McKinsey&Company’s recent Inside the Strategy Room podcast had a conversation between Sean Brown, Strategy and Corporate Finance Practice, and Matt Stone, an associate partner London office, about key strategies and actions that work in working capital management which is often underappreciated as a source of cash and value creation.
Key ideas and tips were:
- Accept that working capital is not something that just a CEO or CFO can change
- Have to convince people at all levels of the organization to change their day-to-day behaviours, e.g. convince the warehouse manager to reorder spare parts on a more just-in-time basis every few weeks or so, rather than every six months
- First, put the basics in place will release the most cash, e.g. are we sending the invoice to the customer exactly when they should be getting it?
- Second, the target is to change the culture so that:
- Individuals to really understand the cash impact of their day-to-day behaviours
- Person negotiating the next customer contract should insist on advantageous customer-payment terms
- Third, use advanced analytics and other digital tools to extract additional value:
- Use machine-learning algorithms to look at invoice-collection strategy, .e.g. invoice-by-invoice or customer-by-customer approaches that are tailored specifically to what you know about that particular invoice or about that customer. (This also reduces the cost of collections.)
- Use digital tools and integration with your supplier systems to be able to have just-in-time reordering and much more accurate demand-forecasting capabilities
- Using this general approach McKinsey showed how they had been successful with:
- Global mining company which took out billions in working capital, because it was focused on the organizational-transformation element. Right from the top, the CEO was communicating to the organization around the importance of working capital and explaining to people how their behaviours on a day-to-day basis were impacting the cash-flow profile of the company
- Using machine learning in inventory management. Stone: “have real-time visibility on inventories at every stage in the value chain. Once you have that visibility, and you also have a number of metrics and data points around demand forecasts and your production process, you can really start optimizing in real time the amount of safety stock you should be held at every stage in the value chain.”
- For the CFO working capital programmes like this are important in two dimensions:
- value creation and potential which is generally undermanaged in most organizations
- WCM programmes are a chance (for the CFO) to understand and to have a real influence over other parts of the business.
CTMfile take: These ideas will help you unlock the cash and create value in your organisation.
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