aggregate

performance scorers


Source: Aberdeen Group, May 2010

Best-in-Class Performance Advantage Best-in-Class companies:

• Have cash-cash cycles that are three times lower than that of all other companies (including Industry Average and Laggards combined)

• Have twice the return on working capital as compared to Industry Average companies

• Have 1.5 times the perfect order fulfillment metric as compared to Laggard companies

• Have twice the return on supply chain fixed assets as compared to all other companies

The Best-in-Class PACE Model Table 2 outlines the most-adopted capabilities and technologies of the Best-in-Class companies, as well as their top pressure and key actions for WCO.

Table 2: The Best-in-Class PACE Framework

Pressure Actions Capabilities Enablers



Pressure Actions Capabilities Enablers Financial stakeholder pressure to improve key working capital metrics (e.g., cash conversion cycle, return on capital)

Reduce inventory Shorten Days Sales Outstanding (DSO) Increase Days Payable Outstanding (DPO)

Online visibility into financial supply chain events (e.g. invoice/PO/payment status) Online visibility into shipments status and in-transit inventory Ability to set up and use automated, data/milestone triggered payments for non-discrepant approved invoices Extended payment terms with suppliers Early payment discount program with our customers Open account credit Early payment discount program for suppliers

Inventory optimization tool Supply chain visibility/ inventory visibility technology Business Intelligence tools / analytics Automated platform to manage both AR and AP transactions


Best-in-Class Strategies When we look at the strategic actions across supply chain and financial strategies adopted by Best-in-Class companies and compare them to Industry Average and Laggards, we see that Best-in-Class companies are more likely to be focused on inventory reduction initiatives rather than financial or AP related initiatives (Figure 2). In fact Laggards are more likely to try to shorten DSO as compared to Best-in-Class and Industry Average companies.

Figure 2: Best-in-Class Strategies Compared with Industry Average and Laggards

20%

17%

37%

66%

54%

14%

4%

34%

55%

68%

8%

13%

29%

54%

79%

0% 15% 30% 45% 60% 75% 90%


More effectivelyinvest cash short-

term

Increase DaysPayable Outstanding

(DPO)


Reduce inventory

Laggard

Best-in-ClassAverage

20%

17%

37%

66%

54%

14%

4%

34%

55%

68%

8%

13%

29%

54%

79%

0% 15% 30% 45% 60% 75% 90%



term


(DPO)


Reduce inventory

Laggard

Best-in-Class

20%

17%

37%

66%

54%

14%

4%

34%

55%

68%

8%

13%

29%

54%

79%

0% 15% 30% 45% 60% 75% 90%



term


(DPO)


Reduce inventory

Laggard

Best-in-ClassAverage





On the supply chain management side, Best-in-Class companies are more likely to be trying to improve forecast accuracy and pursuing Just-in-Time (JIT) capabilities (Figure 3). Industry Average and Best-in-Class companies are equally likely to be trying to optimize inventory routes, making better decisions on where and how much inventory to store.

Figure 3: Best-in-Class Supply Chain Strategies Compared with Industry Average and Laggards

40%

31%

40%

51%

32%

45%

64%

55%

46%

46%

65%

79%

0% 20% 40% 60% 80%

Implementing Lean and Just-in-Time principles

Inventory collaboration with suppliers/customers

Optimizing inventory routes

Improving forecast accuracy


Laggard Average Best-in-Class

40%

31%

40%

51%

32%

45%

64%

55%

46%

46%

65%

79%

0% 20% 40% 60% 80%

Implementing Lean and Just-in-Time principles

Inventory collaboration with suppliers/customers

Optimizing inventory routes

Improving forecast accuracy


Laggard Average Best-in-Class Source: Aberdeen Group, May 2010

From the overall market standpoint, it is important to look at forecast accuracy and inventory optimization as two sides of the same coin and not prioritize one versus the other. Gaining high forecast accuracy is only the means to an end – namely gaining higher customer service level and reduced inventory. Some of the supply chain strategies outlined above are very industry specific. For example JIT/Lean manufacturing is being adopted by 80% of industrial equipment and industrial product manufacturers.

