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I t d ti – Working
Introduction W ki Capital
C it l 1
Manage
g successful working
g capital
p initiatives 21
1
Volatility for issuers and investors has been unprecedented
Cost of Borrowing vs. Yields … Spread differential between Tier I vs. Tier II Money market yields
Average
g Days
y Working
g Capital
p ((DWC)) increased 32.7 33.0 33.4 33.5 33.0
32 3
32.3
by 8.2% from 2008 to 2009 – the biggest DWC 29.7
INTRODUCTION – WORKING CAPITAL
deterioration over the last 5 years 48.7 48.0 47.7 47.5 48.6 46.3
40.8
DSO increased by 10.4% from 2008 to 2009
DPO improved by 13.4% in 2009; which
37 6
37.6 37 6
37.6 37 3
37.3 39 3
39.3 37 7
37.7
signifies
i ifi iincreased
d ffocus on payables
bl within
ithi 36 7
36.7 34.2
corporations 35.6 37.3 37.8 38.0 38.9 38.3
35.4
DIO increased by 10.7% in 2009 which shows
that organizations are building up inventory
2003 2004 2005 2006 2007 2008 2009
2
Working capital improvements are made by streamlining complex operational
processes across the organization
Your Customers Your Company Your Suppliers
Plan
Process Order Order Forecast Process Order Order
Production
Process Process
Invoice Invoice
Invoice Invoice
INTRODUCTION – WORKING CAPITAL
Collect
Pay Suppliers Collect Pay Suppliers
Payment
T
Treasury
Manage short Ensure funds Manage short Ensure funds
term funds availability term funds availability
3
Impact of working capital on shareholder value
Liquidity
Li idi M Management ((optimize
i i return and
d mitigate
ii risk)
i k)
Working
INTRODUCTION – WORKING CAPITAL
4
By focusing on the operational processes to drive sustainable change, working
capital initiatives also impact revenue
revenue, cost and service
• Reduction
Red ction in spend
• Reduction in obsolescence (SLOB’s)
Working Capital
• Reduction in reserves/write-offs
Is The Cheapest
• Reduced warehousing & distribution costs
Source of Cash
• Reduced transportation costs
Sales COGS SG&A Other Interest D&A Net Income D&A, Fin, Chg in WC Cash Flow
Invest from Ops
5
Case study – Global specialty chemicals & materials company
Working capital improvements and stock price
Situation in Q4, 2008…
Liquidity in question
ng
ys Outstandin
100 $40
Stock Price
e
Manufacturing & supply chain, G&A 80 $30
functions, R&D refocused
60 $20
Paid down/refinanced our debt
Day 40 $10
improving liquidity profile
INTRODUCTION – WORKING CAPITAL
20 $0
Amended debt to EBITDA covenant Dec '08 Mar '09 Jun' 09 Sep '09 Dec '09 Mar '10
6
INTRODUCTION – WORKING CAPITAL
7
Agenda
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Symptoms of inefficient working capital – days payables outstanding
9
Driving cash from the purchase to pay process
Payment Clock Standard payment terms linked to Procurement Rapid dispute Fixed payment
starts on latter Commodities with clearly defined payment terms and resolution cycles – 2 x per
of invoice or conditions Automated month, monthly
goods receipt Single payment term for each supplier workflow for Electronic
DAYS PAYABLES OUTSTANDING OPTIMIZATION
10
Cycle time comparison across payables solutions
Below is a cycle time comparison across various payable options available to an organization
Illustrative
PAYABLES MANAGEMENT PROGRAM – CYCLE TIME ANALYSIS
Payables Cycle Extend Terms 15* days… Extend Terms 15* days…
ii. Invoice Approval N/A (no Invoice) Day 10 thru 40 Day 10 Day 10
iii P
iii. Pay S
Supplier
li D 1 th
Day thru 30 D 10 th
Day thru 40 D 10 ((early)
Day l ) or D
