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The new normal of working capital management
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Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or
distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.
The New Normal in Working Capital
Management
#DBSSMEWebinar
December 19, 2013
Topics for today’s webinar
2
Evolving trends in supply chain and working
capital management
Agenda
Working Capital: Tapping the multi-billion
opportunity in trapped cash
What DBS can do for you: Working Capital
Diagnostics and product solutions
3
Based on survey of 1600 companies by Atradius on B2B businesses
Source: DBS; Atradius Payments Practices Barometer, Nov 2013
Cash remains King, especially in India
Account Payables
Inventory
Account Receivables “What will be the greatest challenge to your profitability in 2013?”
34
32
32
31
37
36
31
35
28
26
24
25
18
17
21
14
56
50
53
55
52
Singapore
China
Japan
Hong Kong
India
Australia
Indonesia
Taiwan
62
58
57
Collection of
Outstanding invoices
Maintaining Adequate
CashFlow Percent of respondents
4
However, India has the highest proportion of uncollectable B2B receivables...
China 4.3
Australia 3.9
Japan 2.1
Hong Kong 6.1
Indonesia 5.6
Taiwan 4.4
Avg. = 5.0
India 7.7
Singapore 6.2
7.2
6.5
4.4
4.4
4.4
3.6
5.5
3.4
Avg. = 4.9
“Over the last 6 months, what percentage of the total value of
your B2B receivables were uncollectable?” Percentage
Domestic Foreign
India uncollectable
rate (7.7%
domestic/7.2% foreign)
highest among all
countries surveyed
Also higher than
Americas (5.8%/6.4%)
and Europe rate
(4.6%/4.2%)
Driven by customers
being bankrupt or out
of business and/or
failure of collection
attempts
Source: Atradius Payments Survey (Nov 2013) of 1,670 companies on B2B payments (n=214 in India); DBS
5
...as well as the largest Days Sales Outstanding
51
51
45
81
58
55
54
53
Indonesia
Japan
Taiwan
China
Singapore
Hong Kong
Australia
India
“What is your company annual
average Days Sales
Outstanding?” Days
Source: Atradius Payments Survey (Nov 2013) of 1,670 companies on B2B payments (n=214 in India); DBS
Marked increase in
average DSO across Asia
Pacific from 48 days to 56
days (Nov ’12 to ’13)
India average DSO (81
days) largest in survey;
40% more than next
largest country (81d vs.
58d for Indonesia)
Lack of focus on early
warning system in India
may have led to increased
DSO
- Only 26% of India
respondents got
concerned when
payments are 1-30 days
late
26%
50%
40%
19%
20%
27%
26%
38%
“According to your company's credit
policy, when does your DSO level
become a concern?” Percentage of respondents who answered "1-30
days longer than payment term“ 1
1 Other responses were “31-60 days longer”, “61-90 days longer” and “90+ days longer”
6
0 20 40 60 80 100 120 140 160 180
Infra-Construction
Hospital
Machine Tools
Pharma
Industrial paper
Steel Reroller
Steel: Pig/Sponge iron
Electrical Equipments
Heavy Engineering
Leather
Plastic Pipe and Fittings
Wheat Milling
Wood
Textile
Irrigation
Dyes and Pigments
Hotel/ Resorts
Packaging / Printing
Plastic products
Transport
Auto
127
65
75
95
85
90
75
95
143
105
123
80
75
105
175
85
85
75
95
80
90
Working Capital Trends Across SME
7
We estimate up to $2.7 trillion in “trapped cash” in key Asian
Markets
Hong Kong Singapore South East
Asia1
China Total
Listed Firms
($,Bn) 21 18 333 247 619
Non Listed
Firms ($,Bn) 34 36 1541 447 2058
USD 55 Bn USD 54 Bn
USD 1,874 Bn
USD 694 Bn USD 2,677 Bn
Source: DBS Research, IHS, Mckinsey
Majority of the
“trapped” working
capital improvement
opportunities are
developing
countries
USD billions
1 South East Asia includes Taiwan, Indonesia and India
8
SMEs require intense focus on Cash conversion cycle, due to
many competing products and limited cash / credit available
Limited working capital stock …
Selection process by leading operator for
distributors
Number of distributors
31
205
Approved
distributors
Unable to
meet other
criteria
67
Insufficient
working
capital
107
Total
applicants
Days of inventory stock carried by SME for
leading operator
% of outlets
67
1 day 16
<1 day
Total 100
>2 days 17
Most retailers need
to be restocked on
a daily basis
SME OPERATOR
EXAMPLES
… and many products competing for it
Stores in low-end micromarkets typically sell a
broad range of goods
Competing telecom products
Other products, e.g., fast-moving consumer goods
In addition, credit systems are risky as many
small shops will disappear very fast
To ensure
that their products are
adequately stocked,
operators must offer:
▪Attractive ROI
▪Quick stock turnover
9
Unlocking this trapped capital requires intimate
understanding of business model and supply chain…
High Tech Short life cycles, Seasonality, long supply lead times
FMCG Promotions, SKU complexity and last mile
distribution
Retail Multichannel, large product range, supplier
management
SME Tight resources, Cash constraints, industry diversity
AP Inventory AR
How to optimize Working
Capital to grow revenue and
profitability?
