Optimizing working capital through procurement efficiency
Background
BY OPTIMIZING PROCUREMENT, THE CLIENT SECURED SUPPLIER RELIABILITY, REDUCED EXCESSED INVENTORY AND FREED UP WORKING CAPITAL, ACHIEVING A SIX-FOLD ROI.
A renowned Belgian praline manufacturer encountered significant challenges with its packaging material procurement and logistics, which is crucial for both product presentation and distribution.
The lack of formal supplier contracts led to:
- no performance commitments from the supplier,
- frequent late deliveries,
- quality issues,
- opaque pricing,
- unpredictable cost increases.
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These inefficiencies disrupted the supply chain and tied up working capital by forcing the company to hold excess inventory, absorb unexpected costs, and operate with reduced financial flexibility.
This oversight in procurement strategy required urgent attention to optimize operations and financial health.
Approach
Our consultant Marcos Viale was assigned to the client for a 3-month part-time mission to address the critical deficiencies in their procurement processes.
His objective to improve supplier reliability was part of a broader effort to optimize working capital by implementing a comprehensive source-to-pay process, streamlining everything from supplier selection to invoice management.
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Marocs established a robust procurement framework by shifting from informal agreements to structured, formal contracts, enhancing compliance and efficacy. The new detailed contracts incorporated service level agreements complete with KPIs, ensuring transparency and imposing penalties for underperformance.
This strategic overhaul made it possible to significantly enhance the management of key elements such as expenditures, inventory, and cash flow. The structured procurement approach unlocked additional cash for the client by ensuring suppliers were held accountable and operations were streamlined.
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Furthermore, integrated financial reporting between procurement and finance departments was implemented to ensure transparency and improve decision-making. Additionally, sustainability practices were incorporated into financial operations.
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Marcos also led targeted training workshops aimed at improving the maturity of the procurement department. Additionally, it contributed to dissolve operational silos between procurement and finance, this fostering a collaborative approach that utilizes financial insights for smarter procurement decisions.
Results
By enforcing the structured contracts with clear KPIs and penalties for non-compliance, the client significantly reduced instances of late and substandard deliveries. This improvement in supplier reliability directly decreased the holding costs and unproductive inventory, thereby freeing up working capital and enhancing cash flow efficiency.
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The results were substantial and multifaceted:
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Financial return: Achieved a six-fold return on investment through working capital optimization.
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Team awareness: Elevated the financial acumen of the purchasing team, fostering a better understanding of financial impacts.
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Procurement structuring: Reduced risks by formalizing supplier engagements, thereby strengthening business operations.
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Ongoing education: Requested by the purchasing team, to keep them updated and strategically aligned.
