Despite all of the supply chain and lean initiatives that companies have underway, it turns out working capital reduction is still a huge opportunity for North American and European organizations. According to the highlights from a recent Hackett Group Study featured in Supply and Demand Chain Executive, "The 2,000 largest companies in the United States and Europe have more than $1 trillion in cash unnecessarily tied up in working capital in the form of invoices paid late by customers, suppliers paid too early and inventory moving too slowly through the supply chain." The article states that, “By implementing best practices and achieving working capital levels seen by leaders in this study, companies would also reduce annual operating costs by up to $42 billion ... Taken together, these working capital improvements could enable companies to boost net profits by up to 11 percent. Hackett's research also shows a strong correlation between companies that consistently grow shareholder value and those that excel at working capital management."
Spend Management can help address two of the areas that Hackett cites as an opportunity: A/P and slow moving inventory. From an A/P perspective, gaining control and visibility is absolutely essential. The good news is that Electronic Invoice, Payment, and Presentment (EIPP) capabilities are available today that can help companies optimally chose when to pay suppliers while reducing A/P operating costs. As important, they can help bridge the gap between procurement and finance, creating a shared set of objectives, processes, and goals. From a slow moving inventory vantage point, organizations can focus on making the best total cost sourcing decisions by balancing customer demand and inventory requirements, supplier flexibility (e.g., the ability to deliver JIT and VMI programs), and the appropriate mix of make / buy manufacturing options. For companies operating in complex, multi-tier manufacturing and distribution environments, multi-echelon planning solutions (not available from ERP providers) are an absolute must.
With interest rates rising, the cost of capital is only going to increase. Given this, now is the time for organizations of all sizes to target further reductions in working capital while also optimizing A/P performance. Need more insight? Read the full-length Hackett Study by clicking here (registration required). Kudos to Hackett again for producing a great piece of work. Hackett's top-down approach to benchmarking (surveying and building relationships with senior executives) makes their numbers trustworthy and actionable.