CASE: A-235

DATE: 10/01/18

HAVILAH MERCHANTS NIGERIA LTD:

GENERATING CASH FROM A
COMPANY’S VALUE CHAIN

Havilah Merchants Nigeria Ltd. was Nigeria’s leading one-stop shop for outfitting libraries and
archives. The company had successfully executed over 100 library and archive projects, and
Havilah products and service had become the benchmark in the industry for quality.

Lanre Adesuyi, the founder and CEO of Havilah, was a chartered librarian with over 40 years of
professional sales experience in Nigeria and in Europe. He dedicated his career to raising the bar
for libraries in Nigeria—there was even a university library named after him.

Adesuyi incorporated Havilah in 1995 as a book consolidator. By 2000 he had signed an

alliance with several U.K. publishers and by 2005, Havilah had completed its first archive
shelving systems for the First Bank of Nigeria. By 2010, Havilah had refined its business model
and was working with the oil and gas sector, the judiciary, and other government agencies. And
Havilah had outfitted 10 university libraries.

THE BUSINESS MODEL BASICS

Havilah focused on the company mission an integrity in the Nigerian marketplace, and proved
adept at providing expert consultation on the design and implementation of libraries and
archives. To do so meant becoming the exclusive West Africa regional representative of
Europe’s top shelving and hardware brands. Havilah was also skilled in executing installation
projects, and would custom design each library or archive. The company procured all of the
furniture and supplies; for libraries, Havilah then used technology to locate and acquire even the
most hard-to-find books. Havilah would assemble and install the hardware and furnishings, and
Kweku Fleming and Corinne Augustine prepared this case under the supervision of Professors Ron Kasznik and
Joseph Piotroski as the basis for class discussion rather than to illustrate either effective or ineffective handling of an
administrative situation.

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Havilah Merchants Nigeria Ltd: Generating Cash from a Company’s Value Chain A-235 p. 2

then provide follow-up maintenance of the library or archive. While Havilah had its competitors,
few managed to do all of these things well and combine the services as a single source project.

From a cash-flow perspective, Havilah incurred costs in marketing and providing up-front
speculative consulting. During this period, they helped potential clients understand their library
or archive needs, and designed custom solutions for the potential client’s consideration. In the
case of public institutions, this process would take place within a highly regulated government
bidding process. If Havilah succeeded in getting the job, then the company generally would
receive an up-front payment to activate the project. Once activated, these projects took several
months to complete. Upon the completion of the project, the customers often took months to
make final payment. In order to shorten the project cycle, Havilah would procure the shelving
units and the most popular books up-front. But all of this required working capital, effectively
limiting the number of projects that Havilah could engage in at one time.

To Adesuyi and others in the management team, the big question was whether it was this model
that was constraining Havilah’s growth.

In 2015, Havilah served three primary market segments:

Segment 1: Public University Libraries

Public university libraries made up the largest share of Havilah’s customer pool—accounting for
70 percent of the company’s annual turnover. The public libraries benefited from a fund set up
by the Nigerian government to ensure quality education. The commitment to strengthening
tertiary education in Nigeria was a multiyear endeavor. The government aimed to build up
national capacity, which meant a number of new Nigerian universities, complete with operating
libraries, would be built in the 2015 to 2020 period.

Federal law in Nigeria set a 15 percent pre-funding limit for government projects. This meant
that a deposit of 15 percent of the total project value had become the customary and accepted
payment for activating a library project. Once the project was completed, these public
universities on average paid the remaining 85 percent of the contract within 90 days. Havilah
took extra care to pre-qualify its clients and had succeeded in an almost-perfect record of
payment upon completion of the project—a feat generally unheard of in the government sector in
Nigeria.

Within this segment, Havilah provided a large number of important consulting services, and also
ordered a wide variety of common as well as hard-to-find books. In return for all of these
services, Havilah earned a gross margin of 68 percent.

Segment 2: Multinational Corporations

The multinational companies involved in Nigeria’s oil and gas industry valued the
professionalism, dependability, and quality of Havilah solutions for their archiving needs.
Havilah also distinguished itself by its rapid project completion times. This segment represented
15 percent of Havilah’s annual turnover in 2015. Multinational companies tended to know their
value to a supplier, and they wielded a lot of power in establishing their terms. These projects
Havilah Merchants Nigeria Ltd: Generating Cash from a Company’s Value Chain A-235 p. 3

also tended to be more lucrative, averaging US$108,000. Multinationals typically offered no

advance payment, but once the project was completed, would reliably pay the full value of the
contract within 25 days of delivery. Since there is was no activating payment, Havilah would
instead borrow money from banks and other expensive funders in order to get the project started
quickly. While banks were ready to fund these types of projects involving blue chip companies,
Havilah would procure loans at a typical rate of 30 percent APR. On average, the gross margin
for projects in this segment was 49 percent. There were over 80 major oil and gas companies in
Nigeria, and Havilah was considering sourcing many more contracts from these companies. As
this industry segment became saturated, Havilah had another business development strategy:
approach multinational companies operating in Nigeria in other industries.

