In many companies, it may take an executive team to determine which strategic approaches to the company’s working capital deficiencies would produce the greatest returns. The team would consider many approaches, some of which are familiar and some of which might involve creative solutions.
- Address market complexity by targeting business processes to serve specific revenue streams; in other words, customize products only for premium clientele.
- Ensure that standard contracts balance price, terms, and inventory requirements, maximizing value by also taking into account the customer’s requirements.
- Stick to standard terms and conditions for new contracts, varying only by the type of customer (high volume, low volume, high customization, low customization) involved. Review existing customer relationships to ensure that the cost of capital is covered.
- Create incentives to accelerate payments, particularly from large customers, using as the context the overall industry structure, negotiations on price increases, and willingness to pass along drops in commodity prices.
- Rank accounts by credit risk and size, and shop for better terms through factoring, although factors should be used sparingly during liquidity crises.
- Implement accurate and effective invoicing processes to ensure that the system flags deviations and corrects any problems.
- Resolve disputes with healthy customers and, if possible, with some of those whose credit has been withdrawn.
- Segment suppliers on the basis of their value and condition. Strong suppliers with rigid payment terms may not be flexible, but suppliers that are adding little value (such as those, for example, buying metal and making only a minor change to it before shipping it out) or those in financial difficulty will typically offer lower prices for quicker payments.
- Address supplier volatility by linking the cost of business processes with the target market for specific production streams. That is, low-margin products should enjoy the most inexpensive terms from suppliers.
- Make sure that payment terms are aligned with when goods are actually received.
- Standardize new contracts and examine existing contracts to ensure that they contain the best payment and inventory terms across business units, suppliers, and product types.
- Renegotiate to improve terms with high-leverage accounts, with an eye toward creating the most value across the supply chain, given your industry’s structure.
- Segment supplier credit terms and identify opportunities to leverage trade credit on terms that are less than your cost of capital.
- Establish clear payment policies. Pay invoices on the due date (not before), and take advantage of grace periods. Take early payment discounts only when the value of them is commensurate with the impact on working capital and the balance sheet is healthy enough. Determine whether the discounts are available with longer payment terms. Also explore legitimate opportunities for delaying payments, such as by pointing out errors and quality issues.
- Segment production flow into categories that align with specific customer order patterns.
- Eliminate marginal SKUs that drive inventory growth without profit value, such as packaging types, colors, and brands that offer little benefit to the end customer.
- Factor the impact of your current supply, production, and distribution footprint into the overall inventory position; identify moves to reduce buffer stocks over time.
- Integrate the inventory requirements of the supply chain into purchasing decisions and customer contracts.
- Standardize and update production planning policies and procedures to align inventory with market promotions and required service levels or product demand.
- Institute a rigorous, objective forecasting process that assesses economic drivers of demand.
- Identify and eliminate the root causes of process variation to reduce inventory requirements.
- Evaluate the impact of different production scheduling and shop-floor-control strategies.
- Minimize customer consignment inventories; if such inventories are used, make sure that prices compensate for risk and for the cost of storing inventory.
- Reduce spare parts inventory, as with regular inventory.