Day 45 (t
(term)) N/A – JPM P
Pays supplier
li
v. Client. Settlement Day 44 (14 day grace) Day 54 (14 day grace) Day 36 (on avg.) Day 45 (to JPM)
DAYS PAYABLES OUTSTANDING OPTIMIZATION
Standard Terms: 30 Days 30 Days 10 Days (early); 45 days (term) 30 Days (current DPO)
Payment Type vs. Std. Terms DPO Impact: -1 Days DPO Impact: + 9 Days DPO Impact: +6 Days DPO Impact: +15 days
Earn rebates (i
(i.e.,
e 1 1.00%)
00%) Increase DPO Self-fund
Self fund early payments while Increase DPO
increasing DPO
Reduce invoice and Earn rebates (i.e., 1.00%) Improve supplier
payment transaction cost Earn high returns (2.00% for relationships by providing
Reduce payment transaction
Benefits 20 days early = 36.50% supplier liquidity at a
cost competitive rate
return)
11
Considerations to improve payables operations
gh
Hig
Hig
Order To
Two-way match of invoices requires system ERS Pay
enhancements but derives substantial benefits
on
Web based EDI
Web-based Order To
Deploying web technology to develop central
lower costs
Order To
Imaging technology Outsourcing with Pay
Minimizes change management for with OCR / ICR offshore processing
supplier and drives automation
Low
foundation needs to be vendor / item master and integrated payment structure
Low
established
12
Case study – Auto parts retailer
Supply Chain Finance (DPO extension)
Program Specifics
Business:
B i Auto-parts
A t t retailer
t il
Objective: Extend supplier payment terms to better match with inventory turns
Solution: Initiated Supply Chain Financing (SCF) in 2003 in the U.S. to support terms extension; expanded to
Asia in 2007 when began sourcing in China. Discussions underway to expand to Latin America.
Spend size: Approximately $150 million with J.P. Morgan; multiple providers total approximately $1 Bn annually
Buying entities: Supporting 2 buying entities in the U.S
U S and 1 in Asia.
Asia
Suppliers enrolled: Approximately 50 strategic suppliers located in the U.S., H.K. and China
Competitor with
Retailer with SCFSCF
250 Auto Parts Retailer
Competitor with Improved
with SCF SCF Improved
CashCash Flow
Flow
Competitor 2
$ Millions
Competitor 3 1,000
200 900
bles Outstanding
800
150 700
600
500
100
Days Payab
400
300
50 200
100
0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2001 2002 2003 2004 2005 2006 2007 2008
13
DAYS PAYABLES OUTSTANDING OPTIMIZATION
14
Agenda
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Symptoms of inefficient working capital – days sales outstanding
16
Driving cash from customer to cash cycle
# of days 5 30 10
0 10 2
Billing at Adherence to credit policy, short Proactive dispute Credit limit and Electronic
point of standard payment terms with identification scoring transfers
shipment / escalation for exceptions Root cause eradication Customer Automated
service Sales team aware and incentivized programs Segmentation allocation
delivery
DAYS SALES OUTSTANDING OPTIMIZATION
17
Levers to minimize credit risk through dynamic credit limit setting process
Develop credit management strategy based on 3rd party rating, internal customer payment history and
financials
Create dynamic credit limits to match changes in customer order patterns and risk
• Credit limit adjustment (credit on hold, credit PD% 33% 54% 38%
• FSS,
FSS D&B
increase etc.) WADP 48 46 48
• Paydex Sum of Inv Amt $202,222,255 $37,560,578 $239,782,833
D Total AR$ $20,681,296 $8,324,685 $29,005,982
• Update credit limits: No. of Customers 39 164 203
• Internal info.
