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Cash on the table Working capital management in the consumer products industry, 2013
Cash on the tableWorking capital management in theconsumer products industry, 2013
Executive summaryCash on the table is the latest in a series of working capital (WC) management reports based on EY research.A review of the consumer products (CP) industry’s WC performance in 2012 reveals a signi cant improvement over 2011 in each segment selected for analysis. Brewing and household and personal care (HPC) reported a further drop in C2C, while the food and beverage (FB) segment returned to a level of performance that beat its previous record of 2010.
These WC results were achieved in the context of the highly challenging, uncertain and complex consumer products environment, which EY has named “the brand new order.”¹ In particular, 2012 saw continued subdued demand in most developed countries (weighted down by the effects on consumer con dence of the sovereign debt crisis in the Eurozone and the uncertainty surrounding the US scal outlook), softening growth in rapid-growth markets toward the end of the year, and persistent volatility in commodity prices and exchange rates.
During the past decade, the CP industry has managed to achieve a substantial reduction in its level of C2C — and, according to our analysis, it has delivered this improvement without materially compromising on or trading off against costs. However, a close review also reveals major differences in the degree and speed with which different companies in each segment were able to deliver these increased ef ciencies.
Today, WC performance continues to vary widely between companies in their CP segments. While these performance gaps may be partly due to variations in business models, they also point to fundamental differences in the degree of management focus on cash and in the effectiveness of WC management processes. Overall, our research ndings suggest that the leading 21 CP companies have still up to US$34 billion tied up unnecessarily in WC. This gure is equivalent to 5% of these businesses’combined sales.
Those companies seeking further WC gains will need to embrace more substantial changes in the way they address a broad range of new operational and market issues. They should consider working more collaboratively with key retailers; building greater responsiveness into systems and processes; achieving higher resilience in their supply chains; striking a careful balance between global and local sourcing; tailoring WC strategies to conditions in rapid-growth markets; making increasing use of nancing solutions; driving WC synergies to deliver higher value from acquisitions; and changing internal behaviors.
ContentsExecutive summary 2
Improvement in WC performance in 2012 3
Acceleration in the pace of reduction in C2C since 2002 5
Case studies 11
Opportunities going forward 12
Adapting WC strategies to the brand new order 12
How EY can help 14
Methodology 14
Glossary 14
Contacts 15
¹ Disrupt or be disrupted
Cash on the table: working capital management in the consumer products industry, 2013 3
Improvement in WC performance in 2012
A review of the CP industry’s WC performance in 2012 reveals a signi cant improvement over 2011 in each segment selected for analysis. Brewing and HPC reported a further drop in C2C, while the FB segment returned to a level of performance that beat its previous record of 2010.
These variations in reported WC performance may be due to a number of factors, each with varying impacts on different CP segments and companies:
A challenging environment, but growth in CP markets remained positiveCP markets continued to grow in value in 2012, driven by higher volumes in rapid-growth markets and price increases in developed countries. Global consolidation was signi cant, particularly in brewing. The world’s second-largest FB company, Kraft Foods,
Table 1. Change in WC metrics across the CP industry, 2011–12
Note: DSO (days sales outstanding), DIO (days inventory outstanding), DPO (days payable outstanding) and C2C (cash-to-cash), with metrics calculated on a sales-weighted basis
Chart 1. Change in C2C per company, 2011–12 (in days)
Brewing FB HPC
2012 Change 12/11 2012 Change 12/11 2012 Change 12/11
DSO 31.6 0% 37.7 0% 33.7 -2% (down 0.5 day)
DIO 25.1 1% (up 0.2 day) 30.7 -4% (down 1.1 day) 32.5 -6% (down 1.9 day)
DPO 58.2 3% (up 1.9 day) 32.6 3% (up 1.1 day) 41.3 -1% (down 0.2 day)
C2C -1.5 down 1.6 day 35.7 -5% (down 2.1 days) 24.9 -8% (down 2.2 days)
also chose to spin off some of its activities to create a low-growth, high-yield and cost-focused regional company (Kraft Foods) and a faster-growing international business (Mondelez International). Compared with 2011, the sales of our sample of CP companies grew by 9% in 2012 (consisting of 10% for brewing and FB and 8% for HPC). As a result, there was a further increase in the absolute levels of WC, but at an overall rate much lower than that sales for each segment.