Segment 3: Banking Industry

Nigeria’s banking sector was evolving, and the sector’s many banks offered creative and
increasingly complex banking solutions. The banks themselves also began to recognize the need
to improving their archiving capabilities. Havilah had distinguished itself by serving high-
profile banks. And Havilah expected to reach many more companies within the financial sector.
In 2015, Nigerian banks represented 15 percent of Havilah’s annual turnover.

Nigerian banks were accustomed to working with under-capitalized suppliers of critical banking
services, and offered favorable terms to their service providers. They typically offered 60
percent up front as an activation payment, which enabled Havilah to begin a project quickly and
complete its work with minimal delays. Once the project was completed, the banks reliably paid
the balance of the contract within 45 days of invoicing. Havilah earned an average of 45 percent
gross margin when serving companies in the banking sector.

HAVILAH’S DILEMMA

It was the fourth quarter of 2015. Despite their operational successes, Adesuyi and his
management team found themselves at a crossroads. The company seemed unable to grow
further, and the team was experiencing a year of reduced turnover. While Havilah ran a
profitable business, had six months of customer demand, and possessed the operational capacity
to increase the number and frequency of projects, the company’s expansion to date had
consumed their cash, leaving Havilah with no working capital to fund the projects in the
pipeline. This cash shortage even threatened the timing of the current payroll.

In 2014, Havilah performed 30 installations. The company earned US$3.6 million in turnover
with a gross margin of 62 percent and an EBITDA of 22 percent. To date in 2015, Havilah had
completed only 15 installations—and had put 12 projects on slow course as the team searched
for a financial partner to help with cash flow. If this problem did not exist, the management team
projected it would have performed 42 installations for the year, which could have been a 40
percent year-over-year turnover growth rate. In contrast, Havilah had to slow its marketing
efforts, since it was clear the company would be unable to execute against new projects. Absent
changes within the value chain to generate cash and minimize working capital requirements,
Havilah ran the risk of stagnating, and in doing so, disappointing existing customers and
diminishing the brand. The company also risked creating opportune gaps for their competitors to
fill. It was clear to Adesuyi and his executive team members that the key to solving their
Havilah Merchants Nigeria Ltd: Generating Cash from a Company’s Value Chain A-235 p. 4

problem was finding money. Specifically, they determined that if they could find US$2 million
in cash, then they could fund all of the projects currently on hold.

Adesuyi has called his management team together to address this avoidable threat head on, and
to determine what they must do to get back on track with their growth trajectory. They were not
sure where they would find the funds, but were contemplating these types of conventional
sources:

1. Borrow from a local bank. Despite the annual interest cost of 30 percent, loans hadhave
been Havilah’s first course of action to secure additional working capital. A US$2 million
loan would incur US$600,000 in debt liability. However, securing a loan had become less
feasible, given currency instability within the Nigerian banking. Moreover, banks were
increasing the amount of collateral to insure the loan, posing a problem for Havilah, which
already had much of its assets tied to current debt. In the past year, despite multiple attempts,
Havilah was close in on an expanded line of credit.

2. Seek project funding from investors. This approach meant finding financiers willing to
advance a bridge loan to Havilah on terms which were more flexible than a bank would
provide. It required someone from Havilah to manage relationships and negotiations with
these potential financiers, and then manage multiple financing arrangements. Although
common practice in Europe, the investment community in Nigeria was not active or familiar
with this type of financing activity and it would require considerable marketing effort, which
would distract management from devoting sufficient time to the business.

3. Look for equity investors. Adesuyi, as founder and CEO, was open to equity investment to
grow the business. He foresaw offering up to 35 percent of the business. However, given
Havilah’s plateau in revenue due to cash flow constraints, valuation would not be attractive,
and the investment for a 35 percent equity stake would not make a substantial difference.

4. Continue along the same path and do nothing. This was not a viable option, however. It
would only be a matter of time before Havilah went out of business.

Another Possibility – Generating Cash from Havilah’s Value Chain

The team set about looking for financial partners, focusing on banks, individual investors, and
private equity partners. They identified promising sources, but the process was proving long,
and forced them to dig a little deeper.

Fortunately, another idea entered the conversation. Adesuyi wondered if it was possible to work
with the existing customers and suppliers to reduce the cash flow pressures. Perhaps Havilah
could harness untapped cash potential from its value chain.