• New industry PD% 51% 63% 55%
evaluation • Collection strategies
trends WADP 46 50 47
• % Current based on risk
• Updated 3rd party Sum of Inv Amt
Sum of Inv Amt $150 406 377
$150,406,377 $20 983 469
$20,983,469 $171 389 846
$171,389,846
• Pay History classification and credit
risk score F Total AR$ $106,776,281 $45,764,660 $152,540,941
• Yrs. of limit adjustments No. of Customers 128 1,010 1,138
• Internal payment
business PD% 57% 72% 61%
history
WADP 64 76 66
Sum of Inv Amt $431,802,686 $89,184,298 $520,986,984
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Levers to optimize working capital through payment receipt and application
Improving working capital across the customer to cash cycle requires an optimized & comprehensive payment strategy
which focuses on reducing transaction costs and mail float by increasing electronic adoption rate supported by real time
payment
p y reporting
p g and exception
p management
g
Adjustments
Write-offs
Payment Channel Strategies DSO Impact
Fraud
19
DAYS SALES OUTSTANDING OPTIMIZATION
20
Agenda
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21
Approach for optimizing working capital
Main Objectives Main Objectives Main Objectives Main Objectives Main Objectives
Working capital Deep dive process, Mobilization and initial Commence transfer of Ensure conformance to
assessment by policies & tools review realization of Quick wins responsibilities to implemented processes
geographic / business Working Capital and tools
line / legal entity Conduct analysis of Identify pilot projects to champions
incentives and their build / design / Fulfil role of trusted
Root cause analysis to alignment across the recommend Roll-out process, KPI’s advisor
identify linkages organization structure Process and tools enhancements
between performance Policy in a prioritized sequence
and companyp yggoals / Identification of benefit KPIs and incentive
MANAGE SUCCESSFUL WORKING CAPITAL INITIATIVES
Main Outputs Main Outputs Main Outputs Main Outputs Main Outputs
Benefits quantification Identification of “quick- Mobilization and Implementation of Continuing delivery of
wins” realization of quick wins recommendations improvements
Identification of key (process, tools, metrics)
drivers of Working Business case Plan for roll out of policy, Progress against action
Capital
p p
performance ((recommendation,, process,, KPIs,, tools and
p Realization of benefits plans and improvements
p p
improvement benefits, level of effort ) incentive enhancements
Knowledge Transfer and Issue resolution
Implementation Orientation and training training
approach of Working Capital
champions and staff Tracking of benefits and
achievement of Action
Plans
22
Successful working capital initiatives require a cross functional team
team…
business case
Implement and operate
Customer To Cash Purchase To Pay Forecast To Fulfill Treasury Operations
23
To track benefits a framework establishing visibility across headline and
operational KPIs is needed
Managerial Metrics
Treasurer
Controller
Accounts Accounts
Inventory VP (Finance, Operations)
MANAGE SUCCESSFUL WORKING CAPITAL INITIATIVES
Payable Receivable
Management
Management Management Director
Senior Manager /
Manager
Operational Metrics
Project
j Manager
g
Functional
Customer to Cash Specialists
Lean / Six Sigma
Purchase to Pay Forecast to Fulfill Specialists
Third Party
Treasury Operations
Resources
Change
Management
Communication
S
Specialists
i li t
24
MANAGE SUCCESSFUL WORKING CAPITAL INITIATIVES
25
ONLINE SEMINAR SERIES: STRATEGIC CLIENT DIALOGUES
26
?
Team overview
27
Presenter biography
Rohit Godara
Vice President Rohit has over nine years of professional experience of which
J.P. Morgan Treasury Services six years has been in the capacity of a management
consultant; helping clients in industries such as
Tel: (212) 552-6563
communications, media, technology, pharmaceutical and life
Fax: (212) 552-5199 sciences, client services and retail organizations.
rohit.godara@jpmorgan.com
hit d @j
Rohit’s work has included revenue assurance, financial
Rohit Godara is a Vice President with J.P. Morgan Treasury & transformation (in order to cash, procure to pay), financial
Securities Services. As a senior advisor with the Treasury modeling, financial close and reporting, regulatory
compliance, operational process improvement and systems
ONLINE SEMINAR SERIES: STRATEGIC CLIENT DIALOGUES
28
Presenter biography
Marcus Homeyer
Marcus has been a member of the REL team since Marcus received his M.Sc. in General
2005 and has lead or contributed to projects in various Management from Stevens Institute of
industries including consumer goods, oil and gas Technology, NJ in 2001 and his Dipl.-Ing. (M.Sc.)
equipment services, household durables, specialty in Industrial Engineering from Technische
chemicals, office supplies, book publishing, and Universität Berlin, Germany in 2004. In addition,
pharmaceuticals. Marcus did MBA coursework at Fordham
University, NY.
29