The new normal of working capital management

1. The New Normal in Working Capital
Management
#DBSSMEWebinar
December 19, 2013
Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or
distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.

2. Topics for today’s webinar
Agenda
Working Capital: Tapping the multi-billion
opportunity in trapped cash
Evolving trends in supply chain and working
capital management
What DBS can do for you: Working Capital
Diagnostics and product solutions
2

3. Cash remains King, especially in India
Account Receivables
“What will be the greatest challenge to your profitability in 2013?”
Maintaining Adequate
CashFlow
Percent of respondents
India
34
28
Hong Kong
32
26
Japan
32
24
China
31
25
Collection of
Outstanding invoices
57
56
62
58
Inventory
Singapore
37
Australia
36
18
55
Account Payables
Indonesia
Taiwan
31
35
Based on survey of 1600 companies by Atradius on B2B businesses
Source:
DBS; Atradius Payments Practices Barometer, Nov 2013
17
21
14
53
52
50
3

4. However, India has the highest proportion of uncollectable B2B receivables...
“Over the last 6 months, what percentage of the total value of
your B2B receivables were uncollectable?”
Percentage
Domestic
Japan
Australia
Foreign
2.1
3.4
3.9
China
Taiwan
5.5
4.3
4.4
Indonesia
 India uncollectable
rate (7.7%
domestic/7.2% foreign)
highest among all
countries surveyed
3.6
 Also higher than
Americas (5.8%/6.4%)
and Europe rate
(4.6%/4.2%)
4.4
5.6
Hong Kong
6.1
Singapore
4.4
6.2
India
4.4
6.5
7.7
Avg. = 5.0
7.2
 Driven by customers
being bankrupt or out
of business and/or
failure of collection
attempts
Avg. = 4.9
Source: Atradius Payments Survey (Nov 2013) of 1,670 companies on B2B payments (n=214 in India); DBS
4

5. ...as well as the largest Days Sales Outstanding
“What is your company annual “According to your company's credit
average Days Sales
policy, when does your DSO level
Outstanding?”
become a concern?”
Days
Percentage of respondents who answered "1-30
days longer than payment term“ 1
Australia
 Marked increase in
average DSO across Asia
Pacific from 48 days to 56
days (Nov ’12 to ’13)
38%
45
Hong Kong
51
26%
Singapore
51
27%
China
53
20%
Taiwan
54
19%
Japan
55
 India average DSO (81
days) largest in survey;
40% more than next
largest country (81d vs.
58d for Indonesia)
Indonesia
India
40%
50%
58
81
26%
1 Other responses were “31-60 days longer”, “61-90 days longer” and “90+ days longer”
Source: Atradius Payments Survey (Nov 2013) of 1,670 companies on B2B payments (n=214 in India); DBS
 Lack of focus on early
warning system in India
may have led to increased
DSO
- Only 26% of India
respondents got
concerned when
payments are 1-30 days
late
5

6. Working Capital Trends Across SME
90
Auto
80
Transport
95
Plastic products
75
Packaging / Printing
Hotel/ Resorts
85
Dyes and Pigments
85
175
Irrigation
105
Textile
75
Wood
80
Wheat Milling
123
Plastic Pipe and Fittings
105
Leather
143
Heavy Engineering
95
Electrical Equipments
75
Steel: Pig/Sponge iron
90
Steel Reroller
85
Industrial paper
95
Pharma
75
Machine Tools
65
Hospital
127
Infra-Construction
0
20
40
60
80
100
120
140
160
180
6

7. We estimate up to $2.7 trillion in “trapped cash” in key Asian
Markets
USD billions
USD 694 Bn USD 2,677 Bn
Majority of the
“trapped” working
capital improvement
opportunities are
developing
countries
USD 55 Bn
USD 1,874 Bn
USD 54 Bn
Singapore
Hong Kong
China
South East
Asia1
Total
Listed Firms
($,Bn)
21
18
333
247
619
Non Listed
Firms ($,Bn)
34
36
1541
447
2058
1 South East Asia includes Taiwan, Indonesia and India
Source: DBS Research, IHS, Mckinsey
7

