supply chain management and working capital
TRANSCRIPT
2010-11-20
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Supply Chain and Working Capital Management
KTH November 19th 2010
© UnitedLog 2009
WCM – Working Capital Management
WCM
– Definition
– Methods and practise
– Case
WCM and SCM
– Focus on how to handle business cycle variations
– Capacity issues
2010-11-20
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© UnitedLog 2009
www.unitedlog.com
Hans von EulerConsultant and Trainer in Supply Chain Management
� Manufacturing� Retail and distribution� Services� Healthcare
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Founded in 2005
9 offices on 3 continentsOwned by 6th AP Fund and AB Arvid Svensson150 employees
www.unitedlog.com
2010-11-20
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© UnitedLog 2009
UnitedLog
Supply Chain Management & Finance
Consulting
Supply Chain
SoftwareSupply Chain
Services
Customer
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SOURCING PRODUCTION DISTRIBUTION
END CUSTOMERSUPPLIER
FLOW OF CAPITAL
FLOW OF INFORMATION
FLOW OFGOODS
Reduce your working capital
• Working Capital Management• Financial Solutions
Reduce your costs and increase your service
levels
•SCM Strategy• Change Management
Visibility and cost control
in your inbound and outbound flow of goods
• Control Tower Software• Performance Management
Flexibility
• Outsourcing Services
UnitedLog – How we improve your supply chain and profitability
2010-11-20
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We enable increased revenues and unique competiveness through more efficient flow of
goods, services, information and financial means.
Senior consultants with great experience.
Strong in implementation and achieving lasting results.
Strategy
Supply/DemandChain Management
Finance
Corporate strategies
Organization Development
Product and Business area development
Supply/Demand Chain Strategy
Sourcing
Production
Distribution
Working capital management
Financial management
Transaction Services
Supply Chain Consulting
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Supply Chain Software– Control Tower Software
� Manages Inbound and Outbound Logistics
� In-Sourced or Outsourced Does Not Matter
� Goods Flow Control and Operation Tools
� Information Flow Control and Operation
� Financial Control and Operation Tools
� Performance Management Tools
� Advanced tendering
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Supply Chain Outsourcing Services
CUSTOMERSupply Chain
Outsourcing
Services
Inbound and OutboundTransport Management
3PL Contracting
Invoice Control
Customs Brokerage
Logistics Trading
WCM - Working Capital Management
KTH November 19 2010
2010-11-20
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© UnitedLog 2009
WCM – Working Capital Management
WCM
– Definition
– Methods and practise
– Case
WCM and SCM
– Focus on how to handle business cycle variations
– Capacity issues
© UnitedLog 2009
WCM – Working Capital Management
� Working Capital is the capital needed in order to
finance the ongoing business
� Working capital is mainly tied up in� Cash� Inventory� Accounts receivable
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© UnitedLog 2009
The Aim of improving WCM is always to increased Profitability
Reducing working capital improves cash flow...
...giving direct results on the profit
A successful WCM project is not only a “financial” project but as much a matter of improving operational conditions in the supply chain.
© UnitedLog 2009
All activities in a WCM and SCM project must be balanced in
order to achieve increased profitability.
SERVICE
COSTS CAPITAL
Captal
ProfitityProfitabil =
The Cornerstones of Logistics
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© UnitedLog 2009
THE IMPORTANCE OF CASH FLOW
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Income vs Cash Flow
Production
Supplier Customer
Cost
Income
Purchase
Income
Sales
Incomingpayment
Outgoing payment
Cash Flow
Supplier Customer
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© UnitedLog 2009
Capital tied up - from Order to Cash
Suppliers Customers
Purchasing SalesProduction
Time
Capital tied up
Material from
supplier delivered
Machine delivered and
customer invoiced
Payment from
customer Customer’s credit time
Cash payment
to supplier
Working Capital tied up
Credit time from supplier
Machine produced
Machine placed in finished stock
Operating margin
FINISHED PRODUCT
© UnitedLog 2009
Exercise: Calculation of released capital
A company has a total sales of
180 millions.