Persistent volatility in commodity and exchange ratesChanges in commodity prices and exchange rates also played a role in driving reported WC performance in 2012. Commodity prices remained highly volatile throughout 2012, adding signi cant stresses to WC management and supply chains in particular. Compared with 2011, food prices in 2012 were lower on average (down 4%) but higher at year-end (up 8%). It is also worth noting that within the food price group, there have been wide price variations between categories during the year relative to 2011. The lag effect of changing commodity prices (smoothed by the use of hedging policies) means that the reported inventory performance generally improves in the short term when prices fall and deteriorates when prices rise. However, these trends are partly mitigated by changes in payables performance.
Source: EY analysis, based on publicly available annual nancial statements
Chart 2. Change in global food price index, 2010–12
Source: IMF Food and Beverage Index, Jan. 2010 = 100
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Cash on the table: working capital management in the consumer products industry, 2013 4
For companies reporting in US dollars, the relative weakness of the US dollar against the euro at the end of 2012 compared with its average during the year was a negative contributory factor to WC performance. In contrast, for those reporting in euros, the strength of this currency bene ted WC performance.
Continued attention to WC management
Many CP companies reported ongoing initiatives in WC management, especially with regard to billing and cash collection, spend consolidation, global sourcing, extension of payment terms and supply chain ef ciency. For a large FB company, WC optimization was mentioned as having been one of the greatest management achievements in 2012. Overall, a higher proportion of companies than in 2011 (13 out of 21) reported an improvement in WC performance in 2012.
Moderate change in receivables performance
Brewing and FB reported a marginal deterioration in receivables performance, while HPC showed a slight improvement. Twelve CP companies reported a stronger performance. One of the primary causes of the variations in DSO arose from changing payment practices with retailers. Compared with 2011, an analysis of the payables performance of the 14 largest retailers (by sales) in the US and Europe shows a much larger drop of 4% in DPO (based on cost of sales) than in the previous year (when it was 2%). This was entirely due to the impact of European retailers that experienced a further fall of 6% in DPO, exacerbated by the regulatory decision to cap payments terms in France and Spain. However, some CP companies also chose to trade off WC improvements against sales growth or margin expansion while extending credit to some customers affected by dif cult trading conditions and tightening nancial covenants. Another consistently in uential factor was
obviously the continuing change in the geographical sales mix toward new regions and countries and the resulting effect on average payment terms. In contrast, US retailers’ DPO again remained almost unchanged.
Stronger inventory and payables performance overall
During the year, CP companies achieved further progress in driving greater ef ciency in manufacturing, supply chain and procurement operations. These efforts included applying lean manufacturing and Six Sigma practices across supply chains, leveraging procurement and reducing complexity by simplifying
the supply base and cutting the number of stock-keeping units (SKUs). However, in some cases, progress was hampered by the decision to build up inventory to grow sales and improve service levels. A majority of CP companies (13) reported an improvement in inventory performance in 2012, in contrast with the year before, when commodity cost in ation had a negative impact. For payables, 13 companies also managed to boost performance, with further progress driven by extension of payment terms and supply chain ef ciency.
More speci cally, there were wide variations in the degree of change in C2C among CP segments.
Strong showing for brewing
In a year of moderate change in input costs and further increases in excise duties in a number of countries, brewing reported another solid improvement in WC performance in 2012. C2C was 1.6 day lower on a year-over-year basis. Progress came entirely from higher DPO, while both DSO and DIO increased marginally. Consolidation continued apace, providing the industry with further opportunities to drive greater ef ciency in operations. Three brewers out of four registered better WC performance.
Rebounding performance for FB
FB saw a signi cant improvement in WC performance in 2012, more than regaining the ground lost in the previous year. C2C was down 5% after being up 4% the year before. This overall performance was driven by an increase in DPO (up 3%) combined with a fall in DIO (down 4%). DSO remained almost unchanged. However, only four out of nine FB companies reported improved WC results in 2012 compared with 2011, with one in particular having a disproportionate impact on the overall segment performance (reversing the counterperformance it suffered in the previous year).