8. SMEs require intense focus on Cash conversion cycle, due to
many competing products and limited cash / credit available
SME OPERATOR
EXAMPLES
… and many products competing for it
Limited working capital stock …
Selection process by leading operator for
distributors
Number of distributors
205
Stores in low-end micromarkets typically sell a
broad range of goods
107
31
67
Total
applicants
Insufficient Unable to Approved
working
meet other distributors
capital
criteria
Days of inventory stock carried by SME for
leading operator
% of outlets
<1 day
67
1 day
16
>2 days
Total
Competing telecom products
17
To ensure
that their products are
adequately stocked,
operators must offer:
▪Attractive ROI
▪Quick stock turnover
Most retailers need
to be restocked on
a daily basis
Other products, e.g., fast-moving consumer goods
In addition, credit systems are risky as many
small shops will disappear very fast
100
8

9. Unlocking this trapped capital requires intimate
understanding of business model and supply chain…
AP
Inventory
AR
High Tech
Short life cycles, Seasonality, long supply lead times
FMCG
Promotions, SKU complexity and last mile
distribution
Retail
Multichannel, large product range, supplier
management
SME
Tight resources, Cash constraints, industry diversity
How to optimize Working
Capital to grow revenue and
profitability?
9

10. …and how step-changes in supply chain are evolving and
driving changes in working capital management
The “classic” supply chain trends
will remain important …
… but a “New Normal” must be
mastered to win
globalization
1
channel innovation
commodity scarcity
2
last mile
efficiency
3
consumer differentiation
offshoring
4
talent scarcity
automation
5
green supply chains
supply management
6
volatility
inventory
7
near shoring
10

11. 1
Channel innovation
11

12. 1 e-commerce sales is booming across Asia
B2C market size in major Asian countries
(USD Billions )
+45% p.a.
11
22
34
45
10
11
12
13
+7% p.a.
58
73
14
15
36
39
42
45
48
51
10
11
12
13
14
15
2
2
14
15
+7% p.a.
17
19
20
10
11
12
22
+26% p.a.
23
25
1
13
14
15
1
1
1
10
11
12
13
Key insight /
question:
• Lean out
operations,
prior to
capitalizing
on rapid
growth
• Is your
business
prepared for
the shift to
ecommerce?
12
Source: Euromonitor

13. 1 e-commerce adds complexity to the supply chain
Average number of SKUs to be sold
700,000
30,000
Key insight /
question:
• Significant
challenge of
managing
inventory level
and % of
product
returns
• How robust
are your
inventory
management
systems?
Source: McKinsey
13

14. 1 … putting pressure on distribution and logistics
networks …
… and overloaded local logistics
providers
Complex multi layered distribution
networks …
Medium scale
manufacturer
s
60-70%
Truckers all overload. They cannot
make money even with 2 times
overloading, so everyone overloads at
least 2.5 to 3 times
–Operations manager, 3PL provider
Distributor(s)
Use 3PL
30-40%
40-50%
20-30%
Wholesaler(s)
20-30%
Top retailers
with fair trade
terms and low
credit risks
Modern
trade
retailers
Retailers
outside
tier 1 cities
Key insight:
• Complexity in operations
driven and differs
increases in lower tier
cities
Source: McKinsey
14

15. 1 … and creating innovative ways to reach last mile
Nestlé's supermarket boat sits docked at the Port of Belem
It will be a service to
the population of the
Amazon, who has
streets and avenues in
the form of rivers. It is
a project aligned with
our concept of
Regionalization, based
on the different profiles
of consumers, where
we deal with each
region as a different
area.
Clerks work inside Nestle SA's supermarket boat
- Ivan Zurita,
Nestle Brazil President
Source: Press
15

16. FMCG Case example: How 1 company runs 5 supply
1
chains
Digital retailer
Digital shopper
90 %
Hypermarket,
Retail & departmental stores
On Time Product availability
Drugstores,
beauty
specialist
Distributor
99 %
Speed (Replenishment order lead time)
21 days
24hrs
Choice (Range/Complexity)
STD
Customized
Promotional intensity
High
Low
Demand Volatility/Predictability
High
Low
Key insight:
• Use segmentation to
beat supply chain
complexity
16

17. 3
consumer
differentiation
17

18. Data has gone from being highly macro …
We burn 1,800 calories per day
18

19. … to very customised
He burns
1,438 calories
per day
Weekly Overview
Typical
108 Cal
You
319 Cal
531 Cal
742 Cal
954 Cal
1165 Cal
1377 Cal
1588 Cal
1800 Cal
You burned an average of
Your activity level is rated
You are in the
1438 cal/day
Lightly active
2011 Cal
84th percentile
from activity this week
of all men 25-35 years who are overweight
19

