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Supply chain management and working capital
- 1. 2010-11-20 Supply Chain and Working Capital Management KTH November 19th 2010 WCM – Working Capital Management WCM – Definition – Methods and practise – Case WCM and SCM – Focus on how to handle business cycle variations – Capacity issues © UnitedLog 2009 1
- 2. 2010-11-20 www.unitedlog.com Hans von Euler Consultant and Trainer in Supply Chain Management Manufacturing Retail and distribution Services Healthcare © UnitedLog 2009 www.unitedlog.com Founded in 2005 9 offices on 3 continents Owned by 6th AP Fund and AB Arvid Svensson 150 employees © UnitedLog 2009 2
- 3. 2010-11-20 UnitedLog Supply Chain Management & Finance Consulting Customer Supply Chain Supply Chain Services Software © UnitedLog 2009 UnitedLog – How we improve your supply chain and profitability Reduce your working capital • Working Capital Management • Financial Solutions FLOW OF CAPITAL FLOW OF SUPPLIER END CUSTOMER GOODS SOURCING PRODUCTION DISTRIBUTION FLOW OF INFORMATION Visibility and cost Reduce your costs and control increase your service Flexibility in your inbound and levels outbound flow of goods •SCM Strategy • Control Tower Software • Outsourcing Services • Change Management • Performance Management © UnitedLog 2009 3
- 4. 2010-11-20 Supply Chain Consulting Corporate strategies Organization Development Product and Business Strategy area development Supply/Demand Chain Strategy Working capital management Sourcing Supply/Demand Finance Chain Management Financial management Production Transaction Services Distribution We enable increased revenues and unique competiveness through more efficient flow of goods, services, information and financial means. Senior consultants with great experience. Strong in implementation and achieving lasting results. Supply Chain Software – Control Tower Software Manages Inbound and Outbound Logistics In-Sourced or Outsourced Does Not Matter Goods Flow Control and Operation Tools Information Flow Control and Operation Financial Control and Operation Tools Performance Management Tools Advanced tendering © UnitedLog 2009 4
- 5. 2010-11-20 Supply Chain Outsourcing Services Inbound and Outbound Transport Management 3PL Contracting Supply Chain Invoice Control CUSTOMER Outsourcing Services Customs Brokerage Logistics Trading © UnitedLog 2009 WCM - Working Capital Management KTH November 19 2010 5
- 6. 2010-11-20 WCM – Working Capital Management WCM – Definition – Methods and practise – Case WCM and SCM – Focus on how to handle business cycle variations – Capacity issues © UnitedLog 2009 WCM – Working Capital Management Working Capital is the capital needed in order to finance the ongoing business Working capital is mainly tied up in Cash Inventory Accounts receivable © UnitedLog 2009 6
- 7. 2010-11-20 The Aim of improving WCM is always to increased Profitability Reducing working capital improves cash flow... ...giving direct results on the profit A successful WCM project is not only a “financial” project but as much a matter of improving operational conditions in the supply chain. © UnitedLog 2009 All activities in a WCM and SCM project must be balanced in order to achieve increased profitability. The Cornerstones of Logistics SERVICE Profit Profitability = Captal COSTS CAPITAL © UnitedLog 2009 7
- 8. 2010-11-20 THE IMPORTANCE OF CASH FLOW © UnitedLog 2009 Income vs Cash Flow Income Supplier Customer Purchase Sales Cost Income Production Cash Flow Supplier Customer Outgoing Incoming payment payment © UnitedLog 2009 8
- 9. 2010-11-20 Capital tied up - from Order to Cash Suppliers Customers FINISHED PRODUCT Purchasing Production Sales Capital tied up Material from Machine delivered and Payment from supplier delivered customer invoiced customer Customer’s credit time Cash payment Operating margin to supplier Machine placed in finished stock Machine produced Working Capital tied up Time Credit time from supplier © UnitedLog 2009 Exercise: Calculation of released capital A company has a total sales of 180 millions. How much operating capital can be released by having the customer’s payment 3 days earlier? 180 millions = 0,50 x 3 days = 1,5 millions 360 days © UnitedLog 2009 9
