The cash flow revolution

February 1, 2018 Cedric Bru

Industry 4.0 technologies are transforming how businesses across the supply chains optimize cash

Whether we recognize it or not we are now living in the Fourth Industrial Revolution. This January at the World Economic Forum in Davos – and for the third year running – global political and business leaders debated its impact on every aspect of life from business transformation to social equality and well-being. What was first coined in Germany in 2006 as a manufacturing initiative, now is a global technology-led revolution. But what exactly is Industry 4.0, how is it impacting business and why is it driving a renewed focus on cash?

From physical entities to digital enterprises

In terms of its impact on business Deloitte describes Industry 4.0 as:

“...the marriage of physical and digital technologies such as analytics, artificial intelligence, cognitive technologies and the internet of things (IoT). This marriage of the physical with the digital allows for the creation of a digital enterprise that is not only interconnected, but also capable of more holistic, informed decision making.”

The key takeaway here is that businesses are transforming from physical entities into smart digital enterprises. The impact of this paradigm shift is difficult to overstate. Established businesses are now being exposed to an ever increasing rate of change in a global marketplace; subject to external forces that are difficult to comprehend and almost impossible to predict. New digital entrants surface, with radically different business models that don’t just disrupt established market leaders, but often annihilate them almost overnight. In 2016 at the WEF, Pierre Nanterme, CEO of Accenture, said that: 

“Digital is the main reason just over half the companies on the Fortune 500 have disappeared since the year 2000”

Forbes in 2015, also found that the average lifespan of a S&P 500 company is just 15 years versus 75 years back in 1955.

The transformation isn’t just limited to software companies. Take Tesla, theoretically a car company, in reality a hardware platform (the car) built around a living, beating heart of software. Critically, these companies have completely new levels of insight and agility in the marketplace. Tesla gathers millions of data points every day on how people drive, and it uses this insight to inform product design. Further, when the Ferrari 458 outpaced the Tesla S, overnight Tesla released a software update to all its cars giving drivers the option to select ‘insane mode’ to regain the top spot. This example of the new world order showcases how companies have intelligent long term product strategies together with the ability to respond with lightning speed to a perceived market threat.

Fueling the shift

To compete in this new world order astute companies are marshalling their resources, focusing investment in R&D, productivity improvements, M&A, debt reduction and technology to enable them to shift their business models towards smarter, digitally enabled enterprises. While cash has always been king in the business world, a renewed focus is required, as businesses seek the fuel to power essential transformation strategies.

Following the 2008 Financial Crisis banks are no longer the default option for liquidity. Instead companies are looking to their own operations to free up cash. Company supply chains are a critical target with The Hackett Group estimating that some $6 trillion is locked up in supply chains in companies across North America and Europe alone. And advisory firm EY estimates that companies can release 5-7% of their revenues in cash back to the business; for a $10bn revenue company this equates to $500-$700m back on the Balance Sheet. Further, it’s not just about Balance Sheet improvements, by managing supplier payments more effectively companies can reduce their Cost of Goods Sold by tens of millions of dollars, while at the same time ensuring supply chain health through early payment options.

A blurred and fragmented landscape

However, fully realizing the cash prize until now has been challenging. Companies have struggled to truly understand how cash is deployed across their supply chains and the ability to take action to free up and invest cash has been limited for buyers and suppliers alike. Companies have suffered from:

Poor visibility: up to 70% of company revenues can be deployed in working capital to fund operations. Yet companies struggle to gain an accurate picture of how this cash is deployed, where cash is stagnating and how this changes over time.

Broken processes: few companies today are truly connected with their supply chain. Accounts payable process are labour intensive, with over 60% of suppliers still submitting paper invoices. Existing supplier financing solutions do not alleviate the burden, as they too require high levels of manual intervention for reconciliation, deployment and support.

Siloed solutions: supplier financing solutions only address small parts of the supply chain and can normally only meet a single goal of improving working capital or reducing costs. They are challenging to deploy and once implemented, virtually impossible to adjust to meet changing business conditions.

Misaligned: internal functions including treasury, procurement and finance have operated with conflicting working capital, supply chain cost and supplier health objectives resulting in opposing goals and reduced program performance.

Company-centric: programs to date have primarily been company-centric, prioritising the buying organisation over the welfare of suppliers. Working capital and invoicing programs have therefore struggled to gain buy-in and adoption, limiting their success and often stressing the supply chain.

While working capital programs to date have therefore achieved some degree of success, the friction in the financial supply chain caused by these issues has resulted added cost, limited cash efficiency and additional strain in the supply chain.

The cashflow revolution

Now however, a revolution is taking place. Driven by the need to release new levels of cash, companies are transitioning from limited working capital programs towards enterprise-wide cash optimization. This transition is both fueled and enabled by the Industry 4.0 technologies. The key attributes of this approach are:

Intelligent: companies today are leveraging Big Data and Analytics to accurately understand how cash is currently deployed across their supply chain by comparing their performance against ‘data lakes’ of real supplier payment behaviour. This understanding aids the creation of accurate scenarios and enables them to deploy A.I. augmented working capital and early payment programs that optimize cash flows for all parties and reduces financing and supply chain costs.

Connected: the advent of true working capital focused networks is enabling businesses to become connected with each other, exchange financial information and access early payment on demand. These networks create new levels of transparency, automate the purchase-to-pay cycle and elevates insight and business agility.

Scalable: by accessing working capital networks, adopting an intelligent approach to payment terms and early payment programs, cash optimization programs are scaled rapidly across supply chains as suppliers access programs digitally and are automatically provided with terms that fit their requirements.

Collaborative: by utilizing an intelligent, data-driven approach treasury, procurement and finance functions can assess and align around common company-wide goals, creating working capital, early payment and cost reduction programs that benefit all parties across the supply chain.

Equitable: supply chain liquidity and resilience is enhanced as suppliers benefit from early payment certainty and financing, which is based on the buyer’s cost of capital and free-to-use invoicing tools.

The effect of this revolution is that business across the supply chain are surpassing the way they currently manage and optimize cash. Working capital processes are more efficient, freeing up cash to invest back in their business and supply chain costs are lowered, realizing margin improvements. They are ensuring that their supply chains have access to affordably priced finance through early payment certainty and are improving collaboration and supply chain strength through aligned and connected processes.

It is these businesses that are identifying the cash opportunity and leveraging a technology-led approach to realize it, that are positioned to compete and thrive in Industry 4.0.

About the Author

Cedric is the CEO of Taulia

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