How much operating capital
can be released by having the
customer’s payment 3 days
earlier?
180 millions
360 days= 0,50 x 3 days = 1,5 millions
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© UnitedLog 2009
What we want to achieve
Goods received
Cash disbursement
to supplier
Average time topayment of supplier
Cash ConversionCycle (CCC)
Cash collection
from customer
Invoiced sales
Average inventorylead time
Average customerpayment time
We want to decrease the lead time in inventory…
Days
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What we want to achieve
Goods received
Cash disbursement
to supplier
Average time topayment of supplier
Invoiced sales
Average inventorylead time
Cash ConversionCycle (CCC)
Cash collection
from customer
Average customerpayment time
We want to decrease the lead time in inventory…
…and decrease the payment time from customers…
Days
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© UnitedLog 2009
What we want to achieve
Goods received Invoiced sales
Average inventorylead time
Cash collection
from customer
Average customerpayment time
Cash disbursement
to supplier
Average time topayment of supplier
Cash ConversionCycle (CCC)
We want to decrease the lead time in inventory…
…and decrease the payment time from customers…
…and increase the payment time to suppliers…
...and thus reduce working capital and the cash conversion cycle !
Days
© UnitedLog 2009
The main drivers of Cash Flow
Operating income
(operational)
Changes in Working capital
(operational)
Changes in Fixed assets
(strategic)
Income statement Balance sheet
Cash flow
Balance sheet
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© UnitedLog 2009
Working Capital Management
Fixed Assets
Inventories
Accounts
Receivable
Cash
Equity
Untaxed
Reserves
Long-term
Liabilities
Short-term
Liabilities
Accounts
Payable
Balance Sheet
AssetsLiabilities &
Equity
“Management of
a company’s
Operating
Capital, e.g. the
short-term
assets &
liabilities.”
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Working Capital Management
Focus on non interest bearing items in the Balance sheet
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© UnitedLog 2009
Operating income vs. Cash Flow
-60000
-40000
-20000
0
20000
40000
60000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Operating income Cash Flow
MSEK
Note that good profit does not necessarily mean a positive Cash Flow
A high operating income doesn't mean a company has cash on hand; the company can go bankrupt, due to lack of cash, even if the operating income is high.
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Value added
Value added in the
Balance sheet
Cash Flow
ProductDevelopment Marketing Sales Order
Purchase
ProductionCredit-time
Raw material
WIP,Work In Progress
AccountsReceivable
0
20
-20
-40
-60
-80
-100
Working Capital Management
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© UnitedLog 2009
Every day is important!
With a 10% margin on
sold products you need
to sell 100 products to
finance 10 unsold
products in inventory.
© UnitedLog 2009
Experience of Working Capital Management
Based on previous conducted WCM projects; 5 -10% of sales are identified as a potential reduction of working capital
Activities amounting to 50 % of the identified potential is normally released within 6 -12 month after the workshop.
The same methodology can be applied in all business sectors
Accounts payable
OrderDelivery precision
InvoicingAccounts receivables
Purchase Production Distribution
Where the “Cash” improvements normally occur:
Sales Process
(Accounts
Receivables)
20-30 %
Production and Distribution
(Stock)
40-60 %
Procurement
(Suppliers)
20-30 %
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© UnitedLog 2009
Use for released working capital
Increase the cash buffer
Repayment of loans
Investments in property and
machines
Acquisitions
Dividends to shareholders
To be able to seize business
opportunities
Investments in marketing
Investments in competence
development
Investments in research and
development, incl. new
products and services
To keep our shareholders
pleased and willing to invest in
our business by giving
dividends
”Cash is King”
© UnitedLog 2009
Working Capital Management
Working
Capital
ManagementLiquidity Management • Bank accounts• Financing• Borrowing• Currency management• Liquidity planning• Salaries• VAT and other taxes
Sales process• Credit Management• Offer & Contracts• Order• Invoicing• Accounts Receivable• Incoming payments
Production process• Product development• Delivery precision• Inventory• Planning• Production• Finished goods & distribution
Purchase process• Evaluation of suppliers• Purchase agreements• Distribution• Approval of supplier
invoices• Outgoing payments
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© UnitedLog 2009
All activities are important!
