Cash is always king.
With market disruption, businesses with a favorable cash position are seen as being more stable and balanced by stockholders and analysts. Supply chain and procurement leaders have a critical role to play.
Where should procurement leaders focus amid the business challenges posed by COVID-19?
The latest GEP BULLETIN, 4 Immediate, Impactful Cash Flow Strategies for Procurement Leaders, offers the quickest, most effective ways procurement can make an impact on cash flow for the company regardless of the vertical industry.
The bulletin is a must-read for all procurement leaders who need to make an immediate financial impact.
The unfortunate and expanding coronavirus (COVID-19) outbreak is causing unprecedented shock to the sales and supply chains of global businesses. There is rapidly declining demand for many services and products, such as travel, tourism, entertainment, automotive, banking, and oil and gas. At the same time, however, demand has spiked in niche segments of emergency health care products, such as personal protective equipment, and consumer packaged goods, such as groceries.
Given the market challenges ahead, companies will need to focus now on improving cost structures and liquidity. A renewed focus on cash flow is imperative. We at GEP believe that supply chain and procurement leaders have a critical role to play.
As companies and their employees grapple with remote work, closed offices and social distancing, leaders are coping with rapid protection and recovery strategies. At a macro protection level, the U.S. Federal Reserve and U.S. government have taken a number of significant measures to provide monetary stimulus to maintain liquidity in the system including:
A. Slashing the Fed Funds target interest rate to zero
B. Adding $2 trillion to the banking system by taking massive reverse-repo actions
C. Deferring payment of tax bills by three months, freeing up $300 billion in extra liquidity
D. A pending $2 trillion stimulus package that will send paychecks to American households
E. Announcing $50 billion in loan guarantees for passenger airline
— especially in troubling times. Cash flow management has always been an integral part of a company’s overall risk assessment. With the disruption in the market, businesses that have a favorable cash position relative to competition will be viewed as more stable and balanced. This might be the difference between a minor crisis and major crisis for the board.
So, what can companies do to improve operating cash flow in the difficult economic conditions? Well, three things:
i. Adjust production plans to align with high-demand categories to maximize sales and net income
ii. Make products or services more competitive with favorable pricing and terms
iii. Optimize working capital to shorten cash conversion cycle
To help implement these strategic cash flow plans, here are four key tactical areas procurement leaders can concentrate on over the next two financial quarters.
By understanding raw material, parts and sub-assemblies and packaging requirements for the high-demand categories, procurement can ensure continuity of supply for production lines to run uninterrupted. This means staying close to the raw materials, parts and packaging suppliers, making sure that such requirements are fulfilled for production of the optimal number of finished goods in line with market demand. Procurement also has a critical role to play in ensuring timely delivery of finished goods to customers – it should work closely with transport providers and ensure that there are no capacity constraints causing delivery delays.
On the topic of purchasing cost reduction, a lot of suppliers in certain iindustry segments are benefitting from lower input costs, i.e., from lower oil prices, for example. The time is ripe for procurement and business to ask suppliers to pass on the cost reductions. The outreach for this request should be broad and not just limited to tier-1 suppliers. Additionally, to reduce cost of production procurement should look at savings generated by direct cost cutting measures that could be quick wins. Labor cost, for example, can be lowered by reducing contract labor and distributing work to permanent staff.
Optimizing supplier payments and lowering inventory levels should be part of the broader strategy of focusing on cash conversion cycle: In the current abnormal business conditions, companies are increasingly shifting their focus from income statement to balance sheet. Of the three elements of supply chain working capital – payables, receivables, and inventory – companies typically focus on inventory. However, to minimize working capital requirements, it is important to apply a coordinated approach applicable to all three areas. Procurement can help optimize supplier payment terms (days payable outstanding) by lengthening credit terms and stopping early terms, and lower inventory levels by helping make better forecasts and optimizing safety stock levels wherever possible.
Selling assets and leasing them back with favorable lease terms will convert fixed cost into variable cost and ease the cash situation. Procurement should work with the business to identify areas of fixed asset utilization and negotiate favorable lease terms. Procurement should also help reduce variable costs using a variety of stop spending efforts. This include several levers, including but not limited to:
The key to implementing these measures is for procurement to partner with the business and be intimately aware of the company’s strategic plans.
Procurement should focus on improving cost structures and liquidity where possible by renegotiating supplier agreements, providing customer incentives to make advance payments and asking banks for extended payment terms. To preserve cash, procurement should implement spend-specific control towers to "spend better," aligning resources to high-value spend areas and increase transparency in spending patterns.
Spending plans should be reviewed often to put a stop to all discretionary investments if COVID-19 adversely influences investment returns and defer those expenses that can be avoided. Simultaneously, a company’s finance organization should renegotiate short-term debt to make the current assets more favorable.
Improving operating cash flow is a critical element of company’s financial health and requires a coordinated approach with procurement, business, finance and suppliers.
As the coronavirus crisis intensifies, managing your supply chain is going to get even more challenging. It may be worth finding a partner with deep experience in procurement and supply chain management to reinforce your capabilities and help you stay on course.
If you would like to have a conversation about how we can help, please reach out to our supply chain leadership.
Vice President, Consulting
John has over 15 years of strategy consulting experience managing several large-scale engagements with leading global clients.
At GEP, John is responsible for partnering with leading CPG and retail enterprises on strategy, supply chain and management initiatives. John is also the Chair of GEP’s Thought Leadership Council.