Improved results for HPC
There was a further improvement in WC performance for HPC in 2012, with C2C down 8% from its levels of 2011. Each HPC company reported improved WC results. Progress was driven by a fall in both DIO and DSO (down 6% and 2%, respectively), with each company except one contributing to it. By contrast, payables performance deteriorated (DPO down 1%) with three companies in particular scoring poorly.
Cash on the table: working capital management in the consumer products industry, 2013 5
Acceleration in the pace of reduction in C2C since 2002
The ndings for 2012 show that during the past decade, each CP segment has made signi cant progress in reducing C2C levels, with the pace accelerating in the past ve years.
Table 2. Change in WC metrics across the industry, 2002–12
C2C
Change 12/07 Change 07/02 Change 12/02
Brewing down 30 days -27% (down 11 days) down 41 days
F&B -12% (down 5 days) -6% (down 3 days) -18% (down 8 days)
HPC -41% (down 17 days) 6% (up 2 days) -37% (down 15 days)
Chart 3. Change in C2C per company, 2002–12 (in days)
Source: EY analysis, based on publicly available annual nancial statements
BrewingBrewing reported the biggest improvement in WC performance among the three CP segments, with a drop in C2C of 41 days since 2002. Three out of four brewers reported lower C2C, thanks to a much stronger focus on cash and WC management driven by the need to grow returns and repair balance sheets stretched by aggressive acquisition strategies.
This rapid progress has been driven by a much improved payables and receivables performance (DPO up 90% and DSO down 31%), resulting in a DSO/DPO differential that fell from a positive15 days in 2002 to a negative 27 days in 2012. A negative gure means that brewers are able to collect from customers much faster than they pay their suppliers. In contrast, DIO was slightly higher over the period (up 2%).
Overall payables performance bene ted from increased centralization and globalization of procurement, as well as from further extension of payment terms.
Industry consolidation played a signi cant part in boosting WC progress in recent years. Scale provided brewers with the opportunity to achieve signi cant cash and cost savings by leveraging relationships with customers and suppliers and increasing supply chain ef ciencies.
Another signi cant factor that has in uenced WC performance since 2002 has been the doubling of sales from emerging countries. These are now close to half of the total. While emerging markets are typically seen as a potential drain on WC, the brewers have been able to grow investment in these markets, while also improving WC performance.
However, despite the efforts that have already been made, current WC performance continues to vary widely across the brewing industry. One of the brewers in particular exhibits a negative C2C of as much as 34 days, with most countries where the company is selling in negative territory. This great disparity of performance in the brewing segment can be partly explained by variations in the way brewers manage their production and distribution models. For example, some are bound by a three-tier distribution system, while others may operate with or without in-house bottling operations.
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Cash on the table: working capital management in the consumer products industry, 2013 6
Chart 4. C2C (based on sales)1 per brewing company, 2012 Chart 5. DSO (based on sales)1 per brewing company, 2012
Chart 7. DPO (based on sales)1 per brewing company, 2012
Source: EY analysis, based on publicly available annual nancial statements1. Average is sales-weighted
Food and beverageThe FB segment has managed to reduce its C2C levels by 18% since 2002, with progress gathering pace in the last ve years. Six out of 10 FB companies reported lower C2C. However, a more detailed analysis shows that the segment’s WC performance has been more erratic since the global downturn of 2008, affected by increased volatility in trading conditions and commodity prices.
The overall WC improvement was primarily driven by a dramatic increase in DPO (up 22%), due to a much stronger focus on procurement and payables, notably via extended payment terms.
Both inventory and receivables performance also improved, but to a limited degree (DIO and DSO were down 3% and 2%, respectively). By improving billing and cash collection and driving greater ef ciency in supply chain operations, companies in this
segment appear to have been relatively successful in mitigating the effects of input cost in ation and continued pressure from retailers for higher discounts together with enhanced payments terms and service.
However, it is worth noting that FB continues to exhibit a positive DSO/DPO differential of ve days, in contrast with the negative gures reported by both brewing and HPC. This may suggest
that the potential for improving both receivables and payables performance remains signi cant for most companies within that segment (see “Opportunities going forward,” page 12).