THE PROPOSED INITIATIVES

The team put their heads together and identified a number of opportunities. They calculated the
potential improved effect to cash flow from each opportunity, first based upon their 2014 data,
referenced in Exhibit 1. Then the team rationalized the figure based on estimated project
Havilah Merchants Nigeria Ltd: Generating Cash from a Company’s Value Chain A-235 p. 5

feasibility. After reading each proposed initiative, the challenge was to determine the exact
amount of cash Havilah might generate.

Customer Collection and Payment Terms – Generating Cash from Accounts Receivable

Havilah knew that the company’s value chain could generate cash if they could collect payment
for their projects quicker, as well as reduce write-offs. After brainstorming a dozen ideas with
senior leadership, the sales team decided to implement the following:

1) Increase up-front activation deposits from universities:

In 2014, Havilah succeeded in obtaining an 85 percent up-front payment, instead of the statutory
15 percent payment, from one of its university customers. Since the university’s funds could
only be used for this purpose, this collaborative librarian used his discretion to decide that it was
in the university’s interest to finish the project quickly. As such, he followed the initial 15
percent payment with a second payment equal to 70 percent of the project bid, in order to help
Havilah start the project earlier. Following the completion of this project, Adesuyi asked the
librarian to confer with his colleagues from other university libraries, to share his perspective and
experience. Following these meetings, another university agreed to pay an additional 30 percent
midway through their project. In response to this positive feedback from the university
community, Havilah decided to adopt a more aggressive up-front payment for all future projects.
The team believed that across the university segment up-front deposits could increase on average
from 15 percent to 25 percent. Havilah estimated that this approach would prove effective at 90
percent of Nigeria’s universities.

2) Focus sales agents on bank deals:

With approval from Havilah senior leadership, the sales team decided to cease uncovering new
leads in the multinational customer segment in order to focus on deals with banks, so as to
capture the large up-front activation deposits. Even though there was a margin loss with this
decision, the ability to cover all project costs up front through the deposit was extremely
appealing. Using 2014 actuals as projections, the team estimated that Havilah could replace five
corporate deals with bank deals—as well as increase those deals to a total of 13. Adesuyi
considered this approach to be 75 percent feasible.

Negotiate Better Credit Terms with Suppliers – Generating Cash from Accounts Payable

Havilah knew that the company could minimize its working capital cash requirements if the team
could establish or improve credit terms with their key suppliers. After brainstorming a dozen
ideas with senior leadership, the purchasing/procurement team has decided to implement the
following:

3) Negotiate supplier credit with shelving suppliers:

Shelving equipment, utilized on all of Havilah’s projects, represented 55 percent of the

company’s cost of goods sold. Havilah’s shelving suppliers currently required payment before
shipping any material. Shelving shipments, which arrived from Europe by cargo ship, usually
Havilah Merchants Nigeria Ltd: Generating Cash from a Company’s Value Chain A-235 p. 6

required 23 days for transit, plus seven days to clear customs. These orders were placed once the
project contract was signed, with shipment typically occurring seven days later. As the exclusive
agent for Bruynzeel, Elsevier, and Ebsco brands, Havilah visited these companies to discuss
obtaining supplier credit. Havilah’s purchasing agent believed that visiting the suppliers at their
factories would increase the likelihood of a positive negotiation. Adesuyi accompanied the agent
to underscore the importance of the relationships. Together, they made a case to their suppliers
that the provision of supplier credit would reduce the firm’s working capital constraints, which
would ultimately increase the volume of products sold. They learned that, in exchange for
supplier credit, all of their shelving suppliers would require Havilah to lock in a rolling 12-month
forecast with financially committed 3-month rolling purchase orders. In return, the equipment
manufacturers could offer 60-day credit terms, with Bruynzeel considering an even longer option
if the change toward locking in purchase orders proved successful. Implementing this project
would increase Accounts Payable by a total of 60 days. Havilah considered this initiative to be
100 percent feasible.

4) Renegotiate purchase and credit terms with rare book suppliers:

Rare books represented 10 percent of the company’s cost of goods sold. These books were
sourced from various locations and consolidated in London. This process took 30 days in
addition to the 23 days plus 7 days for clearing, similar to the shelving requirements. Typically,
rare books required a 10 percent upfront deposit, with the balance due 10 days later. Havilah’s
purchasing agent spoke with their top suppliers and worked out a way to restructure these
payments. Some of these suppliers then agreed to restructure Havilah terms. Specifically, in
exchange for a 20 percent upfront deposit, they would grant Havilah 120 days to pay the
remaining balance. Havilah estimated this initiative to be 100 percent feasible.