On the finance side, Best-in-Class companies are more likely than all others to pursue a series of strategies: improve accuracy of operational budgets (e.g. transportation spend, raw material spend), improve cash management (better use of cash on hand and increase the return on short-term investment).




Aberdeen Insights — Early Payment Discounting

Aberdeen research finds that 78% of companies offer only up to 2% of a discount on top of the invoice value. In addition, as Figure 4 illustrates, 53% of respondents indicate that only up to 10% of their suppliers participate in early payment discount programs.

Figure 4: Percent of Suppliers Participating in Early Payment Discount Programs

29%

24%

13% 13%10%

5% 6%

0%

5%

10%

15%

20%

25%

30%

35%

<1% 2 - 5% 6 - 10% 11 - 20% 21 - 30% 31 - 50% 50-100%

Percent of Discount

Perc

ent o

f Res

pond

ents 29%

24%

13% 13%10%

5% 6%

0%

5%

10%

15%

20%

25%

30%

35%

<1% 2 - 5% 6 - 10% 11 - 20% 21 - 30% 31 - 50% 50-100%

Percent of Discount

Perc

ent o

f Res

pond

ents


What is the reason for this poor adoption of early payment discount programs? The obvious reason for this is that 46% of suppliers are unwilling to discount. However 36% of respondents indicate that they have technology challenges that prevent them from adopting early payment discount programs. This is a huge opportunity for companies to resolve given the improved cash flow potential.




Chapter Two: Benchmarking Requirements for Success

Fast Facts

√ Fifty-four percent (54%) of Best-in-Class companies indicate that they have online visibility into shipments status and in-transit inventory as compared to 25% of Industry Average companies

√ Fifty percent (50%) of Best-in-Class companies indicate that they have online visibility into financial supply chain events (e.g. invoice / PO / payment status) as compared to 27% of Industry

WCO is an area that provides significant cross functional process, organizational and technology opportunities. In this chapter we will explore several fact-based discussions of how, through development of specific capabilities and use of technology enablement, companies can reach Best-in-Class performance status.

Case Study — Buffalo Rock Company Adopts Capital Expenditure Projects to Reduce Inventory

Buffalo Rock Company, one of the largest privately owned Pepsi-Cola bottlers in North America, is located in Birmingham, Alabama and services a population of over 6 million throughout the Southeast. Buffalo Rock operates a production facility in Birmingham, Alabama and 14 distribution centers in Alabama, Florida and Georgia. Operating 24 hours, 7 days a week, Buffalo Rock produces over 43 million cases of product annually with over 2,300 employees.

In 2009, Buffalo Rock faced a major challenge: the company was cutting costs and, unfortunately, it was using supply chain practices that could not scale to accommodate existing production levels with reduced staff. "When I was hired in 2009, the company was using very labor intensive methods for order picking, product loading and other critical inventory activities," said Randy Pettigrew, Director of Engineering at Buffalo Rock. These practices would be under even greater strain as the economy slowdown and credit markets became much tighter. "Although we have been able to manage relatively well during the recession, we knew that in order to maintain our competitive advantage we needed to automate many of our present day processes," said Pettigrew.

The potential gains from automation for Buffalo Rock were increased due to the high volume nature and lower profit margins inherent to the beverage bottling industry. They adopted a strategy where they invested in capital expense projects which had a good track record of getting rapid ROI to reduce operating expenses. To that end, Buffalo Rock installed new supply chain automation technology including pallet flow racks, carton flow racks and picking conveyors. The company also pieced together best-of-breed technologies from different vendors to form their new TMS solution. This solution features an onboard GPS system, new routing system, and new dispatch software.

continued




Case Study — Buffalo Rock Company

“With the help of these new supply chain systems, we are able to be much more efficient from production all the way to the store shelves. We are able to drive out unnecessary labor cost and free up a lot of money for further investments in the business. With these improvements we were able to lower our inventory from 11 days down to 9.5 days (our goal is 7.5, we’ve managed to get to 9.5 consistently)," said Pettigrew. Through the use of supply chain automation technology, Buffalo Rock was able to drive out unnecessary labor cost and free up cash for further investments in the business.