For the FB segment, the change in the geographic sales mix has also been signi cant, with the proportion of sales coming from emerging markets almost doubling to nearly 40% of total sales since 2002.
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Cash on the table: working capital management in the consumer products industry, 2013 7
Chart 8. C2C (based on sales)1 per food and beverage company, 2012
Chart 11. DPO (based on sales)1 per food and beverage company, 2012
Source: EY analysis, based on publicly available annual nancial statements1, Average is sales-weighted
While signi cant progress has been achieved, current WC performance continues to vary widely among FB companies. However, the spread of WC metrics is lower than for brewers if we exclude one outlier that exhibits a C2C of just one day (and which boasts best-in-class performance in both payables and inventory).
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Chart 9. DSO (based on sales)1 per food and beverage company, 2012
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Cash on the table: working capital management in the consumer products industry, 2013 8
Household and personal careHPC has reported a strong WC showing since 2002 (with C2C dropping by 37%), with the gains achieved in the past ve years easily offsetting the deterioration seen in the rst ve years, when C2C increased by 6%. Five HPC companies out of seven reported an improvement in WC performance.
As with brewing and FB, progress has come primarily from payables, with DPO up 42% (equivalent to a gain of 12 days). This upward trend is unlikely to slow down in the near future, as one of the world’s largest HPC companies recently started to negotiate with suppliers to extend payment terms to up to 75 days from the current average of 45 days, while planning to offer supply chain nancing through banks to help them mitigate part of this impact.
HPC’s receivables performance has also improved since 2002, with DSO down 6%. In contrast, progress in inventory has been
Chart 14. DIO (based on sales)1 per household and personal care company, 2012
Chart 12. C2C (based on sales)1 per household and personal care company, 2012
Chart 15. DPO (based on sales)1 per household and personal care company, 2012
Source: EY analysis, based on publicly available annual nancial statements1. Average is sales-weighted
limited, with DIO showing a decrease of just 2%. Some HPC companies have pursued a deliberate policy of trading off WC improvements against sales growth by building up inventory to support capacity expansions and sourcing changes, while also improving service levels.
For the HPC segment, the proportion of sales from emerging markets has risen from 31% of total sales in 2002 to over 40% in 2012.
As with other CP segments, current WC performance continues to vary widely among HPC companies. One of these companies in particular exhibits a C2C of just one day, boasting best-in-class performance in receivables together with a top quartile performance in payables, while highlighting the potential for further improvement in inventory.
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Chart 13. DSO (based on sales)1 per household and personal care company, 2012
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Cash on the table: working capital management in the consumer products industry, 2013 9
The most signi cant initiatives behind the overall WC improvementVariations in WC levels over the past decade have been in uenced by a number of factors — some of them con icting — that have been reshaping the CP industry. These factors include:
• Ongoing pressure from retailers on discounts, terms andservice levels
• Customer trade-downs to cheaper lines and private label products
• Rise of new distribution channels
• Accelerating shift of demand to rapid-growth markets
• Consolidation of suppliers, manufacturers and buyers
• Volatility in commodity prices and exchange rates
Amid these changes, CP companies have made signi cant strides in increasing WC ef ciency, albeit with large differences in the degree and speed with which each one of them was able to deliver these ef ciencies. The most signi cant of these initiatives include:
• Optimization of global manufacturing footprint and increased adoption of lean principles
• Recon guration of supply chains by deploying different strategies and solutions for different products or countries
• Consolidation of spend, intensi cation of global procurement and standardization of processes
• Improvements in billing and cash collections
• Better monitoring of the rebates, discounts and other sales incentives
• More effective management of payment terms for customers and suppliers, including renegotiation of terms
• Improved coordination between sales, manufacturing, procurement and supply chain processes
• Increased collaboration with retailers to increase demand visibility
• Monitoring of the nancial viability of key suppliers
• Adoption of common technologies up and down the value chain to enable sharing of real-time and accurate supply and demand information
Easing pressure on payment terms from retailers, but with wide variations by regionAn analysis of the payables performance of the largest retailers (by sales) in the US and Europe shows a signi cant drop in DPO overall since 2007 (down 9%), suggesting that retailers may have chosen to pay early or negotiate shorter terms. This reduction in DPO entirely canceled out the increase seen in the previous ve years, meaning that the retail industry’s DPO has remained almost unchanged in the past 10 years.