20. Granularity is key to growth - customer needs differ
by region and city
CHINA EXAMPLE
Jingjinji is most concerned about product safety
Jingjinji
cluster
Shandong
cluster
Shanghai
cluster
Shenzhen
cluster
Shandong prefers Chinese brands and has high
brand loyalty
Shanghai prefers well-known brands, especially
foreign brands
Shenzhen is least concerned about product safety
Source: McKinsey Insights China
20

21. LG is building products from the ground
up to meet local Indian needs
INDIA EXAMPLE
Indian need
LG’s response
• Low literacy in rural areas;
English not understood
• People use television to
listen to music
• Menu in local languages
• 2,000-watt speakers and
powerful bass
• Most Indians prefer large
vegetable compartments
• Indian spices discolor
refrigerators
• Small freezers, since frozen
food is not as common in India
• Bright colors
• Scarcity of water in India
means automatic machines
not as effective
• Large-capacity semiautomatic
washing machines to suit
Indian families
• Traditional cooking; new to
cook in microwave ovens
• One-touch “Indian Menu”
• Recipes for cooking Indian
food in microwaves
Source: Press search; McKinsey analysis
21

22. 6
Volatility
22

23. 6
Increased risk post 2008 increased importance of
working capital focus
May 2010 – Gulf of Mexico
Major oil spill affected the
ocean traffic and seafood
industry
April 2010 – Iceland
Volcanic eruption
stopped air traffic
Jan 2009 – Russia
Shuts off all gas
supplies to Europe
Sep 2008 – USA
Lehman Brothers
filed Ch.11 starting the
global economic crisis
Mar 2011 – Japan
Major earthquake
and tsunami hurt all
major supply chains
Feb 2010 – Haiti
Earthquake shutdown
all commercial activity
Jan 2010 – China
FTA between Asian
nations removes tariffs
on 90% of goods
Jun 2009 –
Honduras
Major political crisis
affected most
businesses
Mar 2010 – Chile
Supply disruptions in
pulp cause prices to
reach near all-time high
Jan 2009 – Iceland
Government and
banking system
collapsed
2009 – S.E. Asia
Ocean transportation
capacity shortage
leads to price spikes
April 2010 – Greece
Major economic crisis
dramatically reduced the
value of Euro
Nov 2009 – Dubai
Economic crisis hit
the world economies and
major currencies
23

24. 6
In addition, unforeseeable risks have increased in
frequency and intensity
Value stream
Probability of steel price change
Before 2000
2000
After 2005
> -20
-10
-5
-2
0
2
5
10
20
Monthly price change (percent)
Source: McKinsey Agile Operations
24

25. Best practice: Design to volatility- Standardization and spec
optimization enable players to lower DIO and A/R
Common architectures across product lines …
Arrangemen
t of engine
components
Cable harness
structure
•
•
•
•
•
Joint
components
across the
family models
Define packaging zones
Determine arrangement of components
Define requirements on component
strategies
Systematically optimize number of variants
Optimize system across package space
… reduces working capital and risk across
the value chain
Reduces working capital:
• Less product lines to manage result in less
buffer stock and inventory
• Reduction in the number of suppliers allows
better management of A/P, resulting risk is to
be managed
Reduces risk across the value chain:
• Reduced risk exposure (less raw materials to
take care of)
• Volume bundling
• Improved sourcing and supplier management
25

26. Best practice: Working Capital benchmarking and
data analytics to improve cash-conversion cycle
SME EXAMPLE
Footwear Industry Benchmark1 Working Capital Ratio
Benefit
Lowest Top Quartile Median
Highest
Client
DSO
$5m
246 days
4 days 31 days46 days 47 days
Median
Lowest Top Quartile
DIO
0 days
38 days
$1m
DP
O
77 days days
78
769 days
Median Top Quartile
Lowest
Highest
$1m
Client
0 days 9 days
Lowest
CC
C
35 days 55 days
129 days
Highest
Top Quartile Median
41 days
90days 106 days
• [Client] lags behind
industry benchmark in
terms of receivable days
• Opportunity for [Client] to
aggressively target
receivables while
managing transition to
new supplier and reduce
CCC
$7m
Client
-12 days
• [Client]2 better than
industry median in DIO,
despite inherited stock
Highest
Client
Observations2
809 days
1 Footwear industry benchmarks based on FY12 financials of 54 companies from Bloomberg database
2 Client ratios based on 5 months data (1 cycle)
Note: DSO: Days Sales Outstanding; DIO Days Inventory Outstanding; DPO Days Payables Outstanding; CCC Cash Conversion Cycle
Source: Bloomberg; Client data; DBS Working Capital team
26