The benefits gained include:

• Reduced inventory by 46% - This frees up resources for re-investment

• Improvement inventory accuracy - More automation decreased the number of mistakes

• Improved transportation efficiency - Vehicles are directed to the most efficient routes saving gas and vehicle wear

• Faster customer/partner response times - Much easier to adjust the changing customer needs and adjustments

• Greater inventory visibility - Less reliance on paper and hand counting leads to more real-time visibility into supply chain dynamic

Competitive Assessment Aberdeen Group analyzed the aggregated metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (the approaches they take to execute daily operations); (2) organization (corporate focus and collaboration among stakeholders); (3) knowledge management (contextualizing data and exposing it to key stakeholders); (4) technology (the selection of the appropriate tools and the effective deployment of those tools); and (5) performance management (the ability of the organization to measure its results to improve its business). These characteristics (identified in Table 3) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics.



Table 3: The Competitive Framework

Best-in-Class Average Laggards Extended payment terms with suppliers

67% 59% 47% Ability to utilize statistical methods to establish inventory

targets Process

70% 59% 45%

Early payment discount program for suppliers Organization

42% 36% 29% Online visibility into shipments status and in-transit inventory

54% 25% 20% Online visibility into financial supply chain events

(e.g. invoice / PO / payment status) Knowledge

50% 27% 23% Inventory optimization tool

38% 25% 23%

Supply chain visibility / inventory visibility technology Technology

42% 27% 20% Cross-functional team to lead working capital improvements

Performance 46% 39% 29%


Process Capabilities In this section, we will look at process capabilities that Best-in-Class companies are focusing on. We will look at the three categories associated with managing receivables, payables and inventory. "We are doing thorough credit

checking before the sale. Also we strive to contact the customer quickly when an invoice exceeds terms.”

~ The CFO of Medium Sized 3PL Company

Managing Receivables In reducing days sales outstanding, the top two actions are: 1) changing customer terms, credit, or discount policies (49% of those focused on DSO reduction) and 2) improving the percentage of perfect orders delivered to customers (49%). Best-in-Class companies are more likely than Industry Average companies to be focused on improving the percentage of perfect orders delivered to customers (57% versus 41%), in order to speed up the collections.

"We are giving channel partners intensives to pay earlier before they receive end customers payment.”

~ The VP of SCM at a Large Telecommunications

Equipment Manufacturer

This shows that Best-in-Class firms are exploring more ways of driving cash faster in addition to simply changing customer terms - they are looking at improving the customer service level and on-time delivery as a means of getting paid faster.

However, as companies focus more on internal strategies for driving working capital improvement, they should remember that working capital should be managed with a view of end-to-end supply chain process optimization. For instance, the implications of the actions above on




customer retention and new customer acquisition rates should be examined before proceeding with these strategies. A number of internal process improvement steps may be implemented first and may lead to initial improvements.

Managing Payables Sixty percent (60%) of all companies already use extended payment terms with suppliers, with 20% more planning to start within one year; while 35% are running early payment discount program for suppliers, and 17% more planning to start within one year. Technology plays an important role in automating the payables process of Best-in-Class companies and increasing their financial supply chain visibility.

An organization embarking on a payables improvement project can realize benefits in several areas: extended payment terms with suppliers combined with early payment discount programs, and the flexibility to either hold more cash or use it proactively if it is in excess. The establishment of a more collaborative relationship between buyers and suppliers - including strategic supplier relationships or the use of supply chain finance programs involving third parties - offers more opportunities for buyer companies to negotiate extended terms, thus improving their working capital.