I can invoice on
Friday instead of
Monday
I will never pay
before due date
I can enforce
freeze time
I can charge
penalty interest
I can
introduce
direct debit
I can push for
reduction in
finished stock
WCM and SCM- controlling in business cycle changes
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© UnitedLog 2009
Challenging times
The finance crisis and the recession that followed left many companies to face quite new challenges that had to be dealt with rapidly.
Focusing on efficiency in every aspect of manufacturing, distribution and supply have a potential in reducing the imposition of company profit.
Working capital does often hide substantially potentials.
Focusing on capacity- and utilization issues will be of highest strategic importance to very many companies.
© UnitedLog 2009
CAPACITY – HOW MUCH WILL BE NEEDED AND WHEN?
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© UnitedLog 2009
CAPACITY PLANNING
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Capacity planning
Planning vs Control
� Planning - making up the route
� Controlling - adjust to reality
Perspective:
Longer
Shorter
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CAPACITY– DEFINITION
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Capacity
People
Machines
Materials
ControllingShort perspective
Daily, weekly
PlanningLong perspective
Monthly, quarterly
Fine tuning Changes in takt, investments
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”Fine tuning” – daily control
Make the best of things
Within the rules..
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Capacity Planning – long term
Create new conditions
Secure the new levels – higher or lower.
Reducing
Increasing
Continuing in unchanged takt
Investments
It is in the Capacity Plan the decisions are taken
on investments in the flow
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© UnitedLog 2009
Capacity Planning
Planning is made on different levels
– Overall, budget
– Overall continuously
– Capacity, utilization rate
– Operational level
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”THEORY”
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The Bucket theorem
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Capacity plan
Openingvalues
Jan Feb Mar Apr May June Target
Sales budget
actual
Inventory budget
actual 280
Productionbudget
(forecast adjusted)
”actual" (production friendly)
50
270
40
260
60
70
250
75
85
240
55
65
230
60
70
220
70
80
220
360
420
60 60 60 60 60 60 360
40
300
60
300
60
300
70
290
65
285
65
280
360
280
Capacity section:..................
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© UnitedLog 2009
Capacity Planning
The closer to market, the quicker
reaction to changes.
The closer to market, the later you can
take decisions - and the better you
know what has to be done.
© UnitedLog 2009
Capacity Planning
The quicker you react to changes less
adjustments are needed
The more often you react and act the smaller
adjustments each time.
Making change work and
Making work change
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© UnitedLog 2009 Projektnamn etc
Planning processes
There are several planning levels but the two most
important once are:
Capacity planning(the whole factory or a segment)
Order planning(Which items, products components or materials shall be ordered internally or externally? When and How Much?
Two completely different levels of planning
© UnitedLog 2009 48 © Establish/ 20/11/2010
Supplier Customer
BUDGET
Capacityplanning
Materialscall-off Customer
order
ORDERplanning
Materialsclearance
Manufacturingorder
Monthly/Quarterly
Weekly
Weekly
WeeklyDaily el
Shop floorplanning Daily
Purchasing
Planning and Control
Pull-principal
Capacity decision
Order decision
Marketforecasts
Frames
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© UnitedLog 2009 Projektnamn etc
Planning processes – Capacity planning
Capacity planning is made on a high level:
� The decisions include accumulated flows and groups of items and products rather than individual items.
� The decisions gives a frame for the detailed decisions on order- and shop floor planning levels.
� The decisions have consequences for the future and are often strategically based.