Restructure Inventory Supply Chain and Logistics – Generating Cash from Inventories

Havilah realized that the company was holding a considerable amount of cash in inventory.
After examining the supply chain, the team realized that the following operational improvement
in their inventory management process could minimize these cash requirements:

5) Shorten project cycle time:

One of the firm’s university projects had a unique learning outcome when Havilah had a
bottleneck in the assembly process. Specifically, the firm was experiencing delays at the final
shelving assembly step, which was constraining the output of the entire process. To resolve this
bottleneck, Havilah hired two additional casual laborers to help the operations team reduce
assembly and installation time. Adding the two people permanently was the only additional
labor required to reduce the installation cycle time by 25 percent, thus shortening the time from
eight weeks to six weeks. By completing the installation more quickly, Havilah was able to
“start the clock” for the 90-day final payment sooner, effectively accelerating the receipt of the
final cash payment by 14 days (relative to the start of the project). This two-week cycle time
reduction had an insignificant labor cost increase. This cycle time change was only feasible for
the university business, yet was considered 100 percent feasible.

6) Restructure book inventory procurement and management processes

Havilah Merchants Nigeria Ltd: Generating Cash from a Company’s Value Chain A-235 p. 7

A sizable portion of Havilah’s finished goods inventory consisted of commonly sold books that
were purchased based on forecasts of new projects. These books accounted for 25 percent of the
company’s cost of goods sold. In 2015, Havilah purchased these books directly from individual
publishers. Because the failure to deliver these books during the final week of installation
effectively delayed project completion and subsequent cash receipts, Havilah always stocked
approximately six months’ worth of books (with average inventory holdings of $172,300). This
inventory ensured there would be no project delays by minimizing the risk of not being able to
procure a book in a timely manner. Given Havilah’s leadership position in this market, the
company approached a leading book consolidator in London to act as their sole book supplier.
Through bulk purchasing arrangements with the publishers, the consolidator should be able to
offer Havilah similar prices, but would then deliver the books in a more “just in time” manner.
This approach would require Havilah to hold only one month’s worth of inventory. Havilah
expected that this change would have a minimal impact on margins. Havilah estimated this
initiative to be 100 percent feasible.

7) Freight reduction for shelving components:

Havilah was able to identify a shipping company willing to transport in cargo containers that
were half the size of what previously had been used. This enabled Havilah’s shelving materials
buyer to cut the purchase order size in half, which in turn reduced the raw materials stored in
Lagos from 6 months to 3 months. In 2014 Havilah’s inventory cost for these shelving materials
was $600,000. This initiative was considered 100 percent feasible.

Operating Cost Reductions

Havilah also realized that the company could save cash by controlling operating costs.

8) Energy savings:

Havilah was testing new office procedures to reduce overhead costs, most significantly, the
energy costs. The company decided to operate the generator during strictly prescribed hours—
which meant it would turn on at 9 am, shut down from 1 to 2 pm, and then turn off at 5 pm sharp,
with a newly implemented fixed end-of day ritual. These measures resulted in a 35 percent
energy savings, without significantly impacting the company’s operations. Havilah’s energy bill
is $3,000/month. Since this change was an internal move, and controllable through management,
it was considered 100 percent feasible.

With these measures, they foresee creating a larger cash reserve for working capital. But would
it be enough to set the company on a path towards greater growth?
Havilah Merchants Nigeria Ltd: Generating Cash from a Company’s Value Chain A-235 p. 8

Exhibit 1
Havilah Market Segment Profile 2014

Item Universities Multinational Banks Total

Corporations

Revenue $2,520,000 $540,000 $540,000 $3,600,000

Cost of Sales $806,400 $275,000 $297,000 $1,378,400

% of Total Turnover 70% 15% 15% 100%

Number of Jobs 20 5 5 30

Average Project Size $126,000 $108,000 $108,000 $120,000

Gross Margin 65% 49% 45% 62%

Activation Deposit 15% 0% 60%

Days to Receive Final Payment 90 25 45

Accounts Receivable $479,600

Accounts Payable $109,950

Inventory $495,003

Source: Compiled by authors, based on company reports.

Havilah Merchants Nigeria Ltd: Generating Cash from a Company’s Value Chain A-235 p. 9

DISCUSSION QUESTIONS

1. How much cash would Havilah generate if the company implemented each of these new
initiatives, as outlined on pages 5 to 7? Consider both the monetary benefit and the
feasibility of occurrence.

2. Of all the things Havilah could do to improve the timing of cash flows, what would you have
prioritized for its ability to provide the greatest impact and likelihood of success?

3. What would be the costs associated with these new initiatives? Can you quantify them?

4. What other ideas would you suggest to Havilah to further improve the timing of the
company’s cash flows?

5. What similar activities related to accounts receivable, accounts payable, and inventory
management would be relevant to your company?