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The pandemic set off a cash scramble for companies on numerous fronts.
It also exposed a breadth of policy, process and cash focus inefficiencies. Organizations had to move quickly to ensure they had enough liquidity.
Businesses rapidly modified site protocols and constraints on productivity across the supply chain. Some pulled a variety of levers to drive cost and cash improvements. Others turned to alternative financing sources to ensure they had access to the level of capital they needed.
Procurement and legal departments immersed themselves in reviewing contracts with their most critical suppliers. These reviews focused particularly on language related to open purchase orders, buying commitments and payment timeliness – and on determining whether the pandemic would trigger force majeure treatment of contract obligations. Treasury functions had to assess existing cash flow forecast processes and develop enhanced protocols so they could properly gauge the impact of cash inflows and outflows and balance that impact across the supply chain.
▉ Insight 2
Supply chain financing (SCF) is the most prevalent vehicle used in the market.
More companies are opting for this approach over other methods such as receivables financing, factoring, loans against receivables and pre-shipment financing.¹
Buyers offer SCF to their suppliers as an investment to maintain supply chain health, offering suppliers an option to manage their liquidity through early payments. The option has proved useful, as the industry experienced a 208% increase in early payment volume from March 2020 to early 2021.²
¹ ICC Global Survey on Trade Finance
² Taulia Inc.
▉ Insight 3
A broad view of your supply chain is key to mitigating risk.
Businesses that fail to take a broad view of their supply chain may saddle sensitive small- and medium-sized suppliers with limited access to liquidity and heightened risk to their operations.
Inaction may increase stress on program and pro forma results, which, in turn, tarnishes the attractiveness of capital reinvestment.
A cohesive supplier financing strategy is an essential element of a well-equipped, resilient enterprise. It minimizes the risk of leaving cash “on the table” and the dubious prospect of encountering unexpected shortfalls. These risks come into sharper relief given that more than $10 trillion of trade volume is eligible to flow through SCF programs.³
³ EY-Parthenon research
▉ Insight 4
Balance drives significant value.
Balancing the supply financing strategy across a portfolio of suppliers can drive significant value in both profit-and-loss statements and cash. It also provides the valuable benefit of optimizing the allocation of risk across the supply chain.
An increased focus on cash can help businesses attain significant financial gains, as illustrated in a recent case study.⁴
Additionally, a recent EY-Parthenon study found that businesses that implemented a cash focus, supported by the appropriate top-down organization and incentive structure, can realize up to 20%-25% cash flow improvement, or 5%-7% of revenue.⁵
⁴ Peter Kingma, Eidji Braghin and Jeff Leach, How a sustainable cash culture can drive growth
⁵ EY-Parthenon research
▉ Insight 5
Liberate working capital from operations to generate cash.
This cash can be used to self-fund multiple strategic priorities.
To optimize the amount of working capital that can be freed, organizations should re-emphasize capital reinvestments that represent the greatest total economic value for the enterprise. Projects should be linked to business strategy to balance and prioritize the portfolio for the greatest overall investment and return, all within a fully articulated risk profile.
▉ Insight 6
Focus on a combination of quick wins and broader strategic initiatives to optimize working capital.
A supply chain finance (SCF) implementation typically takes at least 12 to 16 weeks to get started and another 12 to 18 months to achieve a full run rate and maximum benefits. There are many other actions leading companies can take.
Suppliers can boost their position by participating in their customers’ SCF offerings and accelerating payments where attractive rates are offered. Businesses should use a cash leadership office to support a broader working capital focus across procure-to-pay, forecast-to-fulfill and order-to-cash needs. Such an office must be accountable for sustainable results for long-term benefits to be realized.
Other worthwhile steps include:
Enhancing pre-qualification and planning to evaluate the ability of the organization and vendor base to execute against a measured project’s complexity and inherent risk before starting
Optimizing the scope, phasing and procurement functions to align cash flow with project risk and performance
Re-evaluating performance metrics to increase visibility and transparency on project performance through structure, discipline and accountability
Implementing standardized processes and methodologies, ensuring integration among all work streams, and operationalizing modified site protocols, constraints and logistics
Reducing project risk and providing earlier identification of potential issues
▉ Insight 7
Having a third-party in place can lead to tangible benefits.
A global supply chain reinvention initiative for an EY client focused on establishing a 1.7-million-square-foot food “manufacturing facility of the future.”
Ernst & Young LLP-led efforts
20.5%
20.5%
cost savings for the client on potential out-of-scope changes
The EY Capital Projects Consulting Group established and implemented the needed administrative, financial and technical control frameworks; monitored project performance; tracked and monitored costs; managed risks; and implemented a quality control oversight program.
Ernst & Young LLP-led efforts helped the enterprise achieve a 20.5% cost savings on potential out-of-scope changes through detailed constructability reviews (a method to integrate construction expertise into design phases) and a rigorous change management process. The company also reaped a 7.7% buy-out savings on the awarded scope of the high-profile project through value engineering and constructability reviews and a rigorous procurement management process.