Managing Inventory "Extending standard payment terms on non-strategic vendors.”

~ The VP of Finance of a Large CPG Manufacturer

Best-in-Class companies have more visibility and control over their inventory flows, for example, they are more likely to be able to make mid-course corrections after goods are shipped. They are also more likely to be focusing on implementing just-in-time inventory policies in the next 12 months, and to be adopting statistical approaches to calculate inventory stock targets.

Based on Aberdeen's May 2009 report, Inventory Management: Three Keys to Freeing Working Capital, Best-in-Class companies, compared to all other companies, are:

• 1.5-times more likely to have the ability to determine safety stock targets for inventory at critical nodes in the supply chain, which is typically owned by the inventory analyst within supply chain and is a monthly / weekly process. Companies that follow simplistic general rule of thumb methods realize that they are subject to flabby supply chains. Companies facing high customer service level requirements, short product life cycles, or multi-tier manufacturing or distribution networks have the most to gain from moving toward item-location level inventory policies.

"Ordering more to reduce turns. Saving is in the reduced handling and freight costs. Larger buys also have better costs as our vendors love our larger PO’s.”

~ The CEO of Small Wholesale Distributor

• 40% more likely to have the ability to replenish inventory into distribution buffers based on customer demand, which is typically owned by the inventory analyst and is a weekly / daily process.


http://www.aberdeen.com/aberdeen-library/5965/RA-inventory-management-capital.aspx

http://www.aberdeen.com/aberdeen-library/5965/RA-inventory-management-capital.aspx



• Twice as likely to have the ability to segment inventory based on customer service requirements, which is typically owned by the demand planning organization and is a quarterly / monthly process.

"Improving sales forecasting in order to affect volume purchasing from suppliers and thus getting additional volume discounts.”

~ The GM of Logistics at Large Transportation Provider

Different products have different costs and lead times. For example, a customer who requires a custom part from a manufacturer (build to order) will have different service requirements than a customer who sells a commodity (build to stock) part. Thus segmentation of the customers based on their inventory management requirements is necessary. Best-in-Class companies are 1.5-times more likely than all others to be leveraging a statistical method for computing inventory targets.

Seasonal industries can see large swings in demand as well as lead time variability across demand peaks and lows driven by seasonality. Construction equipment companies are examples of companies that have long-term seasonality and the apparel industry involves short-term seasonality.

Organization Best-in-Class companies are 25% more likely to have a cross-functional team to manage working capital improvements including finance, which helps them incorporate valuable insight from finance into their strategic operational decisions.

Embedding cash conversion into the supply chain / procurement performance metrics and having a finance executive on the supply chain steering committee can also help move towards more effective cross-functional management of the process. The sales and operations process is an ideal process within the finance team should be embedded with a specific emphasis on managing working capital metrics.

Knowledge Management Best-in-Class companies are more than twice as likely as Laggards to have online visibility into shipments and in-transit inventory, and more than twice as likely than Laggards to have online visibility into financial supply chain events (e.g. invoice/P.O./payment status).

These capabilities give the Best-in-Class significant advantage in both planning / identifying inbound logistics opportunities, and reacting to the new pressures they face under tighter inventory levels. This ability to be more market responsive enables Best-in-Class companies to achieve faster cash to cash cycles.

Performance Management Best-in-Class companies are 30% as likely as all others to use cash conversion metrics as part of their supply chain organization metrics. Companies that embed cash conversion metrics into the set of supply chain metrics are twice as likely to have reduced their cash conversion cycle over the past year (45% versus 21%).




"We are focused on implementing metrics to focus on cash conversion cycle. We are introducing cost of capital into customer profitability metrics.”

~ The CFO of a Medium Sized Industrial Manufacturer

Some of the key metrics that have been adopted as part of the S&OP process are: Sales Forecast Accuracy, on-time shipping, on-time delivery, inventory turns, logistics costs as a percentage of sales, gross profit margin. Cash conversion cycles should be added to the list above along with its components. This will provide companies a clear picture of how their operational performance translates to financial value creation.