10
The “classic” supply chain trends will remain important …
globalization
supply management
commodity scarcity
efficiency
offshoring
automation
inventory
1
2
3
4
5
6
7
… but a “New Normal” must be mastered to win
…and how step-changes in supply chain are evolving and
driving changes in working capital management
green supply chains
channel innovation
last mile
talent scarcity
consumer differentiation
near shoring
volatility
…and how step-changes in supply chain are evolving and
driving changes in working capital management
11
Channel innovation 1
12
B2C market size in major Asian countries
e-commerce sales is booming across Asia
+45% p.a.
15
73
14
58
13
45
12
34
11
22
10
11
+7% p.a.
15
25
14
23
13
22
12
20
11
19
10
17
+7% p.a.
15
51
14
48
13
45
12
42
11
39
10
36
+26% p.a.
15
2
14
2
13
1
12
1
11
1
10
1
Source: Euromonitor
1
(USD Billions )
Key insight /
question:
• Lean out
operations,
prior to
capitalizing
on rapid
growth
• Is your
business
prepared for
the shift to
e-
commerce?
13
Average number of SKUs to be sold
e-commerce adds complexity to the supply chain
30,000
700,000
Source: McKinsey
Key insight /
question:
• Significant
challenge of
managing
inventory level
and % of
product
returns
• How robust
are your
inventory
management
systems?
1
14
… putting pressure on distribution and logistics
networks …
Complex multi layered distribution
networks …
Distributor(s)
Wholesaler(s)
60-70%
20-30%
20-30%
Use 3PL
30-40% 40-50%
Top retailers
with fair trade
terms and low
credit risks
Retailers
outside
tier 1 cities
Modern
trade
retailers
Medium scale
manufacturer
s
Truckers all overload. They cannot
make money even with 2 times
overloading, so everyone overloads at
least 2.5 to 3 times
–Operations manager, 3PL provider
… and overloaded local logistics
providers
Key insight:
• Complexity in operations
driven and differs
increases in lower tier
cities
Source: McKinsey
1
15
It will be a service to
the population of the
Amazon, who has
streets and avenues in
the form of rivers. It is
a project aligned with
our concept of
Regionalization, based
on the different profiles
of consumers, where
we deal with each
region as a different
area.
