Starting situation – shortage of capital and false incentives in the management system
The incentive system, and therefore the workforce management at an international automotive supplier, was strongly EBIT-driven. There was no incentive embedded in the systems for active NWC management or for optimizing capital costs. For this reason, little use had been made of the opportunities offered by active net working capital management, even though the company had a liquidity problem that had been growing more serious over the years. After performing an internal analysis, management had already realized that they lacked adequate systems or incentives in place that were needed to increase their liquidity reserves to the required level.
Project approach – optimizing inventory management and establishing NWC management
An initial analysis of the drivers to optimize the net working capital identified some serious problems in the area of inventory management. Thanks to a holistic optimization approach, the company managed to reduce its inventory by around a third. The measures implemented included target processes for material calls with both customers and suppliers, technical optimization of the warehouses, consignment stock concepts, and logistical improvements based on the just-in-time strategy.
Finding – capital may be tied up in many places in a company – sometimes unnecessarily
Faced with a shortage of capital, it is necessary to activate the critical levers for internal financing. For this, active NWC management is the key to freeing up liquidity. With inventory in particular, valuable capital can be unlocked by optimizing the processes for dealing with upstream and downstream companies, without having to make structural changes.
- Cash reserves in NWC increased by reducing inventory
- All relevant levers were used to optimize the inventory
- Cash reserves released and capital costs reduced