Download - Unlock your supply chain
© 2012 AlixPartners, LLP
JANUARY 2013
iNside:
in distress? Unlock Your supply ChainA Practitioner’s Viewpoint
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© 2012 AlixPartners LLP
he number of companies in
distress is growing. in europe
last year almost 180,000
corporations1 entered into
insolvency, with the number of privately-held
enterprises likely to be much higher.
For stakeholders of distressed organisations,
maintaining liquidity is critical to allow
them to continue to trade. P&L measures
take a backseat as the generation of cash
becomes the primary focus. This cash can
either come from new capital injections or
(as preferred by most financial stakeholders)
self-generated cash from the distressed
organisation itself.
suppliers and supply chain costs typically
represent 60-80% of manufacturing
companies’ revenues and are one of the
major areas for self-generation of cash.
Logistics and warehousing costs alone can
amount to 3-5% of revenues (depending on
outsourcing) and can also have significant
asset value. even in a well run organisation,
the cash that sits in inventories can represent
10-15% of revenues. in short, the supply
chain offers significant opportunities, but it
also has risks. Only the best leaders seem to
really understand both.
T
1 Creditreform 2011/12 report www.creditreform.de
Where’s the Cash?
An organisation in distress must rapidly gain
an overall picture of where the cash is in the
business. This is typically done at a high level
as an immediate priority and then in greater
detail (such as rolling 13-week cash flow
forecasts) as the turnaround work progresses.
With large amounts of cost sitting within the
supply chain, specific focus on identifying
where and how much cash could be extracted
will enable quick prioritisation of actions by a
mobilised and fully empowered team.
What’s the Risk?
A supply chain in distress is very different to
one trading normally. securing supply during
this time can make the difference between life
and death. Once supply is disrupted, costs
spike, volumes (and typically revenues) decline
and corporate collapse inches nearer. A fast
yet thorough risk assessment of all existing and
potential suppliers and their possible actions
as a result of your distress is critical.
There are some key questions to answer: How
financially stable are your suppliers? Who
in distress? Unlock Your supply Chain
In Distress? Unlock Your Supply Chain 3
© 2012 AlixPartners LLP
holds the balance of power? Could their
exposure to you cause their own distress?
Could their credit insurance be pulled leaving
them no choice but to curtail or even cease
supply (as in the case of Comet, a large UK
retailer, which cited losing credit insurance as
the key catalyst to appointing liquidators2)?
A simple assessment is all that is required to
properly segment the supplier base and tailor
the approach for concessions or support.
Working out where your power is and how
exposed you are is a key part of any supply
chain cash-generation programme.
What to do?KeY sUPPLY CHAiN CAsH ReLeAse TACTiCs
• Sell off logistics asset such as warehouses, ships and trucks & trailers either through divestment and third party contract or sale & leaseback
• Be specific about what you want from each supplier. Do not go for “broad brush” cost down• Realise that one-time cash payment from suppliers are alternatives to unit cost reduction
• Ignore book value, sell off inventory quickly even if it causes an impairment• Change delivery frequency
Monetise Inventory
Sweat fixed assets
Cost down suppliers
• Do not over-stretch payments terms. They will spring back causing a higher cash requirement• Permanently extend payment terms even if unit costs slightly increase
Extend accounts payable
successful supply chain cash-generation
programmes are built around four key tactics.
Inventory monetisation in normal trading, organisations simply
scale back operations to generate a staged
reduction in finished goods inventory. in
distress, monetising finished goods in
addition to sustaining (or even increasing)
operations can add significant value.
An often-encountered stumbling block is
the inherent desire to sell inventory at its
“correct value”. These rules do not apply
when cash is tight—impairment is of little
consequence when in distress—and leaders
should encourage their staff to sell for the
best price quickly, regardless of what the
book value is. Looking at metrics, such as
how many weeks worth of stock per stock
keeping unit (sKU) you have, will highlight
opportunities to dispose of some inventory. it
will also highlight slow moving and obsolete
stock which can be quickly monetised as it
2 Thompson, Christopher. “Comet set to shut all stores by Christmas.” FT.com, November 28, 2012. Accessed december 07, 2012. http://www.ft.com/intl/cms/s/0/97087d90-397b-11e2-85d3-00144feabdc0.html#axzz2eNmlcXQH
In Distress? Unlock Your Supply Chain 4
© 2012 AlixPartners LLP
has little effect on day-to-day operations.