Technology

AP/AR Automation Payables and receivables automation technologies play an important role in providing visibility into and streamlining financial processes, which eliminates data errors, speeds up transaction processing time and reduces transaction processing costs. In fact, in this study, companies that reported using AR or AP automation technologies are about 80% more likely to have online visibility into their financial supply chains (53% versus 30%).

Inventory Optimization "Being a services company, the inventory is not THE major item in term of working capital. The action we are taking is to optimize customer's payments terms and consequently cash collection. Other action relevant is to better allocate and use people delivering services.”

~ The CEO of a Small Services Organization

Seventy percent (70%) of respondents indicate that they revise their inventory targets once a quarter or at a lower frequency. Inventory policies should not be updated very frequently due to the nervousness it creates in the plan – a monthly frequency is the ideal frequency, which 24% of respondents selected.

Inventory segmentation, however, should be done based on business drivers such as profit margin optimization. For example, a large consumer electronics manufacturer saw a spike in demand for a specific type of video recording device that it had not foreseen, resulting in lost revenue. For the next cycle of planning, the company changed its process to segment the inventory at a more granular level of attribute of the product than what they had done previously. The key takeaway is that the process and the technology that enables it should be flexible enough to support segmentation in the middle of the planning cycle driven by impending business challenges.

This process step involves being able to consider the entire network – either the finished goods inventory in distribution-centric environments or including Work-in-Process (WIP) inventory for manufacturing-centric environments – and right-size the inventory buffers.

Over 43% of respondents set their inventory policies based on general rules of thumb. Forty-nine percent (49%) of respondents leverage spreadsheets for doing inventory optimization and 27% leverage ERP systems. Twenty-three (23%) leverage some form of home grown system, while only 16% leverage a best of breed SCM solution.




Aberdeen Insights — Planned Adoption of Technology

Working capital ratio is not just a financial metric - it is a reflection of how efficient a company is in driving cash from its supply chain operations. For companies with complex global supply chains, information technology has become a critical tool for achieving supply chain excellence, providing process and shipment visibility, workflow automation, alerting, analytics, and supporting processes from planning to execution. In the current study:

• Companies are 1.5 more likely to have an automated platform to manage AR transactions than having supply chain visibility / inventory visibility technology

• Companies are twice as likely to be implementing an inventory optimization tool as an automated platform to manage AP transactions

Figure 5: Technology Enablers in Use and Planned to be Implemented within 12 Months

29%

30%

13%

16%

13%

27%

28%

35%

39%

40%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Inventory optimization tool

Supply chain visibility/ inventory visibility technology

Automated platform to manage both AR and AP transactions

Automated platform to manage Accounts Receivable (AR)transactions

Automated platform to manage Accounts Payable (AP)transactions

29%

30%

13%

16%

13%

27%

28%

35%

39%

40%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%






29%

30%

13%

16%

13%

27%

28%

35%

39%

40%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%







Plan to Implement within 12 MonthsCurrently Use


Currently Use Plan to Implement within 12 MonthsPlan to Implement within 12 MonthsCurrently Use





Chapter Three: Required Actions

Fast Facts Best-in-Class companies are, compared to all others:

√ Over 50% more likely to use Inventory Optimization tool

√ Over 40% more likely to use automated platform to manage both AR and AP transactions

Companies should consider the following steps to optimize their working capital. The recommended actions are arranged according to whether the companies fall in the Laggard, Average or Best-in-Class category.

Laggard Steps to Success • Set up an early payment discount with suppliers Forty-two

percent (42%) of suppliers have set up an early payment discount program for suppliers versus 29% of Laggard companies. Extended payment terms with suppliers, combined with early payment discount programs, offer the company flexibility to either hold more cash or use it proactively if it is in excess. The establishment of a more collaborative relationship between buyers and suppliers - including strategic supplier relationships or the use of supply chain finance programs involving third parties - offers more opportunities for buyer companies to negotiate extended terms, thus improving their working capital.