However, a detailed analysis reveals a more varied payables picture among regions and individual retailers.
The UK retailers have reported the biggest increase in DPO(up 9%) since 2002, but from a much lower base than in Continental Europe. However, this upward trend — which is consistent with a reported shift in policy by some of them to stretch terms with their main suppliers — has come to a halt in recent years.
US retailers have also boosted their DPO (up 4%) over the same period, but with poor results in recent years wiping out half of the gains registered in the rst four years.
In contrast with their peers in other countries, retailers in Continental Europe have seen a sharp fall in DPO (-5%) since 2002, with the decrease since 2007 more than offsetting the increase seen previously. Retailers there were especially hit hard by the regulatory decision to cap payment terms in a number of markets, such as France and Spain. However, DPO levels remained substantially higher than in other regions.
The chart on the next page shows both retailers’ DPO and FB’s and HPC’s DSO peaking in 2007. For FB, much of the rebound in DSO seen in 2009 was due to sales bouncing back sharply in the nal quarter of the year. Brewing has not been featured in the chart, as its customer base is more dispersed, ranging from wholesalers and distributers to smaller retailers and licensed premises. Yet its DSO has been falling since 2002, with the pace of reduction also accelerating from 2007.
• Implementation of more robust risk management policies
• Tracking and monitoring of WC metrics and linking compensation to these metrics
Total costs to deliver under controlDuring the past decade, the CP companies covered in our survey not only reported a signi cant reduction in C2C, but also kept their total costs to deliver under control despite the effects of input cost in ation and increasingly onerous commercial demands from retailers. In other words, CP companies appear to have managed to squeeze cash out of WC without compromising on or trading off against costs.
However, it is also important to note that our analysis is based on a selection of large branded CP companies. By their nature, they are likely to be in a stronger position than others in the same industry to resist pressure from retailers and leverage scale, while also having major brands that are more dif cult and costly to replace.
Total costs to deliver relates to the costs associated with manufacturing and delivering a product to a customer. It generally includes both cost of sales (COS) and cost to serve.
COS refers to the direct costs attributable to the production of the goods or supply of services. It accounts for around half of sales for FB and HPC and 40% for brewing. Our analysis shows that the COS-to-sales ratio for CP segments has remained almost stable over the past decade (slightly up for FB and HPC and down for brewing, with the latter ratio probably affected by the impact of industry consolidation). This stability suggests that most companies in our survey have been successful in mitigating or absorbing all or most of the input cost in ation by taking pricing actions and costs out and by accelerating the pace of products innovation.
In contrast with COS, cost to serve is more dif cult to de ne and measure. It represents the cost implications of the various trade terms and agreements in place and the cost of meeting these obligations with the customer. Cost to serve is composed of costs
10 Cash on the table: working capital management in the consumer products industry, 2013
Table 3. DPO retailers versus DSO FB and HPC industry, 2002–12
Source: EY analysis, based on publicly available annual nancial statements
associated with order processing, order quantities and frequency, storage and handling, inventory nancing and transport. Even if many elements cannot be easily assessed from an external perspective, our analysis and experience across the industry indicates that for the CP companies covered in our survey, cost to serve accounts for between 10% and 15% of sales, with a wide range among segments resulting from differences in business models and corporate strategies. Our analysis shows that logistics and distribution costs (or SG&A by default), which make up a signi cant proportion of cost to serve, have risen slightly faster than sales over the past decade. In contrast, DIO has remained almost unchanged for the CP industry as a whole over the same period, while it has dropped by 8% for the largest retailers in the US and Europe.
These cost-to-serve patterns mean that the CP industry appears to have been able to offset most of the cost impact of increased demands from retailers for higher service levels (via more frequent deliveries, cross-decking, continuous replenishment or vendor-managed inventory programs) by driving greater ef ciencies in supply chain and procurement operations and improving collaboration with retailers, while leveraging cost structures through consolidation.
