unlock your supply chain

© 2012 AlixPartners, LLP

JANUARY 2013

iNside:

in distress? Unlock Your supply ChainA Practitioner’s Viewpoint

2

© 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

http://www.creditreform.de

In Distress? Unlock Your Supply Chain 3


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

http://www.ft.com/intl/cms/s/0/97087d90-397b-11e2-85d3-00144feabdc0.html#axzz2ENmlcXQH



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.



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.



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.



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AlixPartners LLP is a global business-advisory firm offering comprehensive services in four major

areas: enterprise improvement, turnaround and restructuring, financial advisory services, and

information management services. The firm was founded in 1981 and can be found on the Web at

www.alixpartners.com.

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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