One way to dispose of this aged stock is to
run a competition within the sales team—an
industrial goods company recently did this
and managed to clear 90% of all stock over
six months old.
increasing frequency of supply is another
method of monetising inventory; the average
finished-goods stock quickly reduces when
moving, say, from one to four shipments per
month. The key factor to consider for this
option is truck/container utilisation—lower
utilisation quickly adds cost.
Raw material stocks also present a large
opportunity to release cash. selling
unneeded materials (back to suppliers or
on the open market), even at a discount;
reducing order / lot sizes; and increasing
frequency of supply can quickly free up that
cash.
Fixed Assets Disposal
disposing of fixed logistics assets may seem
counterintuitive; however warehouses,
ships and trucks and trailers are assets that
are typically simple to divest as they are
easy to value and sell. Multiple commercial
agents and brokers specialise in these types
of logistics assets and can facilitate a quick
sale. To continue operations, an organisation
can simply divest and then outsource the
activity to a third party or go through a sale
and leaseback of the original asset; however,
this typically takes longer to execute. if the
supply chain was efficient previously, this will
probably add cost, but the amount of cash
released from these assets can be essential to
an organisation fighting for survival.
Supplier Cost Reduction
Without a complete assessment of the risks,
organisations typically aggressively seek
untargeted cost reductions from all the top
suppliers when in distress. As part of their
cash identification activity they see third-party
goods and services as a large proportion
of the costs and make commitments on
cost reductions to their lenders, which
they typically fail to deliver. They are either
too aggressive with their suppliers and
risk their supply, or too weak to protect
existing relationships at the expense of cost
reduction. The best approach, which may
not be unit cost reduction, can be found
by conducting a thorough supplier-by-
supplier analysis. Other alternatives, such as
a single one-time cash payment, moving to
consignment stock, or changing ownership of
any shared assets, can be possible.
In Distress? Unlock Your Supply Chain 5
© 2012 AlixPartners LLP
The Bottom Line
extracting cash from suppliers can have
very large benefits, but it is frequently more
opaque than it appears. Be prepared to put
a large, dedicated team on this if you want to
maximise the cash quickly.
Accounts payable improvements
Most distressed organisations simply delay
paying suppliers, stretching payment
terms well beyond their maximum. These
techniques work well in the short term and
can release a significant amount of cash.
But suppliers generally figure this out fairly
quickly and begin to demand ever shorter
payment terms, until they ultimately get
to cash-on-delivery. The working capital
released from the delay is then required to be
reinstated, however this time they also seek
to eliminate the original payment terms. in
short, the technique can backfire, requiring
a significant cash injection some weeks into
any turnaround programme. A much better
approach involves clear and structured
negotiation that permanently extends those
terms—even with a price increase on the
unit cost. As a case in point, a large food
manufacturer recently stretched over 3,000
supplier payment terms from 30 days to an
average of 45 days, with no additional cost of
goods, releasing over €20 million in cash.
Restructuring a distressed company presents
management with a set of demands very
different from those that arise in the course of
normal business. Managing and leveraging
the supply chain in a distress situation
is critical as a source of controlling and
maximising available cash. if it isn’t addressed
quickly the company may no longer be able
to trade.
Once it becomes clear to the market that
you are in distress, suppliers (and all other
stakeholders) will begin to severely question
your longer term viability. A very clear
communication plan is critical to ensuring
that miscommunication is kept to a minimum.
Worried suppliers are not keen to offer any
concessions and, on the contrary, may add
cost and complexity. A best practice is to
communicate with them frequently.
In Distress? Unlock Your Supply Chain 6
© 2012 AlixPartners LLP
Organisations must conduct a rigorous
supply chain assessment with prioritised
actions, create a focussed and frequent
communication plan and put in place a well
staffed, suitably empowered team.
The supply chain offers a rich source of funds
from which to prolong an organisation’s
survival, but leaders must be prepared to put
aside P&L performance and concerns about
impairment of assets to focus on extracting
cash for the sole benefit of maintaining
liquidity. Only then will they stand a chance
of prolonging the life of the business.
In Distress? Unlock Your Supply Chain 7
© 2012 AlixPartners LLP
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AlixPartners LLP is a global business-advisory firm offering comprehensive services in four major
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sanjay BailurManaging [email protected]+44 20 7098 7451
Andrew [email protected]+44 20 7098 7454
Adam [email protected]+44 20 7098 7494
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In Distress? Unlock Your Supply Chain 8
© 2012 AlixPartners LLP
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