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Total working capital management: requires constant attention, keeping up pressure

Total Working Capital Management is the optimization of every aspect of every process, every system and every structure across the entire supply chain, as the figure below shows.

Source & Copyright©2012 - J&W Associates 

The objective of Total WCM is to shorten the whole Cash Conversion Cycle (CCC) and extract the maximum liquidity without harming the company's business efficiency and customer relations. This requires an optimum balance of: 1) extending payment cycle and long-term supplier relationships, 2) minimising the number of Days Sales Outstanding and achieving maximum efficiency in accounts receivable processing whilst having happy and returning customers, and 3) a level of inventory that allows the company to meet their customers' requirements without unnecessary stock. This is not easy and detailed analyses of the company's culture, customers, business flows, processes, credit agreements and contracts are required to develop an effective Total WCM strategy and programme.

Total WCM Programmes

To achieve long term improvements in WCM and release significant levels of working capital requires real permanent changes to existing business processes, and keeping up the presssure to improve or at least not sliding back. Infomita’s recent analysis of the pharmaceutical industry’s performance, see, showed that the companies “have taken their eye off the ball”:

  • excess Working Capital has risen 24% to €51 Billion in 2 years
  • receivables: varied performances with the move to outsourcing collections not improving performance. There we some surprising names in the Top DSO Deciners, see figure:
    • Source & Copyright©2016 - Informita
  • payables: the average DPO has risen again by 10%. In addition the lower quartile, median and upper quartile points have all improved versus the 2014 survey. Informita believe that “this was because of clear global programmes to extend supplier payment terms and implement supply chain finance initiatives. Our direct observations would suggest that these actions have continued but that the reliance on supply chain finance has increased.”
  • inventories: their 2014 survey Informita found that the aggregate DIO performance only improved by 1%. Of the 33 companies surveyed there were 17 improvers and 16 decliners.

Overall Informita found that there was inconsistency and a lack of strategic direction in the pharma companies with “very little progress on inventories, receivables seem to be getting worse and there seems to be an over-reliance on financial products to support improvements in payables.” And finished by saying, “The elephant in the room remains inventory. While some companies have made improvements, these improvements have not usually been sustained. This will require a real change in strategic direction that we have not yet seen.”

CTMfile take: Total WCM is all about strategic direction, best practices and keeping focus. Sloppy WCM practices are so easy to slip into when company attention wanders. 

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