Working capital management – How to be resilient in a volatile world
(October 2022)

The COVID-19 pandemic and the recent political and economic climate within the global Automotive industry has put tremendous pressure on the working capital of organizations of all sizes. It has demonstrated the need to have a futuristic outlook towards effective working capital management and applying modern digital technologies such as Artificial Intelligence and Intelligent Automation to maximize the free cash flow for organizations.

Working Capital Strategy to Execution

Within Capgemini Invent’ Finance Transformation practice, we support clients’ end-to-end needs, from developing a data-driven working capital strategy and business case all the way to executing and delivering on the savings promised to the leadership. We approach working capital optimization initiatives with our holistic framework to assess the current maturity and use a value-based approach to plan initiatives across Inventory, Accounts Payable and Accounts Receivable to maximize free cash flow benefits while minimizing time to value.

Our recent study shows that the reduction of the cash conversion cycle is key to freeing up cash:

• A typical Global 2000 firm can improve cash flow by $100 million or more just by increasing days payable outstanding (DPO)
• A $10-billion company can generate more than $30–$40 million/year in bottom-line savings by reducing days sales outstanding (DSO)

Our Value based Working Capital Optimization Approach

We have developed a robust framework to deliver Value at speed for our clients during their working capital optimization journey. Modern digital technologies such as AI, Machine Learning, Analytics and Process Mining enable a fact based approach towards driving tangible benefits on the ground.

For example, In Procurement, Analytics on Spend and Terms information can help to dive deep into category and vendor terms and identify outliers for renegotiation. In Collections, With targeted analytics by category and customer, clear collection strategies can be put in place to reduce Days Sales Outstanding (DSO). Statistical analysis can also identify potential defaulters and significant factors leading to default. In Inventory, AI/ML based Demand Forecasting models and intelligently placed triggers can enable clients to plan the tightrope walk – in other words, minimizing inventory to avoid bloating working capital while having enough inventory to not lose revenue opportunity or reputation. The use of metrics such as Economic Order Quantity (EOQ), Reorder Quantity (ROQ) and Reorder Levels (ROL) help to determine the size and frequency of orders.

Working capital strategy definition cases

One example to illustrate how we can support in defining working capital strategies is from a manufacturing company in the machinery industry. The company lacked clear definitions for working capital dimensions and had not defined a governance model for managing working capital. By identifying and defining clear working capital dimensions and levers, setting a clear governance structure with defined responsibilities, setting clear one-off targets and integrating these into the business planning process, and improving reporting according to the different dimensions, the company was able to reduce working capital by €10 million. A second example is from an aviation company that successfully reduced working capital by 40% by performing a value stream mapping exercise for existing inventories and the relevant processes to identify and quantify the main levers to reduce inventory. We set a clear governance structure and defined responsibilities to manage and report on the identified working capital dimensions.

Working capital strategy execution cases

One example how Capgemini supports companies in strategy execution is from a manufacturing multinational that needed support in implementing changes to stock management. We implemented an AI/ML-based analytics model, re-engineered relevant processes and performed a location storage assessment to optimize the spare parts supply chain and implement improvements in stock management. Ultimately the project delivered €270 million working capital savings over a 12-month period. A second example is from a global beverage company that needed to release additional cash flow. By concentrating on its top late-paying customers and the root causes of these late payments, our analysis helped reduce DSO by 12 days and enhanced cash flow by €95 million. This also included the credit term normalization we carried out for 43 client end customers and reduced DSO by four days.

We’d be happy to meet with you and discuss how we can support you with working capital optimization initiatives.

Author

Rahul, Director – Finance Transformation at Capgemini Invent