Published: November 01, 2012
Royal Unibrew built up its impressive brand portfolio and geographic coverage through a series of acquisitions during the 1990s and 2000s. This resulted in significant debt levels, so treasury’s primary focus was on debt management. More recently, however, cash management has become a higher priority, and there has been a considerable focus on optimising working capital. In this article, Allan Kristoffersen, Group Treasurer, Royal Unibrew, outlines some of his priorities over the past few years, and how he has taken part in fostering a culture in which every individual is focused on constant improvement and refinement of the company’s cash, treasury and working capital management.
When I first joined Royal Unibrew, an important priority was to review our cash management processes, and the elements of the financial supply chain that contribute to our working capital requirements. This is inevitably a major undertaking, not least because many of the business functions involved are not directly controlled by treasury. In this we have been greatly assisted by our partner bank, SEB, which we appointed as one of two cash management banks soon after I joined the company. One immediate benefit of appointing SEB was the ability to leverage the bank’s Corporate Financial Value Chain™ approach, which assisted us in analysing our financial activities and business processes systematically, and identifying areas in which we could add the greatest value.
We started by reviewing our cash management structures, as this is the area in which treasury typically has the greatest autonomy. This included enhancing our cash concentration and improving access to cash across the group, with the extra benefit of reducing our counterparty exposure. Once this had been completed, we turned to bank integration, in which we received excellent support from SEB, with significant expertise, experience and a strong approach to teamwork. This resulted in more streamlined and automated processes, such as payments and collections, with standardised file formats and richer information flows between SEB’s systems and our internal systems. We broke down the project into different payment types (both in and outflows). This approach minimised our own and our customers’ operational risk, and enabled key resources such as IT to be used more efficiently. Having achieved migration, the same set-up could then be rolled out to other group entities.
The success of the project required SEB and Royal Unibrew to establish a detailed knowledge of each other’s business, including systems, processes and organisational constraints. By engaging in an open dialogue, we were able both to plan our activities in detail, and manage unexpected events which inevitably occur during complex integration projects, assisted significantly by the flexibility and support offered by SEB. There are considerable technical as well as business implications of an integration and automation project. We are fortunate in that our IT personnel are very responsive and task-oriented, but it is always essential to work through each process several times to ensure that people with different backgrounds and skill sets have a common understanding of what is to be achieved.[[[PAGE]]]
Automating our payments and collections flows, and enhancing integration, has freed up resources that can be re-allocated to high-value tasks. For example, by automating collections reconciliation and account posting, we could direct more resources into managing overdue collections, therefore reducing our DSO (days’ sales outstanding). We have also been proactive in reviewing each business function that contributes to the working capital cycle, including accounts payable, inventory and accounts receivable, both individually and in combination.
We are proud of the fact that we are able to operate with negative working capital. One initiative has been in inventory management. We have reviewed and revised our distribution set-up, established central warehousing facilities and reduced changeover time in between brews in order to reduce batch sizes without slowing down production. This has enabled us not only to reduce our distribution costs and increase efficiency, but also facilitated more ‘just-in-time’ production and distribution, thus driving down inventories. To do this, we continue to work closely with strategic suppliers to ensure that they are also capable of delivering ‘just-in-time’ to avoid having more raw and packaging material on hand. This is very important to Royal Unibrew, not only from a working capital perspective, as cans and glass bottles take up a great deal of space!
From an accounts payable and receivable standpoint, we focused on achieving more favourable payment terms with suppliers and customers. This required a combination of initiatives:
Firstly, management support is essential in order to direct the culture of the organisation;
Secondly, education is key, not only amongst finance managers, but across the wider sales and procurement teams, so that everyone understands their role in optimising working capital. We had already implemented a cash flow forecasting discipline, which was important when debt management was a priority, but continues to have considerable value in our working capital efforts. SEB’s WebForecast is pivotal to liquidity forecasting at Royal Unibrew, enabling us to construct a complete group-wide liquidity position, and monitor changes to forecasts over time. This allows us to engage constructively with our subsidiaries on working capital management and improve the accuracy of forecasting;
Thirdly, we have changed our incentives model so that the sales teams are not only rewarded on their sales achievement, but also on their contribution to working capital.
Finally, putting in place new processes helped to change the behaviour of the organisation. For example, we have stipulated that there can be no deviation from standard supplier and customer payment terms without approval.
The results of our efforts in cash and working capital management have been considerable. Over the past few years, we have freed up several hundred million DKK, by establishing a group-wide culture of constant refinement and improvement, so that we are continually evolving our practices and procedures. We rely on our colleagues to challenge legacy processes and introduce practical improvements. We can now operate routinely with negative working capital, which frees up capital for investment, debt reduction and shareholder return. SEB continues to be a valuable partner by delivering solutions tailored to our needs, sharing their expertise and experience gained from working with other companies, and devising a structured approach to identifying working capital improvements.
Looking ahead, we will continue to refine and revise the way in which we operate to maximise our efficiency and use of resources. For example, SEPA migration will be a very important initiative. We have a business operation in Italy, where migrating from the local RID and RIBA to SEPA Credit Transfers will reduce the cost of collections and reduce our collection period by several days. As yet, not all banks in Italy are ready for SEPA migration, but both SEB and Royal Unibrew are prepared to make the transition. Once again, we will migrate one payment type at a time, to build up expertise and test the infrastructure before full adoption of SEPA instruments. We also have significant activities in Germany based on Lastschrift, which will become less expensive and more standardised.
Securing and enhancing relationships with key strategic suppliers is essential to the resilience of our physical and financial supply chains. We are therefore considering financial initiatives that will enable us to further improve our working capital performance whilst ensuring that our suppliers have sufficient access to capital, such as supply chain financing.
We believe that Royal Unibrew can do even better in the future. Our culture encourages everyone to strive to do things a little better each day. Our appetite for excellence is endless, and we have the organisation and culture to support it.[[[PAGE]]]
During 2012, consumer products vendors have been seeking growth opportunities in what have been very challenging market conditions. With the economic crisis continuing to impact consumer spending across Europe, and some high profile insolvencies, this year has continued to present very unstable trading conditions for the sector, with similar prospects for the year ahead.
The major retailers have continued to look to stimulate customer spending in both essential (basic grocery) and the more discretionary product categories – constantly striving to find new ways of tempting us into their stores and delivering better value for money.
As the online retailers drive down end-user price tags and at the same time manage to minimise their tax bills (by channelling sales through non-domicile trading vehicles), their bricks-and-mortar cousins struggle to remain competitive. This in turn puts additional pressure on the consumer goods vendors to lower their prices, extend payment terms and keep to rigorous service level targets. They also have to offer attractive retrospective rebates and enter into joint venture arrangements with the retailers to support new store openings and product merchandising programmes. All in all, the major retailers can exercise their market muscle to reduce their suppliers’ own margins and put additional strain on their working capital. Failure to comply can lead to a retailer stopping some or all orders for a period of time (so- called ‘cliffing’) just to bring them back into line.
PwC’s 2012 European working capital benchmarking study indicated that overall performance levels have stayed relatively consistent over the last three years. The sector median for working capital as a percentage of sales reduced slightly from 20.6% in 2009 to 19.8% in 2011 - while the 1st quartile increased 6.8% to 7.0%.
If the largest 300 consumer goods companies across Europe all achieved 1st quartile working capital performance, they would together generate over €50bn of additional cash flow.
Over the past few years PwC has worked with many consumer products companies and identified a number of recurring themes in relation to working capital:
NOTES
This document has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2012 PricewaterhouseCoopers LLP. All rights reserved. In this document, ‘PwC’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
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