• Set up online-visibility into shipments status and in-transit inventory. Fifty-four percent (54%) of Best-in-Class companies have online visibility into shipments status and in-transit inventory as compared to 20% of Laggards. In-transit inventory visibility is a critical component of responsive supply chain management. Visibility technology provides a view of the current location of in-transit and at-rest inventory, the status of supply chain milestones, and sometimes also includes exception alerts if planned milestones are not achieved on time. "We created $700 M in cash

flow through adoption of simple inventory optimization technology within our supply chain."

~ Chief Supply Chain Officer at Large Consumer Electronics Manufacturer

Industry Average Steps to Success • Establish online visibility into financial supply chain events.

Fifty percent (50%) of Best-in-Class companies have online visibility into financial supply chain events as compared to 27% of Industry Average companies. Having online visibility into financial supply chain events provides the opportunity for companies to track cash conversion cycles in real-time and monitor the performance within limits. Companies can then take actionable steps to resolve the situation if the metric goes out of control.

• Institute a cross functional team to lead working capital improvements. Forty-six percent (46%) of Best-in-Class companies have cross functional teams to lead working capital improvements as compared to 39% of Industry Average companies. Companies need to establish an integrated view of working capital management, taking into account inter-relationships between operational processes impacting working capital throughout the supply chain, including sales, operation, and manufacturing planning,




demand and supply synchronization, inventory management, customer and supplier relationships, and financial management.

Best-in-Class Steps to Success • Implement supply chain financing process. Only 13% of Best-

in-Class companies have the ability to access supply chain financing at various stages in the supply chain (payables/receivables/inventory financing). These companies should explore innovative financing offerings, including reverse factoring, invoice-based receivables financing, third-party Vendor-Managed Inventory (VMI) programs financing and off-balance sheet financing. These companies also have the opportunity to further improve and automate receivables, payables and inventory management processes and increase integration with other enterprise systems.

• Implement an inventory optimization process. Thirty-eight percent (38%) of Best-in-Class companies have implemented an inventory optimization solution. These companies need to institute a process that understands demand and lead-time variability across the supply chain and assigns policy at each SKU location. This will globally optimize inventory policies across supply chain tiers, accounting for both demand and supply variability using a stochastic (probabilistic) approach versus a rules-based or deterministic approach that does not fully account for variability.

Aberdeen Insights — How to Utilize the Cash Flow Created Through Working Capital Projects

The reduction in working capital that results in the release of cash can be utilized in several ways. It can be used to pay back debts that companies may have incurred. It can be used to pay interest for notes that companies may have taken. It can also be used for paying dividends to share holders. However the most important approach that organizations should take is to invest this unlocked cash flow into growth or profitability initiatives. This is the approach known as “leverage” in the financial community, namely creating a multiplier in terms of value creation. Supply chain, procurement and manufacturing professionals have a great tool in the form of working capital optimization to create true economic value for their company's shareholders.



Appendix A: Research Methodology

Between April and May 2010, Aberdeen examined the use, the experiences, and the intentions of 115 enterprises in the area of Working Capital Optimization (WCO) which includes cash management, accounts payable and inventory management functions. Aberdeen supplemented this online survey effort with interviews with select survey respondents, gathering additional information on working capital management strategies, experiences, and results. Responding enterprises included the following:

Study Focus

Responding manufacturing & distribution executives completed an online survey that included questions designed to determine the following:

√ The degree to which Working Capital Management is critical to their operations

√ The difference between Days Payable Outstanding, Days Inventory Outstanding and Days Sales Outstanding metrics for organizations

√ Current and planned use of Supply Chain Finance, Inventory Financing and to aid operational and promotional activities

√ The benefits, if any, that have been derived from working capital initiatives

• Job title: The research sample included respondents with the following job titles: CEO/President/CFO/CIO - 17%; EVP/SVP/VP - 23%; Director - 17%; Management - 23%; Staff - 6%; other - 14%

• Department / function: The research sample included respondents from the following departments or functions: Logistics/SCM - 33%; Procurement/Purchase-20%, Finance-22%, Corporate Management - 14%, Sales - 11%.

