The unfortunate expansion of the Coronavirus (COVID-19) has generated an unprecedented shock to supply and demand to Supply Chains. A rapid decrease in demand is evident for many products and services, in different industries such as travel, tourism, entertainment, automotive and banking. However, at the same time, demand has increased dramatically in some specific market niches such as health products, PPE, and packaged consumer products such as food.

Given the challenges that lie ahead,  companies must focus on improving their cost structure and liquidity.  A re-focus on cash flow is imperative. That is why we are convinced that the role of the leaders of the Procurement/Supply and Treasury areas have a critical role at this time.

At a macro level, the discussions of the Central Banks and Governments in Latin America focus on the following points:

1. Excess public spending that could generate a decrease in international risk rating agencies.

2. Liquidity injection through the purchase of sovereign bonds and reduction of the intervention rates of the Central Banks.

3. Tax incentives for small, medium and large companies.

4. Subsidies for employees limiting their loss 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 financiers. For the board of these companies it can be the difference between a minor crisis and a larger scale one.

So what can businesses do to improve their cash flow in today’s difficult conditions? At least 3 things:

1.Adjust your production plan to align with high-demand sub-categories to maximize sales and operational profit.

2.Make more competitive products or services 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  Procurement and Treasury leaders can focus on in the next two quarters:

1. Enable your suppliers to obtain more liquidity with Factoring/Confirming/Prompt Payment Discounts

This may be counterintuitive, but to the extent that your suppliers obtain more liquidity in advance, your company can  ensure that the Supply Chain is not interrupted by providing some financial oxygen  and at the same time your company can lengthen the times for payment to its suppliers. suppliers.

There are solutions such as  Intelcost  that, 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 issued  and your company in turn can obtain additional benefits by increase the payment term for these.

Thus, invoice tracking  is fully automated on the Platform connected directly to the ERP,  thereby achieving permanent control of the new invoice holder. In the end it becomes a win-win solution for purchasing companies and their suppliers.

2. Ensure the supply of required parts and raw materials for the uninterrupted production of categories with high demand

By understanding the raw materials, parts and sub-assemblies and packaging requirements for high demand categories, Supply can ensure their continuity and supply for production lines  that should operate uninterrupted. This means paying close attention to each part of the production process to have the inputs for the final goods that are in high demand in a timely and optimal manner.

The purchasing team plays a critical role in ensuring the timely delivery of said goods so that they can finally reach the end consumer.  Logistics providers and their distribution capacity become relevant in this task. 

3. Reduce your purchasing costs

In relation to the issue of reducing purchasing costs, the situation may arise where some suppliers, in certain segments, are benefiting from lower input costs, such as lower oil prices.

This is how a point is marked where the areas in charge of the purchasing processes must request suppliers to pass cost reductions, focusing this on a broad scope, which does not only cover level 1 suppliers.

It is important to keep in mind that, to reduce the cost of production,  Procurement areas must consider the savings generated by direct cost reduction measures  that could lead to quick profits or, on the other hand, resort to other types of measures such as reduction. in the cost of labor where, for example, you can adjust by reducing the hired labor and distributing the work to available personnel.

4. Optimize payment terms to your suppliers and reduce your inventory levels

As we saw in Action 1, optimization for payment to suppliers generates shorter cash conversion cycles. By making use of technologies/companies that help extend the payment period to suppliers,  your company is obtaining a  rebate  that goes directly to EBITDA.

Optimizing payment to suppliers and reducing inventory levels can be part of a broader strategy than focusing only on the cash conversion cycle: in current business conditions,  where normal differs from what used to be A few months ago , companies are increasingly changing their approach to the income statement to be much more complete, 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 positive impact, the effort must be on all 3 fronts, starting with optimization based on payment terms, lengthening credit terms, minimizing early deadlines and reducing the most unproductive inventory levels with 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 leasing them back with favorable leasing terms  can turn your fixed costs into variable ones and can improve your cash position.  Supply must be able to list these types of alternatives within the company to quickly convert these fixed assets into variable opportunities that benefit the company.

Likewise, you should focus your efforts on reducing variable costs by compiling a non-limiting series of alternatives such as:  strict travel control policy and restriction on non-essential meetings, carefully review 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 Supply 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 threaten the macro objectives of the company.

By focusing on structural improvements in costs and liquidity, the Supply 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.”

By improving operating cash flow, the company will not only guarantee that it will be able to move forward in the face of crises such as Covid-19,  but will also cement the culture of sustainable and coordinated development where buyers, suppliers, treasurers and all business areas must work in sync. of this.

Article based on GEP publications.