- 10. 2010-11-20 What we want to achieve Goods received Invoiced sales Average inventory Average customer lead time payment time Days Average time to Cash Conversion payment of supplier Cycle (CCC) Cash disbursement Cash collection to supplier from customer We want to decrease the lead time in inventory… © UnitedLog 2009 What we want to achieve Goods received Invoiced sales Average inventory Average customer lead time payment time Days Average time to Cash Conversion payment of supplier Cycle (CCC) Cash disbursement Cash collection to supplier from customer We want to decrease the lead time in inventory… …and decrease the payment time from customers… © UnitedLog 2009 10
- 11. 2010-11-20 What we want to achieve Goods received Invoiced sales Average inventory Average customer lead time payment time Days Average time to Cash Conversion payment of supplier Cycle (CCC) Cash disbursement Cash collection to supplier from customer We want to decrease the lead time in inventory… …and decrease the payment time from customers… …and increase the payment time to suppliers… ...and thus reduce working capital and the cash conversion cycle ! © UnitedLog 2009 The main drivers of Cash Flow Income statement Balance sheet Balance sheet Operating Changes in Changes in income Working capital Fixed assets (operational) (operational) (strategic) Cash flow © UnitedLog 2009 11
- 12. 2010-11-20 Working Capital Management Balance Sheet Liabilities & Assets Equity Equity “Management of Fixed Assets a company’s Untaxed Operating Reserves Capital, e.g. the short-term Inventories Long-term assets & Liabilities liabilities.” Accounts Short-term Receivable Liabilities Accounts Cash Payable © UnitedLog 2009 Working Capital Management Focus on non interest bearing items in the Balance sheet © UnitedLog 2009 12
- 13. 2010-11-20 Operating income vs. Cash Flow MSEK 60000 Note that good profit 40000 does not necessarily mean a positive 20000 Cash Flow 0 -20000 -40000 -60000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Operating income Cash Flow A high operating income doesn't mean a company has cash on hand; the company can go bankrupt, due to lack of cash, even if the operating income is high. © UnitedLog 2009 Working Capital Management Value added Product Sales Credit- Development Marketing Order Production time Purchase Accounts WIP, Receivable Work In Value added in the Progress Balance sheet Raw material 20 Cash Flow 0 -20 -40 -60 -80 -100 © UnitedLog 2009 13
- 14. 2010-11-20 Every day is important! With a 10% margin on sold products you need to sell 100 products to finance 10 unsold products in inventory. © UnitedLog 2009 Experience of Working Capital Management Based on previous conducted WCM projects; 5 -10% of sales are identified as a potential reduction of working capital Activities amounting to 50 % of the identified potential is normally released within 6 -12 month after the workshop. The same methodology can be applied in all business sectors Where the “Cash” improvements normally occur: Accounts Delivery Accounts Purchase Order Production Distribution Invoicing payable precision receivables Procurement Production and Distribution Sales Process (Suppliers) (Stock) (Accounts 20-30 % 40-60 % Receivables) 20-30 % © UnitedLog 2009 14
- 15. 2010-11-20 Use for released working capital Increase the cash buffer Investments in marketing Repayment of loans Investments in competence development Investments in property and machines Investments in research and development, incl. new Acquisitions products and services Dividends to shareholders To keep our shareholders pleased and willing to invest in To be able to seize business our business by giving opportunities dividends ”Cash is King” © UnitedLog 2009 Working Capital Management Sales process Production process • Credit Management • Product development • Offer & Contracts • Delivery precision • Order • Inventory • Invoicing • Planning • Accounts Receivable • Production • Incoming payments • Finished goods & distribution Working Capital Management Liquidity Management • Bank accounts Purchase process • Financing • Evaluation of suppliers • Borrowing • Purchase agreements • Currency management • Distribution • Liquidity planning • Approval of supplier • Salaries invoices • VAT and other taxes • Outgoing payments © UnitedLog 2009 15