� The decisions are therefore taken on highest management level.
What takt must we have for the coming period?
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Planning processes – Order planning
A group of items compete of the available capacity. Order
planning answers the key issues:
� Which of the items shall be released for production now?
� How much shall be ordered?
� The ordered item and quantity shall be delivered one lead time later. When is that?
To what shall we use the Capacity ?
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© UnitedLog 2009
THE SUPPLIER
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MRP planning exampleWeeek 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48
2007
Demand we 43 57 92
week 108 Programme29 38 59 93 106 112
30 41 58 94 108 114 111
31 23 56 90 100 109 118 122
32 -15 36 96 105 109 118 122 121
33 -35 -22 74 105 113 118 111 121 114 119
34 -57 -16 107 108 119 112 123 112 119 115
35 -73 2 96 113 112 112 112 118 114 116
36 -71 -17 100 106 110 113 119 116 116 117
37 -88 -19 98 103 94 116 111 103 114 111
38 -107 -14 103 100 118 109 105 116 111 115
39 -121 -7 107 110 103 106 116 111 115 115
40 -128 13 107 105 88 118 112 115 115 112
41 -115 -11 95 85 90 113 113 112 112 114
42 -126 -8 101 86 73
43 -134 13 78 67
44 -121 -12
45 -133
46
47
48
Decided 38 58 90 105 113 119 112 110 94 118 103 88 90 1238 100%
Actual 23 36 74 107 96 100 98 103 107 107 95 101 78 1125 91%
Ordered omponents 43 57 92 108 112 111 122 121 114 119 114 116 114 1343 119%
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© UnitedLog 2009
Variations increase and get worse up streams
Secure key suppliers capacity by including the in your own capacity
planning process.
Develop new coordinative routines
Big variations upstream means late reaction to changed demands
down streams
All actors shall react to the same signal!
Include all strategic actors in the Total flow
© UnitedLog 2009
SCANIA
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© UnitedLog 2009
Scania Capacity Planning Process
20/11/2010 © 2008 Establish
55
The process of the ”Planning Tour. It´s made monthly and with a 12 month window
Friday at 14.00Wednesdayat 13.00
Data from the Distributors
Statistics of vehicles
registered
Analyses – financial,
marketing, etc.
Forecasts, ratings and
evaluations
Market dept. decision on Volume
plan
Volume plan,
DemandProduction
Capacity-
/Takt Plan
Takt decision
Meeting
Week1 after the turn of
the month
Week 2
Marketing Dept.Production &
Sourcing Dept
Levelling the Capacity
Consequences on Deliveries
Edition
no. #
Production capacity Plan/ Takt Plan
Suggestion on how volume
Plan can be realized
Capacity levelling and component
restrictions can influence delivery dates. The suggested plan is mutually
developed until agreement . Several
editions can occurs during the
process.
Cross
functional
meeting
chaired by
MD
Friday
© UnitedLog 2009
Scania
Frequent planning
Standardised and clear process!
Secured and simple routines to prepare for the
takt decision.
Capacity planning meeting, Takt meeting, is a
decision meeting – all discussions on forecasts,
productions conditions etc. Must be closed in the
preparatory process.
The only one that can take the final takt decision
is the MD.
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© UnitedLog 2009
Capacity planning - summary
The same issues in recession and boom.
The better you function in boom periods the better prepared with
working routines when business turns down.
The closer to market, the quicker reaction to changes.
The closer to market, the later you can take decisions - and the
better you know what has to be done.
The quicker you react to changes less adjustments are needed.
© UnitedLog 2009
Make it often!
React and act rapidly!
Simple routines and rules
Clear decisions every time
Simple and obvious connections to
every day operations
Make it often and simple !
Capacity planning - summary
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© UnitedLog 2009
WCM and SCM
Different basic focus
The same actions and tools
Same demands on the process of change
The same goals
Increased Profitability !
© UnitedLog 2009
Thank You for
listening !