A leading industrial conglomerate with worldwide sales presence in all of its divisions recently conducted a comprehensive, group-wide working capital program with a strong commitment of top management levels. Critical success factors were a holistic approach to the entire value chain and the definition of clear and practicable measures, together with employees responsible for implementation on the operational level.
Improvement measures ranged from more easily implemented quick wins, such as optimizing payment processes, to complete restructuring of production processes. Quick wins not only paid off the initiative after a few months, but also served as a beacon for the initiative and proof of concept. The overall NWC reduction added up to more than 40%. Roughly half of the improvement potential was already realized within one year from start of the implementation.
In order to anchor working capital management in the organization, a pragmatic controlling tool was set up and regular reporting cycles were established. Working capital goals were integrated into budgets and incentive programs to further foster sustainability.
Before the program brought the change, a number of initiatives had fallen short of expectations. The main reasons had been an undifferentiated top-down approach, and the lack of a comprehensive perspective on working capital. Thus, the symptoms rather than the root causes of excess accounts receivable and inventory or low positions in payables had been approached and no sustainable results had been achieved.
Best-in-class companies understand the company- and industry-specific drivers behind each component of operative working capital, and focus on optimizing the most promising ones. During this process, they consider the entire value chain to reveal the root causes of tied-up cash and take into account all interdependencies between the respective components. They apply a holistic approach in which they do not randomly reduce costs but consider all trade-offs with costs and capital employed to optimize the company value. By applying the appropriate levers for each component, obstacles that slow cash flow can be removed and overall company processes can be improved.