27. DBS has embarked on a transformation journey to
add more value to our clients
How a CFO thinks …
… adding value to our clients
… in-depth understanding of what
keeps the CFO awake at night
… being trusted advisers of our clients
… deep
We provide working
capital benchmarking
and diagnostics
industry expertise
…Understanding clients Working
Capital levers and providing value
adding advise
27

28. We developed a suite of working capital tools to help you
unlock trapped cash...
Analysis
1
2
3
A/P
Supplier segment
analysis
4
Early “payments
pocket” analysis
5
Purchase order
analysis
6
A/R
Time to payment clusters
7
Time to payment
DSO analysis by BU
8
Inventory
Inventory to
revenue analysis
Lead time analysis
28

29. …underpinned by comprehensive review across working
capital drivers…
21 days reducing in Cash Conversion Cycle
Increase/
Decrease
Cash Conversion Cycle, (days)
90
-21d
91
86
WC360
DSO down by 24% and DPO up by 23%
Current
WC
After DBS
Value
Levers
Solution
70
DSO
49
24%
81
39
48
0%
23%
201
0
11
201
2
Target
achieve
d
1.1B SGD Cash Flow freed up
2012 ROCE: 26.2%
Potential freed up working capital, $ 1,130 million
Decrease in
Receivables
USD 793 Mn
2,317
337
793
Change Capital
Employed
USD 1,130 Mn
2012 Improved ROCE : 27.27%
3,447
Cash at
current
position
A
R
A
P
Inv
Cash
available
at target
position
Operational
Levers
Increase in
Payable
USD 337 Mn
0
Impact
107 bpp increase in ROCE
WC analyses
81
DIO
DPO
37
29

30. … and in-depth analytics
By customer analysis shows average DSO for company to be higher than industry benchmark
WC360
Retail SME client example
Days of Sales Outstanding
Days
400
250
200
150
100
WC analyses
350
300
Av DSO: 58 days
0
10 20 30 40 50 60 70 80 90 100
270 280 290 300
Size of account
USD ‘000
193
201
Total
58
29
137
Operational
Levers
Average
42
DSO
Industry benchmark
DSO
Impact on WC,
USD ‘000
Impact
50
0
30

31. DBS Working Capital Diagnostics: Working to be your Asian bank of
choice
What is DBS
Working Capital
Diagnostics?
How does
this work?
DBS proprietary suite of tools and recommendations to help
you free up cash by optimising your working capital!
 Compare cash conversion cycle time against
industry benchmarks
 Review detailed analysis of Receivables, Payables, and
Inventory days performance
 Bespoke analytics and actionable report
DBS will partner with you to develop actionable analytics
 Simple: Fill up a template with working capital data (e.g.,
invoices) and participate in initial kick-off session
 Actionable: DBS will data-mine receivables, payables and
inventory data to distill specific recommendations
 Confidential: All data shared kept in strict confidence
31

32. What we need from you
What we need from you
Required support
Description of tasks
Resources
Est. time spend
▪ Data extraction/ collection to fill in the
▪ 1 financial
▪ 1-2 days
templates to conduct working capital
analyses (e.g. AR/AP/Inventory/overall
company profile)
▪ Resource/s allocated to the diagnostics
(e.g. person in charge during working
sessions to discuss preliminary analyses
and findings, answering queries)
▪ Treasurer/ CFO time to conduct survey
analyst
▪ 1 person (can
be the same as
previous)
▪ 1 hour
session, once
a week
▪ Treasurer/ CFO ▪ 1-2 hours
for Maturity Assessment along the 3
dimensions (AR/AP/Inventory)
What next? Contact your DBS representative for more information
32

33. THANK YOU!
Follow us @DBSBankIndia
33