Uncovering the Mystery of the Disappeared Funds in the Supply Chain!
In a remarkable turnaround, a company found itself in a precarious situation just a few weeks after an acquisition. With the parent company facing the prospect of a cash-strapped subsidiary, it became clear that a strong cash management process was essential.
The Supply Chain, uniquely positioned to manage cash flow, took the lead in identifying problems and developing solutions. The evolution of the employees and organisation was significant, with the company contributing cash to the parent company when needed. However, a review revealed that the processes surrounding Accounts Receivable (A/R) and Accounts Payable (A/P) were somewhat nonexistent.
The new business, with its growth potential and revenue upside, required huge upfront investments and had A/R terms that were later than A/P terms, further straining cash flow. The root causes of the insufficient cash flow included the new company being held and operated at arm's length from the parent company, the need for the new company to repay the parent company for acquisition costs, and the parent company allocating a portion of corporate expenses to the acquired company.
To address these issues, a series of strategic actions were implemented. The Management team was educated on Cash flow management and given a plan of attack to improve it. The CFO and an individual took over day-to-day management of the acquired company.
The Procurement team was given a plan of attack to negotiate better terms with customers and suppliers. A review process for Cash flow management and reporting was instituted. Infrequent payment cycles in A/P were tightened to ensure not paying early or late. A series of actions were implemented to reduce inventory lead times, Minimum Order Quantities (MOQs), and improve inventory turnover.
Benchmark targets were set for Cash conversion cycle, Return on Invested Capital (ROIC), A/R days, A/P days, and Inventory turns. Regular Cash flow management reviews were made to identify late payments and establish actions to contact them before they became a problem.
The Supply Chain DetectiveTM approach was used to identify problems and develop solutions. Due diligence revealed a number of investments and business improvements that needed to be made, which had been ignored due to the lean cost structure of the operations. Expenditures were incorporated into the Cash management process to avoid surprises to cash levels.
Within a year, all strategic actions had kicked in, generating lots of cash on an ongoing basis and ensuring positive cash flow. The employees and the culture in the new company had a lack of understanding of the importance of cash flow and proactive cash management. This transformation not only saved the day but also set the company on a path towards sustainable growth.