- 16. 2010-11-20 All activities are important! I can enforce I can push for freeze time reduction in finished stock I can charge penalty interest I will never pay before due date I can I can invoice on introduce Friday instead of direct debit Monday © UnitedLog 2009 WCM and SCM - controlling in business cycle changes 16
- 17. 2010-11-20 Challenging times The finance crisis and the recession that followed left many companies to face quite new challenges that had to be dealt with rapidly. Focusing on efficiency in every aspect of manufacturing, distribution and supply have a potential in reducing the imposition of company profit. Working capital does often hide substantially potentials. Focusing on capacity- and utilization issues will be of highest strategic importance to very many companies. © UnitedLog 2009 CAPACITY – HOW MUCH WILL BE NEEDED AND WHEN? © UnitedLog 2009 17
- 18. 2010-11-20 CAPACITY PLANNING © UnitedLog 2009 Capacity planning Planning vs Control Perspective: Planning - making up the route Longer Controlling - adjust to reality Shorter © UnitedLog 2009 18
- 19. 2010-11-20 CAPACITY– DEFINITION © UnitedLog 2009 Capacity Controlling Planning Short perspective Long perspective Daily, weekly Monthly, quarterly People Fine tuning Changes in takt, Machines investments Materials © UnitedLog 2009 19
- 20. 2010-11-20 ”Fine tuning” – daily control Make the best of things Within the rules.. © UnitedLog 2009 Capacity Planning – long term Create new conditions Secure the new levels – higher or lower. Reducing Increasing Continuing in unchanged takt Investments It is in the Capacity Plan the decisions are taken on investments in the flow © UnitedLog 2009 20
- 21. 2010-11-20 Capacity Planning Planning is made on different levels – Overall, budget – Overall continuously – Capacity, utilization rate – Operational level © UnitedLog 2009 ”THEORY” © UnitedLog 2009 21
- 22. 2010-11-20 The Bucket theorem © UnitedLog 2009 Capacity plan Capacity section:.................. Opening values Jan Feb Mar Apr May June Target Sales budget 50 70 85 65 70 80 420 actual 40 60 60 70 65 65 360 Inventory budget 270 260 250 240 230 220 220 actual 280 300 300 300 290 285 280 280 budget 40 60 75 55 60 70 360 Production (forecast adjusted) ”actual" 60 60 60 60 60 60 360 (production friendly) © UnitedLog 2009 22
- 23. 2010-11-20 Capacity Planning The closer to market, the quicker reaction to changes. The closer to market, the later you can take decisions - and the better you know what has to be done. © UnitedLog 2009 Capacity Planning The quicker you react to changes less adjustments are needed The more often you react and act the smaller adjustments each time. Making change work and Making work change © UnitedLog 2009 23
- 24. 2010-11-20 Planning processes There are several planning levels but the two most important once are: Capacity planning (the whole factory or a segment) Order planning (Which items, products components or materials shall be ordered internally or externally? When and How Much? Two completely different levels of planning © UnitedLog 2009 Projektnamn etc Planning and Control Pull-principal BUDGET Market Capacity forecasts Capacity decision planning Monthly/Quarterly Frames ORDER planning Weekly Order decision Purchasing Materials clearance Weekly Materials call-off Manufacturing Customer order Weekly order Daily el Shop floor planning Daily Supplier Customer © UnitedLog 2009 48 © Establish/ 20/11/2010 24
