Release Working Capital with SAP Supply Chain Planning and Finance, Connected

Last week,?McKinsey released a cash conversion cycle analysis of 250 large Nordic companies ?showing that €220 billion of working capital could be released if companies in the bottom quartile of industry peers could move to the top quartile.

Finance directors and corporate treasurers optimize their company’s cash conversion cycle (CCC) by maximizing days payable outstanding (DPO) while minimizing days sales outstanding (DSO) and days of inventory (DIO).?

Too much working capital suggests companies are not using assets effectively to increase revenue. Many companies of all sizes are prioritizing the optimization of net working capital, or the money available for expenses in the next year, now interest rates and inflation have risen in the last year.?

The?supply challenges during COVID-19 ?meant lean supply chains developed in the last decades with a just-in-time structure were exposed by disruption. Many companies moved to a just-in-case inventory philosophy but are now holding excess inventory as demand weakened.?

Deloitte’s 2022 Working Capital Insights ?for Australia showed that the DIO and therefore CCC was heavily affected in specific industry sectors such as automotive, consumer products, retail, homebuilding and materials.?

Due to the higher cost of materials in many industry sectors, suppliers have taken out loans to cover production costs, while many customers have pushed for longer payment terms. Supplier relationships have been strained as result.?

Balancing inventory and collaborating with suppliers more effectively is a priority for many companies in these sectors. These companies are looking to reduce excess working capital levels, while maintaining product availability and accurate safety stocks amid disruption with high storage and energy costs.?

Deloitte has shown separately how companies can use working capital ?to create strategic advantages against competition amid current disruption and inflation. Key to this success is collaboration across sub-cycles of order-to-cash, forecast-to-fulfill, and procure-to-pay.

However, with finance, procurement, and supply chain teams often planning in silos at most companies, there are clear risks of continued overstocking and high working capital levels without moving to a value chain planning approach where all key decision-makers are involved.?

Can an enterprise planning approach optimize inventory and release working capital with connected supply chain finance??

Enterprise Planning connecting the value chain end-to-end?

Connecting internal planning silos in a value chain that considers risk and working capital is critical to releasing more cash flow. Finance, supply chain, and procurement teams need to collaborate and plan together to improve decision marking and working capital levels.?

This value chain model enables end-to-end planning processes for key products and categories that may be more exposed to risk and volatility than others. It can help identify inventory optimization opportunities for these product lines that could lower working capital.?

By considering supplier and transportation constraints early in the plan, companies can proactively decide on sourcing and production strategies for affected product segments to meet demand.

Collaborating with this ecosystem of suppliers and carriers in an extended value chain planning process means companies develop risk-resilience and identify opportunities to optimize working capital.?

The McKinsey analysis ?showed best practice for top-quartile companies is to create a dedicated team to examine the CCC inputs and establish working capital governance, processes, and technologies to make this a priority through the business.?

Including this CCC team in the enterprise planning process can help to define service levels for the value chains or portfolios, while setting target inventory parameters and supplier inputs to meet these at the right profit margins, aligning commercial and supply teams.?

SAP connects Supply Chain Planning and Finance?

With these enterprise planning governance and processes in place, companies can connect value chain teams globally with a common platform to automate segmented and financialized inventory target setting to meet defined service levels.?

The CCC team can use these real-time recommended inventory levels from the extended value chain to advise on strategies for releasing working capital. For example, by collaborating with their supplier network or identifying excess inventory that will not be used in-year.?

The connected enterprise planning team can then spot chances to deploy supply chain finance, dynamic discounting, inventory and accounts receivable finance to release excess working capital and increase cash liquidity and resilience across their trading partner network.?

SAP’s integrated financial and supply chain planning platform ?can connect with our working capital management platform?Taulia, used by 1.8 million businesses .?

Using SAP enterprise planning, customers can plan on a real-time view of liquidity, decide on priorities to optimize their working capital, and deploy the new liquidity with agility using Taulia in certain countries or within product lines to get additional yield.?

This direct connection with Taulia’s flexible supply chain finance capabilities, creating SAP’s holistic platform, can strengthen relationships with critical suppliers through early payment and dynamic discounting.

Moreover, other customers are?releasing working capital by moving to consignment or third party-managed inventory strategies enabled by Taulia multi-funding capabilities.

Conclusion

Moving to more active working capital management practices with connected supply chain planning and finance means companies can more accurately meet cost and cash targets, while becoming a partner of choice for suppliers, which is critical to going for growth and de-risking supply-side disruption.??

SAP’s real-time planning and treasury capabilities connect with Taulia’s working capital toolbox to enable these active working capital practices for customers.

Using SAP’s AI-driven forecast scenarios, improved inventory forecast accuracy would build confidence with the Taulia funding partners to grow consignment stock opportunities for our joint customers, releasing working capital and maintaining optimized inventory levels for greater agility and resilience.?