Table 4. COS-to-sales ratio across the CP industry, 2002–12
Table 5. DIO CP industry vs. DIO retailers, 2002–12
Source: EY analysis, based on publicly available annual nancial statements
Brewing FB HPC CP
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Cash on the table: working capital management in the consumer products industry, 2013 11
Case studiesA global FB company had pursued a number of initiatives to improve receivables management during the past few years but felt that performance could still be further improved. An EY project team was engaged to review the existing processes and design an action plan to implement leading practices in this area. The planned steps included setting up a collection and dispute management process; designing a receivables management organizational structure that clearly de nes roles and responsibilities; introducing reports and metrics to monitor and assess progress; and putting in place the right incentives to motivate and change internal behaviors.For another large CP company,EY designed and implemented a program to improve the management of payables processes whilst signi cantly reducing the number of suppliers. This program involved segmenting the supplier base according to payment terms, trigger and frequency; renegotiating and harmonizing payment practices for each segment; eradicating the root causes of invoice processing delays; and rationalizing the supplier base after assessing bene ts and risks.
Cash on the table: working capital management in the consumer products industry, 2013 11
Cash on the table: working capital management in the consumer products industry, 2013 12
Adapting WC strategies to the brand new order
The CP industry has made signi cant strides in improving its WC performance in the last decade. But as the pace and scale of industry change continue to escalate, companies seeking to achieve further gains will need to adapt their WC strategies to a broad range of new operational and market issues. These will involve working more collaboratively with key retailers; building greater responsiveness into systems and processes; achieving higher resilience in their supply chains; striking a careful balance between global and local sourcing; tailoring WC strategies to conditions in rapid-growth markets; making increasing use of nancing solutions; driving WC synergies to deliver higher value
from acquisitions; and changing internal behaviors.
• Working more collaboratively with key retailersAchieving true collaboration between manufacturers and retailers would represent a further major step forward in streamlining supply chains and improving service levels. Collaboration also creates an environment for developing innovative supply chain solutions to meet customer demands (for example, in response to the rise of digital shopping), grow markets and increase market share. However, establishing this kind of relationship can be dif cult. For many companies in the sector, the greatest barriers to collaboration remain issues such as poor data quality, non-standardized infrastructures and lack of trust. To address some of these challenges, companies must start by adapting their own operations and potentially changing their corporate culture, and then decide on the speci c type of collaboration they want to pursue with each partner. Partnerships must also be allowed to grow and evolve over time to align the partners’ infrastructures more effectively and build trust by sharing information on demand.
• Building greater responsiveness into systems and processes One of the biggest challenges facing CP companies today is the need to respond more quickly and effectively to demand changes in a business environment that is becoming far more complex to navigate. These trends have resulted in most supply chains being recon gured to make them leaner and more agile, but their complexity has also made them harder to manage. This is why it is imperative that organizations become more responsive. To this end, they need to work more closely with suppliers. They also need to combine lean and agile manufacturing and supply chains solutions, utilizing postponement wherever possible, as well as implementing better integration and coordination between sales, manufacturing, procurement and supply chain processes.
Opportunities going forward
The wide variations that our research reveals in WC performance between different companies in each CP segment point to signi cant potential for improvement — up to US$34 billion of cash for the top 21 US and European CP companies.
Part of the performance gap between companies in each CP segment may be due to differences in country and customer sales mix, manufacturing and supply chain infrastructure, the degree of vertical integration and the nature of supply contracts. Yet all these factors are not enough on their own to explain the size of the gap, suggesting that there are fundamental differences between companies within each segment in the degree of management focus on cash and process ef ciency.
Our high-level benchmarking analysis suggests that the leading 21 CP companies have between US$19b and US$34b of cash unnecessarily tied up in WC processes, equivalent to between 3% and 5% of sales. Note that the upper range of cash opportunity identi ed in 2012 is lower than a year before, when it was6% of sales.
We have calculated this gap by comparing the WC performance of each company with that of the average (low estimate) and the upper quartile (high estimate) of its segment. Even at the top end of each range, our experience across many projects, industries and geographies shows that a dedicated focus on WC management can often realize results at or above this level.
