The unfortunate spread of the Coronavirus (COVID-19) has generated an unprecedented supply and demand shock to supply chains. A rapid decline in demand is evident for many products and services, across industries such as travel, tourism, entertainment, automotive and banking. However, at the same time demand has soared in some specific niche markets such as healthcare, PPE and consumer packaged goods such as food.
Given the challenges we face in the future, companies should focus on improving their cost structure and liquidity. A refocus on cash flow is imperative. That is why we are convinced that the role of Procurement/Sourcing and Treasury leaders is critical at this time.
At the macro level, the discussions of Central Banks and Governments in Latin America focus on the following points:
1. Excessive public spending that may generate a decrease in international risk rating agencies.
2. Liquidity injection through the purchase of sovereign bonds and lower intervention rates of Central Banks.
3. Tax incentives for small, medium and large companies.
4. Subsidies for employees limiting the loss of employees and subsidies for strategic sectors of each country.
Cash flow will always be king
Proper cash flow management will always be an integral part of any company's risk diagnosis. With market disruption, companies that have a favorable cash position compared to their competition will be perceived as more balanced and stable by funders. For the board of these companies, it can be the difference between a minor crisis and a major one.
So what can companies do to improve their cash flow in the current difficult conditions? At least 3 things:
Adjust your production plan to align with high-demand sub-categories to maximize sales and operating profit.
2.To make products or services more competitive in terms of price and technical conditions.
3.Optimize working capital to shorten the cash conversion cycle.
To implement these cash flow plans we provide five tactics that you can focus on Procurement and Treasury leaders in the next two quarters:
1. Make it easier for your suppliers to obtain more liquidity with Factoring/Confirming/Cash Discounts
This may be counterintuitive, but to the extent that your suppliers obtain more liquidity upfront your business can ensuring that the Supply Chain is not interrupted by providing it with some financial oxygen and at the same time your company can lengthen the time it takes to pay its suppliers.
There are solutions such as Intelcost which, in addition to making the treasury process much more agile through the use of cloud technologies, allows your suppliers to discount the invoices that your company has issued and your company in turn can obtain additional benefits by increasing their payment term.
In this way, the follow-up of invoices is fully automated in the Platform directly connected to the ERP, This provides a permanent control of the new invoice holder. In the end, it becomes a win-win solution for both purchasing companies and their suppliers.
2. Ensure the supply of required parts and raw materials for uninterrupted production of high demand categories.
Understanding the raw material, parts and sub-assemblies and packaging requirements for high-demand categories, el Procurement can ensure continuity and supply for the production lines. that should run uninterrupted. This means paying close attention to every part of the production process in order to have timely and optimal inputs for the final goods that are in high demand.
The purchasing team plays a critical role in ensuring the timely delivery of these goods so that they can finally reach the final consumer. Logistics providers and their distribution capabilities become relevant in this task.
3. Reduce your purchasing costs
With regard to the reduction of purchasing costs, some suppliers, in certain segments, may be benefiting from lower input costs, such as lower oil prices.
This marks a point where the areas in charge of purchasing processes must ask suppliers to pass on cost reductions, focusing on a broad scope, not only covering Tier 1 suppliers.
It is important to keep in mind that, in order to reduce the cost of production, Procurement areas should consider the savings generated by direct cost reduction measures. The company can either take other measures such as lowering the cost of labor where, for example, it can adjust by reducing the number of workers hired and distributing the work to the available personnel.
4. Optimize payment terms to your suppliers and reduce your inventory levels.
As we saw in Action 1, optimizing supplier payment generates shorter cash conversion cycles. Making use of technologies/companies that help to extend the payment term to suppliers, your company is obtaining a rebut which goes directly to EBITDA.
Optimizing supplier payments and lowering inventory levels can be part of a broader strategy than focusing on the cash conversion cycle alone: under current business conditions, where the normal differs from what it used to be a few months agoAs a result, companies are increasingly shifting their focus from the income statement to be much more comprehensive, including the balance sheet.
Of the three main focuses of analysis when reviewing working capital: accounts payable, accounts receivable and inventories, companies generally focus on or prioritize inventories. However, to have a real impact in favor, the effort must be on all 3 fronts starting with an optimization based on payment terms, lengthening credit terms, minimizing early terms and decreasing the most unproductive inventory levels based on forecasts and accurate stock controls.
5. Evaluate the conversion of fixed costs to variable costs and reduce your variable costs.
Selling assets and obtaining a leaseback with favorable leasing terms can convert its fixed costs into variable costs and can improve its cash position. Procurement must be able to list these types of alternatives within the company in order to quickly convert these fixed assets into variable opportunities that benefit the company.
It should also focus its efforts on reducing variable costs by compiling a non-limiting series of alternatives such as: strict travel control policy and restriction to non-essential meetings, careful review of hiring plans, scheduled and ongoing training, review of the vacation liability to minimize its possible impact on the balance sheet.
The success of these measures lies in the fact that the Procurement areas become an ally within the company and not a "stopper". that only seeks to reduce costs without any rational agenda behind each measure and that at some point may undermine the company's macro objectives.
By focusing on structural improvements in costs and liquidity, the Procurement and Treasury areas become conservative and promoters of the company's cash and in turn develop the culture of "it is always better to spend better than to save for the sake of saving".
Improving operating cash flow will not only ensure that the company will be able to weather crises such as Covid-19, It will also cement the culture of sustainable and coordinated development where buyers, suppliers, treasurers and all business areas of the company must work in sync.
Article based on GEP publications.
