Cash on the table. Consumer products companies and working capital management 2011
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2 Septembrie 2011 |
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ERNST & YOUNG S.R.L. |
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Cash on the table is the latest in a series of working capital managementfocused studies based on Ernst & Young research.
Consumer products (CP) companies, up until now, have made important strides in improving working capital management. But analysis shows that the industry still has considerably more to do before achieving an optimum allocation. Given the challenges facing the industry, few firms can afford overlooking this hidden opportunity.
Key findings
OVERALL
• In 2010 compared with 2009, CP companies reported further progress in reducing levels of working capital (WC), with each segment showing better results.
• For this industry, these latest findings confirm the positive trend in WC performance seen in prior years.
• Yet we believe that there is still room for improvement.
A high-level benchmarking analysis suggests that up to US$33 billion is still unnecessarily tied up in the WC of the largest 20 CP companies (by sales), equating to 5.3% of sales.
• Leading companies will be those that take a structured “root and branch” approach to improving WC by targeting all the key operational levers and having a robust supporting infrastructure, including focused metrics, aligned incentives and strong risk management policies in place. They will also be those who embrace innovative and structural solutions such as applying lean manufacturing and supply chain initiatives, true collaboration with retailers, leveraging and centralizing procurement and elements of the order-to-cash function, and considering fresh financing initiatives.
• This also requires taking an approach that balances cash, cost and service levels, and therefore a culture that engages all functions (sales, procurement and not just finance) in ensuring the cash lever is included in business decisions.
BREWING
• Brewing saw a further improvement in C2C performance in 2010 compared with 2009, with a drop of 7 days to reach just 5 days.
• Of the three CP sub-segments analyzed, brewing has reported the biggest improvement in WC levels since 2002 (C2C down 88%, or 35 days), driven by progress in both receivables and payables.
• Progress has been steady over the years, with an acceleration since 2005.
• Industry consolidation may have played a significant part in driving the improvement in WC, providing brewers with the opportunity to achieve significant cash and cost savings by leveraging relationships with customers and suppliers and by increasing supply chain efficiencies.
• Among CP segments, brewing exhibits by far the lowest level of WC (C2C), with a significantly negative differential between receivables and payables cycles (DSO-DPO).
*C2C (cash-to-cash) = DSO plus DIO minus DPO (expressed as a number of days of sales,unless stated otherwise).
FOOD AND BEVERAGE
• F&B managed to cut WC levels (C2C) by 8% in 2010 compared with 2009, with each WC component contributing to this improvement.
• Part of last year’s improvement, however, reflects a rebound from the deterioration seen in 2009, which was adversely affected by the global downturn of 2008.
• Latest findings mean that C2C has fallen by 15% since 2002, primarily the result of higher payables.
• F&B still carries higher levels of WC than other CP segments.
• While having improved, the DSO-DPO differential remains positive, suggesting a lack of focus on cash conversion cycle compared with other CP segments.
HOUSEHOLD AND PERSONAL CARE
• HPC reported a strong WC showing in 2010 compared with 2009 (C2C down 12%), but entirely due to an increase in payables.
• These results bring the total reduction in C2C achieved since 2002 to 30%, with the entire gain achieved in the last three years.
• HPC’s levels of WC sit between brewing and F&B.
• The DSO-DPO differential improved from a positive 7 days in 2002 to a negative 1 day in 2010.
Introduction
Most CP companies recognize that there is still significant opportunity for improvement within many areas of WC.
The CP industry is caught in a time of significant change, prompted by shifting demand to private labels and to emerging countries, consolidation in the retail industry, increased competition and more volatile commodity prices. Against this backdrop, CP companies have intensified their focus on cash and cost efficiency and on WC in particular. While significant progress has been achieved in reducing levels of WC, CP companies still have substantial opportunity for improvement in this area.
Part 1 | Working capital challenges
The CP industry as a whole has made significant strides in improving WC performance. In particular, those companies that are proactively focusing on WC management are achieving success. But to sustain such gains and to achieve even more in the way of WC efficiency, businesses must be responsive to an environment of profound change. Any review of recent WC performance must similarly take account of the key challenges facing the industry. These include:
Responding to retail consolidation
CP companies are increasingly dependent on a few key retailers. Consolidation in the retailing industry continues to create more, ever-larger and more sophisticated customers. Larger retailers possess increased buying power. Not only are they resistant to price increases, but they also tend to demand discounts and rebates together with enhanced payment terms and service (often taking them earlier than when making payments for the related services). In addition, by developing their own private label products, these retailers have been eroding the value of the suppliers’ brands.