Table 6. WC cash opportunity per segment, 2012
*WC scope = sum of trade receivables, inventories and accounts payable
Source: EY analysis, based on publicly available annual nancial statements
Cash opportunityValue (US$b) % WC scope* % sales
Average Upper quartile
Average Upper quartile
Average Upper quartile
Brewing 3 5 10% 18% 3% 6%FB 10 17 8% 17% 2% 5%HPC 6 12 11% 18% 3% 5%Total 19 34 10% 17% 3% 5%
13Cash on the table: working capital management in the consumer products industry, 2013
• Achieving higher resilience in supply chainsSupply chains have become more vulnerable to business disruptions as a result of lean practices and reduced supply base. To manage and mitigate these risks, it is important for CP companies to embed higher resilience into their supply chains while taking into account the potential ef ciency cost associated with it. To achieve this, a number of actions are necessary. These include re-engineering parts of supply chains, with processes in place to help ensure alternative sourcing and provide additional capacity and inventory at critical points of the organization; building agility by enhancing the visibility of products across the network and reducing lead times; developing more collaborative supply chain relationships; and creating a risk management culture in the organization.
• Striking a careful balance between global and local sourcing Combining global and local sourcing has become more and more important to CP companies as they increase their geographical footprints and seek to optimize their purchasing costs. Yet this move has also introduced an array of additional risks and challenges, including greater complexity in logistics, potentially longer and more variable lead times, excess safety stocks, and the loss of visibility and control over the manufacturing and delivery processes. To be effective, global and local sourcing requires dedicated structures with clearly de ned roles and responsibilities, trusted providers with contracts that are carefully con gured and managed with improved communication and planning, and the preparation of adequate contingency plans.
• Tailoring WC strategies to conditions in rapid-growth marketsEnsuring continuing and pro table growth in emerging markets is one of the most pressing WC challenges for the CP industry. As each new market has its own characteristics and dynamics, no single WC approach is likely to t all of them. Successful WC strategies will be those that are tailored to each market, with speci c, measurable and balanced goals around cash, cost, quality, delivery and risk. Strategies should also be reviewed regularly to ensure they continue to re ect evolving local market conditions. A large CP company has recently announced a revamping of its supply and procurement operations in its key rapid-growth markets, with responsibility for local operations transferred to local markets, while the global supply organization continues to ensure that best practices are embedded inall operations.
• Making increasing use of nancing solutionsCP companies have been making increasing use of nancing solutions as a way to provide attractive and exible alternatives to their customers and suppliers. The nancing solutions used vary widely, ranging from consigned inventory, extended payment terms and supply chain nancing (notably to help smooth the impact of lengthening payment terms) to more strategic approaches, such as true inventory nancing and sales support. To be ef cient, these solutions need to be accompanied by enhanced information and collaborative processes. They also must be phased in gradually to mitigate risks and ensure full buy-in by the various participants in the extended enterprise. While this trend clearly brings intrinsic risks, it illustrates the trade-offs sometimes required with various WC strategies.
• Driving WC synergies to deliver higher value from acquisitionsCP companies have continued to pursue acquisitions to strengthen their competitive positions, expand their customer base and leverage buying power. A successful transaction depends in part on the ability of the acquiring company to realize within a targeted time frame the expected synergies, growth opportunities, cost savings and improved processes from integrating the two businesses. Our experience suggests that WC is often overlooked by management during the pre- and post-transaction process. A transaction can also be a catalyst for more widely sharing internal WC leading practices across the extended organization.
• Changing internal behaviorsTo realize all these opportunities in WC, an organization must not only implement leading practices in this key area, but must also change its internal behaviors. This requires people, process and technology to work more closely together. It also compels organizations to set adequate targets for improvements in sales, cost and cash; accurately assess the progress being made at both a corporate and unit level; and align the compensation of different groups (with multiple and sometimes con icting interests) to the relevant performance measures.
Cash on the table: working capital management in the consumer products industry, 2013 14
MethodologyThis report is based on a review of the WC performance of 21 of the largest branded consumer products (CP) companies (by sales) headquartered in the US and Europe and operating in the segments of brewing, food and beverage (FB), and household and personal care (HPC).