- 25. 2010-11-20 Planning processes – Capacity planning Capacity planning is made on a high level: The decisions include accumulated flows and groups of items and products rather than individual items. The decisions gives a frame for the detailed decisions on order- and shop floor planning levels. The decisions have consequences for the future and are often strategically based. The decisions are therefore taken on highest management level. What takt must we have for the coming period? © UnitedLog 2009 Projektnamn etc Planning processes – Order planning A group of items compete of the available capacity. Order planning answers the key issues: Which of the items shall be released for production now? How much shall be ordered? The ordered item and quantity shall be delivered one lead time later. When is that? To what shall we use the Capacity ? © UnitedLog 2009 Projektnamn etc 25
- 26. 2010-11-20 THE SUPPLIER © UnitedLog 2009 MRP planning example Weeek 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 2007 Demand we 43 57 92 week 108 Programme 29 38 59 93 106 112 30 41 58 94 108 114 111 31 23 56 90 100 109 118 122 32 -15 36 96 105 109 118 122 121 33 -35 -22 74 105 113 118 111 121 114 119 34 -57 -16 107 108 119 112 123 112 119 115 35 -73 2 96 113 112 112 112 118 114 116 36 -71 -17 100 106 110 113 119 116 116 117 37 -88 -19 98 103 94 116 111 103 114 111 38 -107 -14 103 100 118 109 105 116 111 115 39 -121 -7 107 110 103 106 116 111 115 115 40 -128 13 107 105 88 118 112 115 115 112 41 -115 -11 95 85 90 113 113 112 112 114 42 -126 -8 101 86 73 43 -134 13 78 67 44 -121 -12 45 -133 46 47 48 Decided 38 58 90 105 113 119 112 110 94 118 103 88 90 1238 100% Actual 23 36 74 107 96 100 98 103 107 107 95 101 78 1125 91% Ordered omponents 43 57 92 108 112 111 122 121 114 119 114 116 114 1343 119% © UnitedLog 2009 26
- 27. 2010-11-20 Include all strategic actors in the Total flow Variations increase and get worse up streams Secure key suppliers capacity by including the in your own capacity planning process. Develop new coordinative routines Big variations upstream means late reaction to changed demands down streams All actors shall react to the same signal! © UnitedLog 2009 SCANIA © UnitedLog 2009 27
- 28. 2010-11-20 5 Scania Capacity Planning Process 5 The process of the ”Planning Tour. It´s made monthly and with a 12 month window Week1 Week 2 Wednesday Friday Friday at 14.00 after the turn of at 13.00 the month Data from the Distributors Statistics of vehicles registered Takt decision Analyses – financial, Meeting marketing, etc. Forecasts, ratings and Cross evaluations Levelling the Capacity functional Production & Marketing Dept. meeting Sourcing Dept chaired by Volume plan, Edition MD Production Demand no. # Capacity- /Takt Plan Consequences on Deliveries Capacity levelling and component Market dept. Production capacity Plan/ restrictions can influence delivery decision on Volume Takt Plan dates. The suggested plan is mutually plan Suggestion on how volume developed until agreement . Several editions can occurs during the Plan can be realized process. © UnitedLog 2009 20/11/2010 © 2008 Establish Scania Frequent planning Standardised and clear process! Secured and simple routines to prepare for the takt decision. Capacity planning meeting, Takt meeting, is a decision meeting – all discussions on forecasts, productions conditions etc. Must be closed in the preparatory process. The only one that can take the final takt decision is the MD. © UnitedLog 2009 28
- 29. 2010-11-20 Capacity planning - summary The same issues in recession and boom. The better you function in boom periods the better prepared with working routines when business turns down. The closer to market, the quicker reaction to changes. The closer to market, the later you can take decisions - and the better you know what has to be done. The quicker you react to changes less adjustments are needed. © UnitedLog 2009 Capacity planning - summary Make it often! React and act rapidly! Simple routines and rules Clear decisions every time Simple and obvious connections to every day operations Make it often and simple ! © UnitedLog 2009 29
- 30. 2010-11-20 WCM and SCM Different basic focus The same actions and tools Same demands on the process of change The same goals Increased Profitability ! © UnitedLog 2009 Thank You for listening ! © UnitedLog 2009 30