Making It Happen
Since working capital optimization affects many areas of a company, detailed planning and a holistic approach are crucial for the success of a project. The following points provide some success factors of implementation:
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How should we approach a working capital optimization project? A benchmarking for the company and for all segments/business units should be conducted in order to identify the most promising areas for improvement and respective units. Following this, the project should start with a few selected pilots. Once these pilots have been executed, knowledge gains can be transferred to other business units, and further projects can be rolled out to the entire company.
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How do we ensure that a working capital initiative is sustainable? There are four main aspects to successfully anchoring an NWC project into an organization and making it sustainable: 1. Commitment and resources (sponsorship by top management, clear responsibilities, dedicated teams, internal experts as multipliers). 2. Communication and enabling (conveying motivation and necessity, fostering know-how exchange and best-practice sharing, providing training on NWC principles). 3. Incentives (inclusion in budget planning, linking variable salary to target achievements, recognizing jobs well done). 4. Controlling (integration into existing reporting formats, tracking target achievement and implementation progress).
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How long does it take to optimize NWC? In order to keep a momentum for change and to get a proof of concept, the right mix of quick wins and deep-dive improvements should be aimed for. Quick wins are usually realized within less than a year. They can make up roughly 30% of the overall potential. The overall sustainable optimization takes about three years, depending on company size and industry. According to project experience, the next 40% of the overall potential can be realized in the second year and the rest (about 30%) in the third year.
Notes
1 For some businesses (i.e., project business) prepayments should be included as well. Prepayments received should be related to cumulative sales (as receivables). Prepayments paid should be related to the purchasing volume (as payables).
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