Hackett, Working Capital, and a Massive, Untapped Opportunity

As my United flight left its O'Hare gate earlier this week on-time -- a miracle in and of itself -- I found myself with 20 uninterrupted minutes to catch up and read the print edition of theThe Wall Street Journal. Now reading an actual print newspaper is a luxury that my daily work and personal life rarely affords. When I read something in print -- rather than online -- it gives me the chance to scan for unanticipated stories and tidbits, often buried deep within the publication that I might otherwise miss when reading an online site or searching for specific headlines on Google. As I read the printed word, I literally find myself consuming the page, visually digesting the content at a rate far faster than I can do when scanning my notebook screen.

This time around, what caught my attention in Tuesday's edition of The Journal was a short piece on how US companies are better using working capital, improving the corporate cash-pot by targeting "efficiency in daily business operations". The story captures the essence of a recent Hackett Group study that looked at working capital trends inside US companies. According to article, the 1,000 largest US Companies were able to free up approximately $72 billion last year by reducing working capital requirements through "improvements in collecting bills, turning over inventory and stretching out the amount of time they take to pay their own suppliers."

Since I can remember, supply chain vendors have touted their ability to improve working capital use through forecasting, planning, and execution software aimed at inventory reduction. But quite often -- especially in the case of boil the ocean optimization approaches -- companies realized results that came up short of expectations. I'm sure that many Spend Matters readers can remember, for example, the Nike / i2 debacle from a few years back. In this case, Nike was forced to take a material inventory write-down -- so material, in fact, that it had a significant impact on earnings -- after a blundered planning and forecasting implementation. In i2's defense, the dodgy -- thank you Mark Hillman, for reminding me of another great English word -- implementation was certainly not the fault of just the one vendor in question. But this example is one of many that highlights the risk elements of inventory optimization or improperly forecasting future demand in an attempt to reduce working capital. A far less risky course of action is to invest in Spend Management related working capital reduction areas that present minimal risk to the core business.

Perhaps the largest, low-risk untapped working capital reduction opportunity is a nascent area that Aberdeen and a handful of vendors refer to as supply chain finance. Simply put, supply chain finance helps companies treat their payables as an asset. In some cases, this means trading on their credit to reduce the amount of cash they need to pay suppliers. In others, it might involve a dynamic bid/ask market that offers early payment discounts down to the specific day a supplier wants to get paid. Personally, I would argue that supply chain finance is really an extension of EIPP (Electronic Invoice, Payment, and Presentment) rather than a stand alone sector -- since integration with existing systems and processes is critical to make it work with the majority of a company's suppliers -- but I do not disagree with the vendors and pundits who tout the massive size of the opportunity. In the coming weeks, I will be explaining and investigating the supply chain finance opportunity in more detail. But to give you some sense of the opportunity, John Sculley, Apple's former CEO, has taken a personal interest in the subject, and will be speaking on the matter at Aberdeen's CPO event in Boston later this fall.

Jason Busch

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