- Ivan Zurita,
Nestle Brazil President
Nestlé's supermarket boat sits docked at the Port of Belem
Clerks work inside Nestle SA's supermarket boat
… and creating innovative ways to reach last mile
Source: Press
1
16
FMCG Case example: How 1 company runs 5 supply
chains
Digital retailer Hypermarket,
Retail & depart-
mental stores
Distributor Drugstores,
beauty
specialist Digital shopper
90 % On Time Product availability
Speed (Replenishment order lead time)
Choice (Range/Complexity)
Demand Volatility/Predictability
STD
21 days
Low
Low
Promotional intensity
99 %
24hrs
High
High
Cus-
tomized
Key insight:
• Use segmentation to
beat supply chain
complexity
1
17
consumer
differenti-
ation
3
18
Data has gone from being highly macro …
We burn 1,800 calories per day
19
He burns 1,438 calories
per day
… to very customised
108 Cal 319 Cal 531 Cal 742 Cal 954 Cal 1165 Cal 1377 Cal 1588 Cal 1800 Cal 2011 Cal
Typical You
Weekly Overview
You burned an average of
1438 cal/day from activity this week
Your activity level is rated
Lightly active You are in the
84th percentile of all men 25-35 years who are overweight
20
Jingjinji is most concerned about product safety
Shandong prefers Chinese brands and has high
brand loyalty
Shanghai prefers well-known brands, especially
foreign brands
Shenzhen is least concerned about product safety
Granularity is key to growth - customer needs differ
by region and city
Shenzhen
cluster
Shandong
cluster
Shanghai
cluster
Jingjinji
cluster
Source: McKinsey Insights China
CHINA EXAMPLE
21
LG is building products from the ground
up to meet local Indian needs
Indian need LG’s response
Source: Press search; McKinsey analysis
INDIA EXAMPLE
• Low literacy in rural areas;
English not understood
• People use television to
listen to music
• Menu in local languages
• 2,000-watt speakers and
powerful bass
• Most Indians prefer large
vegetable compartments
• Indian spices discolor
refrigerators
• Small freezers, since frozen
food is not as common in India
• Bright colors
• Scarcity of water in India
means automatic machines
not as effective
• Large-capacity semiautomatic
washing machines to suit
Indian families
• One-touch “Indian Menu”
• Recipes for cooking Indian
food in microwaves
• Traditional cooking; new to
cook in microwave ovens
22
Volatility 6
23
Increased risk post 2008 increased importance of
working capital focus
May 2010 – Gulf of Mexico
Major oil spill affected the
ocean traffic and seafood
industry
Jun 2009 –
Honduras
Major political crisis
affected most
businesses
April 2010 – Greece
Major economic crisis
dramatically reduced the
value of Euro
April 2010 – Iceland
Volcanic eruption
stopped air traffic
Jan 2009 – Russia
Shuts off all gas
supplies to Europe
Mar 2011 – Japan
Major earthquake
and tsunami hurt all
major supply chains
Jan 2010 – China
FTA between Asian
nations removes tariffs
on 90% of goods
2009 – S.E. Asia
Ocean transportation
capacity shortage
leads to price spikes
Nov 2009 – Dubai
Economic crisis hit
the world economies and
major currencies
Jan 2009 – Iceland
Government and
banking system
collapsed
Sep 2008 – USA
Lehman Brothers
filed Ch.11 starting the
global economic crisis
Feb 2010 – Haiti
Earthquake shutdown
all commercial activity
Mar 2010 – Chile
Supply disruptions in
pulp cause prices to
reach near all-time high
6
24
In addition, unforeseeable risks have increased in
frequency and intensity
Source: McKinsey Agile Operations
Value stream
Probability of steel price change
> -20 -10 -5 -2 0 2 5 10 20
2000
Before 2000
After 2005
Monthly price change (percent)
6
25
Best practice: Design to volatility- Standardization and spec
optimization enable players to lower DIO and A/R
Common architectures across product lines …
Arrangement of engine components
Cable harness structure
Joint components across the family models
… reduces working capital and risk across the value chain
Reduces working capital:
• Less product lines to manage result in less
buffer stock and inventory
• Reduction in the number of suppliers allows
better management of A/P, resulting risk is to
be managed
Reduces risk across the value chain:
• Reduced risk exposure (less raw materials to
take care of)
• Volume bundling
• Improved sourcing and supplier management
• Define packaging zones
• Determine arrangement of components
• Define requirements on component
strategies
• Systematically optimize number of variants
• Optimize system across package space
26
DP
O
CC
C
DSO
• [Client]2 better than
industry median in DIO,
despite inherited stock
• [Client] lags behind
industry benchmark in
terms of receivable days
• Opportunity for [Client] to
aggressively target
receivables while
managing transition to
new supplier and reduce
CCC
Observations2
Footwear Industry Benchmark1 Working Capital Ratio
Source: Bloomberg; Client data; DBS Working Capital team
1 Footwear industry benchmarks based on FY12 financials of 54 companies from Bloomberg database
2 Client ratios based on 5 months data (1 cycle)
Note: DSO: Days Sales Outstanding; DIO Days Inventory Outstanding; DPO Days Payables Outstanding; CCC Cash Conversion Cycle
DIO
9 days 35 days
Lowest Median
0 days
Highest
129 days
Top Quartile
55 days
Lowest Median
106 days 90days -12 days
Highest
809 days
Top Quartile
41 days
Lowest Median
46 days 47 days 4 days
Highest
246 days
Top Quartile
31 days
Lowest Median
78 days 0 days
Highest
769 days 77 days 38 days
Top Quartile
$5m
$1m
$1m
$7m
Benefit
Client
Client
Client
Client
Best practice: Working Capital benchmarking and
data analytics to improve cash-conversion cycle SME EXAMPLE
27
… adding value to our clients
… in-depth understanding of what keeps the CFO awake at night
… being trusted advisers of our clients
… deep industry expertise …Understanding clients Working Capital levers and providing value
adding advise
DBS has embarked on a transformation journey to
add more value to our clients
How a CFO thinks …
We provide working
capital benchmarking
and diagnostics
28
Analysis
A/P
A/R
Inventory
1
Supplier segment
analysis
2
Early “payments
pocket” analysis
Time to payment -
clusters
3
Purchase order
analysis
Time to payment
4 5 6
DSO analysis by BU
7
Inventory to
revenue analysis
8
Lead time analysis
We developed a suite of working capital tools to help you
unlock trapped cash...