The segments have been selected on the basis of common features and business issues, such as fast-moving products, prominent brands, global reach and scale. A further common feature is that each of these companies has sales in excess of US$8 billion. While all our ndings are based on publicly available data, the performance of individual companies isnot disclosed.
The companies in the sample for this analysis include:
Brewing: Carlsberg, Heineken, AB InBev and SABMiller.
Food and beverage: Campbell, Coca-Cola, Danone, General Mills, Heinz, Kellogg’s, Kraft Foods, Mondelez International, Nestlé and PepsiCo.
Household and personal care: Beiersdorf, Colgate,Kimberly-Clark, L’Oréal, Procter & Gamble, Reckitt Benckiser and Unilever.
Glossary• DSO (days sales outstanding): year-end trade receivables
net of provisions, including VAT and adding back securitized and factored receivables, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)
• DIO (days inventory outstanding): year-end inventories net of provisions, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)
• DPO (days payable outstanding): year-end trade payables, including VAT and adding back trade-accrued expenses, divided by full-year pro forma sales and multiplied by 365 (expressed as a number of days of sales, unless stated otherwise)
• C2C (cash-to-cash): equals DSO, plus DIO, minus DPO (expressed as a number of days of sales, unless stated otherwise)
• Pro forma sales: reported sales net of VAT and adjusted for acquisitions and disposals when this information is available
• COS: cost of sales (including depreciation and amortization)
How EY can helpEY’s global network of professionals helps clients to identify, evaluate and prioritize realizable improvements to liberate cash from WC through sustainable changes to policy, process, metrics and procedure adherence.
We can assist organizations in their transition to a cash-focused culture and help implement the relevant metrics. We can also identify areas for improvement in cash ow forecasting practices and then assist in implementing processes to improve forecasting and frameworks to sustain those improvements.
Companies that undertake WC improvement initiatives often realize a high return on investment. In addition to increased levels of cash, signi cant cost bene ts may also arise from process optimization, through reduced transactional and operational costs, and from lower levels of bad and doubtful debts and inventory obsolescence. Our WC professionals are there to help wherever you do business. It is how EY makes a difference.
Cash on the table: working capital management in the consumer products industry, 2013 15
Contacts
Country Local contact Telephone/emailUK&I Jon Morris +44 20 7951 9869
Matthew Evans +44 20 7951 7704
Paul New +44 20 7951 0502
Marc Loneux +44 20 7951 3784
US Steve Payne +1 212 773 0562
Peter Kingma +1 312 879 4305
Edward Richards +1 212 773 6688
Mark Tennant +1 212 773 3426
Eric Wright +1 408 947 5475
Australia Wayne Boulton +61 3 9288 8016
Benelux Danny Siemes +31 88 407 8834
Canada Simon Rockcliffe +1 416 943 3958
Chris Stepanuik +1 416 943 2752
Far East Mike Gildea +65 6309 8809
France Benjamin Madjar +33 1 55 61 00 67
Germany Dirk Braun +49 6196 996 27586
[email protected] Wenders +49 211 9352 13851
[email protected] Ankur Bhandari +91 22 6192 0590
Italy Stefano Focaccia +39 0280669423
Latin America Matias De San Pablo +5411 4318 1542
Nordics Johan Nordström +46 8 5205 9324
Peter Stenbrink +46 8 5205 [email protected]
Switzerland Thomas Pallgen +41 58 286 40 08
Local contact Telephone/emailGlobal
Global Consumer Products Leader
Mark Beischel +1 513 612 [email protected]
Global Consumer Products Leader — TAS
David Murray +44 158 264 [email protected]
Global Consumer Products Markets Leader
Emmanuelle Roman
+44 20 7951 [email protected]
Regional
Americas Patricia Novosel +1 312 879 [email protected]
Asia-Paci c Anthony Lucas +65 6309 [email protected]
EMEIA Mike Sills +41 58 286 55 [email protected]
Global Consumer Products Center contactsWorking Capital Services contacts
15Cash on the table: working capital management in the consumer products industry, 2013
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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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