• Industry: Industry: The research sample included respondents from the four major industry segments - Process, Consumer, Discrete and High-tech/electronics. Key demographics are:

o Discrete (18%): Aerospace/Defense/Automotive (4%), Industrial Product Manufacturing/Industrial Equipment Manufacturing (16%)

o Consumer (33%): Consumer Durable Goods/ Consumer Electronics (6%), Consumer Packaged Goods (9%), Food/Beverage (8%), Retail (4%), Wholesale/Distribution (6%)

o Process (16%): Chemicals (9%), Metals and metal products/ Mining/oil/gas (1%), Paper/lumber/timber (2%), Pharmaceutical manufacturing (4%)

o High-tech/electronics (18%): Health/medical/dental devices or services (6%); high-technology/Computer equipment and peripherals (6%), telecommunication equipment (6%)

o Transportation/Logistics (5%)

o Other - 10%

• Geography: The majority of respondents (40%) were from North America. Thirty-five percent (35%) of respondents were from Europe. Remaining respondents were from the Asia-Pacific region (12%) and Middle East/Africa/South America (13%).

• Company size: Forty-one percent (41%) of respondents were from large enterprises (annual revenues above US $1 billion); 31% were from midsize enterprises (annual revenues between $50 million and $1 billion); and 28% of respondents were from small businesses (annual revenues of $50 million or less).




• Headcount: Fifety-nine percent (59%) of respondents were from large enterprises (headcount greater than 1,000 employees); 19% were from midsize enterprises (headcount between 100 and 999 employees); and 22% of respondents were from small businesses (headcount between 1 and 99 employees).

Table 4: The PACE Framework Key

Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management)


Table 5: The Competitive Framework Key

Overview The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) — Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) — Practices that represent the average or norm, and result in average industry performance. Laggards (30%) — Practices that are significantly behind the average of the industry, and result in below average performance.

In the following categories: Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization — How is your company currently organized to manage and optimize this particular process? Knowledge — What visibility do you have into key data and intelligence required to manage this process? Technology — What level of automation have you used to support this process? How is this automation integrated and aligned? Performance — What do you measure? How frequently? What’s your actual performance?


Table 6: The Relationship Between PACE and the Competitive Framework

PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions.





Appendix B: Related Aberdeen Research

Related Aberdeen research that forms a companion or reference to this report includes:

• Integrated Demand-Supply Networks: Five Steps to Gaining Visibility and Control; March 2009

• Inventory Management: 3 Keys to Freeing Working Capital; May 2009

• 2009 Supply Chain Summit: Managing Integrated Demand-Supply Networks; May 2009

• Sales and Operations Planning: Integrate with Finance and Improve Revenue; July 2009

Information on these and any other Aberdeen publications can be found at www.aberdeen.com.

Author: Nari Viswanathan, Vice President / Principal Analyst, Supply Chain Management ([email protected])

Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500.

As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte-Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com.

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

http://www.aberdeen.com/summary/report/benchmark/5845-RA-integrated-supply-networks.asp

http://www.aberdeen.com/summary/report/benchmark/5845-RA-integrated-supply-networks.asp

http://www.aberdeen.com/summary/report/benchmark/5965-RA-inventory-management-capital.asp

http://www.aberdeen.com/summary/report/perspective/6092-AI-demand-supply-networks.asp

http://www.aberdeen.com/summary/report/perspective/6092-AI-demand-supply-networks.asp

http://www.aberdeen.com/summary/report/benchmark/5884-RA-operations-planning-finance.asp

http://www.aberdeen.com/summary/report/benchmark/5884-RA-operations-planning-finance.asp

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