Mattel – Making Working Capital Optimisation Kids’ Play

by Elizabeth ‘Liz’ Minick, Head of U.S. Corporate Sales, Global Transaction Services, Bank of America Merrill Lynch and Rodney Gardner, Global Head of Receivables, Bank of America Merrill Lynch

Mattel, founded in 1945, is the largest global designer, manufacturer and marketer of toys with an iconic brand portfolio that includes Barbie®, Hot Wheels®, Fisher Price® and American Girls®. Like many global companies, Mattel is always seeking opportunities to improve its working capital efficiency. Its most recent move to better align the days sales outstanding (DSO) and days payable outstanding (DPO) is a world-class initiative.

This initiative was spurred by Mattel’s geographic shift in sales to new and developing international markets, which resulted in the DSO/DPO gap widening. “We recognised that the first step towards global cash optimisation is for the company to have a clear cash flow forecasting process and understand the implications of every business decision on its cash flow,” explains Mandana Sadigh, Mattel’s SVP and Corporate Treasurer, who works closely with Bank of America Merrill Lynch for transaction banking in North America and Asia.

By reviewing sources and uses of cash market by market, it became clear to Mattel’s treasury team that there was a significant opportunity to improve its working capital efficiency without impacting the business operations. “Looking at it from a global perspective, it would be easy to assume that every market should behave the same, with the same liquidity needs and working capital challenges or opportunities. However, our cash flow optimisation goals are achievable if we have a complete view of both payments and collections on a market-by-market basis”, says Sadigh.

Helping suppliers through low-cost financing option - a pragmatic approach

During 2013, the company met with its Asia-based vendors, which account for a large share of Mattel’s annual payables. At the meeting, the company shared its decision to extend payment policy to all vendors effective 2014 after benchmarking its payment terms against other companies’ terms. “The decision to extend terms was based on similar initiatives followed by many other global consumer product companies and was necessary to reduce the gap between Mattel’s cash collection and payment terms,” says Sadigh. At the same time, Mattel worked with its Asia banks to provide a low-cost, low-burden financial tool that allowed the vendors to benefit from Mattel’s strong corporate credit rating. “Through our banks, we understood that there was limited liquidity available in Asia and many of our suppliers, particularly the smaller ones, may face higher borrowing costs and liquidity challenges with the term extension,” says Sadigh.

Mattel worked with its banks to develop a solution that would benefit both Mattel and its suppliers. The vendor financing solution was received well by the vendors as it provided them with immediate access to liquidity after the invoice was received, rather than when the invoice was due for payment. Plus, the solution came at a nominal cost based on Mattel's strong corporate credit rating. In late 2014, the company began a similar process in the US, and worked with Bank of America Merrill Lynch to provide a financing option to its US-based vendors.

“It is important that the logic behind our thinking is clear to all our partners. Our transparency and effective communication, combined with the tools offered to the vendors, has made this process a successful one,” says Sadigh.[[[PAGE]]]

Meanwhile, the treasury team began working with the International business units to better understand the company’s receivable terms market by market. Mattel has a diversified revenue base by brand, geography and customers with about 54% of revenues from North America, 26% from Europe, 14% from Latin America and 6% from Asia. “We performed a high level benchmark study to understand how other consumer product companies handled receivable and payable terms by major markets, so that we could address opportunities for better alignment of our terms,” says Sadigh. Although this initiative is in its first phase, the company continues to leverage key market insights such as point of sales (POS) data and best practices to help its cash optimisation strategy market-by-market.

Focus on global cash forecasting accuracy

Mattel has elevated the transparency of its global cash flow forecasting, and continues to look for opportunities to improve the efficiency of its working capital. By narrowing the gap between its DSO and DPO globally through term optimisation, Mattel aims to improve its working capital and create significant cash flexibility. “Mattel is a highly seasonal and working capital intensive business. Through payment term extension, we have improved management of cash and working capital,” says Sadigh.

The company’s financial plan along with the collection and payment terms is set early in the year, loaded into the financial system, and forms the foundation for the build-up of monthly, quarterly, and annual cash flow forecast by market. Although the company does not have a global cash management and forecasting system at this time, it will continue to refine the cash forecasting process and transparency of cash. “Over the past two years, we have seen tangible results; we have reduced the average commercial paper issuance needs, improved the working capital efficiency, and delivered our targeted year-end cash and cash flow from operations,” says Sadigh.

Through the revolutionary alignment of their DSO and DPO, Mattel continues to gain tighter management of cash and working capital - resulting in robust forecasting and increased visibility. Working across markets and time zones, in a business that is largely seasonal, Mattel has become a trailblazer on how to obtain payment efficiency.