29
WC
ana
lyse
s
Imp
act
WC
360
Opera
tional
Leve
rs
39
81
49
48
81
3770
918690 -21d
Target
achieve
d
201
2
11 201
0
337
793
3,447
2,317
Cash
available
at target
position
Inv
0
A
P
A
R
Cash at
current
position
DSO down by 24% and DPO up by 23% 21 days reducing in Cash Conversion Cycle
2012 ROCE: 26.2%
Decrease in Receivables USD 793 Mn
Increase in Payable USD 337 Mn
2012 Improved ROCE : 27.27%
107 bpp increase in ROCE 1.1B SGD Cash Flow freed up
WC
Levers
Current
Value After DBS
Solution
Increase/
Decrease
DSO
DIO
DPO
24%
0%
23%
Cash Conversion Cycle, (days)
Potential freed up working capital, $ 1,130 million
Change Capital Employed USD 1,130 Mn
…underpinned by comprehensive review across working
capital drivers…
30
WC
an
aly
ses
Imp
act
WC
360
Op
era
tion
al
Leve
rs
… and in-depth analytics
By customer analysis shows average DSO for company to be higher than industry benchmark
0
50
100
150
200
250
300
350
400
280 270 100 0 10 20 30 40 50 60 70 80 90
Days of Sales Outstanding Days
Size of account USD ‘000
300 290
Average
DSO 42 193 201 58
Industry benchmark
DSO 29
Total
Impact on WC,
USD ‘000 137
Retail SME client example
Av DSO: 58 days
31
DBS Working Capital Diagnostics: Working to be your Asian bank of
choice
What is DBS
Working Capital
Diagnostics?
DBS proprietary suite of tools and recommendations to help
you free up cash by optimising your working capital!
Compare cash conversion cycle time against
industry benchmarks
Review detailed analysis of Receivables, Payables, and
Inventory days performance
Bespoke analytics and actionable report
How does
this work?
DBS will partner with you to develop actionable analytics
Simple: Fill up a template with working capital data (e.g.,
invoices) and participate in initial kick-off session
Actionable: DBS will data-mine receivables, payables and
inventory data to distill specific recommendations
Confidential: All data shared kept in strict confidence
32
What we need from you
What we need from you Required support
▪ Data extraction/ collection to fill in the
templates to conduct working capital
analyses (e.g. AR/AP/Inventory/overall
company profile)
▪ Resource/s allocated to the diagnostics
(e.g. person in charge during working
sessions to discuss preliminary analyses
and findings, answering queries)
Description of tasks
▪ Treasurer/ CFO time to conduct survey
for Maturity Assessment along the 3
dimensions (AR/AP/Inventory)
▪ 1 financial
analyst
Resources
▪ 1 person (can
be the same as
previous)
▪ Treasurer/ CFO
▪ 1-2 days
Est. time spend
▪ 1 hour
session, once
a week
▪ 1-2 hours
What next? Contact your DBS representative for more information
THANK YOU!
33 Follow us @DBSBankIndia