Dutch manufacturers improve cash conversion cycle and inventory management

13 June 2018 Consultancy.eu

New analysis from Dutch supply chain firm M3 Consultancy finds that, on average, manufacturing firms in the Netherlands have improved their cash conversion cycle in the past year. Yet the gap between the best and worst performing companies has increased as organisations continue to explore alternative methods to reduce working capital.

Supply chain optimisation is at the core of organisational strategies to reduce working capital. Lowering inventories is a critical part of this puzzle and one which manufacturing companies are continually striving to improve. Another vital component is effective oversight of the finance and procurement departments, overseeing processes such as purchase to pay and metrics including days payable outstanding (DPO), among others.

The analysis finds that firms in the Netherlands have successfully improved their inventory management in the past 12 months. This appears, however, to have come at the expense of a smooth financial operation. The consulting firm – which offers services across the full spectrum of supply chains and operations – assessed the working capital performance of over 150 Netherlands-based manufacturing firms in producing its latest report.

The cash conversion cycle at Dutch manufacturing companies

The key takeaway from their findings is that the average manufacturer has reduced its all-important cash conversion cycle (CCC) from 68 days recorded in last year’s report, to 57 days this year. A substantial minority had a negative CCC – considered optimal to maintain a healthy bank balance while acquiring new inventory. Yet some of the worst offenders had a CCC approaching or even exceeding 200 days.

The variation is so great that, despite the average CCC falling, the gap between the most and least effective companies has increased. The first quartile of firms manage a CCC that is on average 139 days faster than the fourth quartile. In last year’s analysis published by M3 Consultancy the gap was slightly smaller at 135 additional days of working capital.

Digging deeper into M3’s analysis reveals that, of the 139 days separating Q1 from Q4, 32 days were stuck in payables (DPO), 73 in inventories (DIO), and 34 in receivables (DSO). In last year’s report DPO and DSO accounted for 24 and 27 days respectively, while inventory took up 84 days. Firms have therefore reduced the time their CCC spends wrapped up in inventories but their time management of payables and receivables has gotten worse. In other words, while supply chain has managed to improve its grip on excess inefficiencies, finance and procurement are struggling to realise improvement potential.

The trouble with inventories

Despite the improvement in inventory management, it is clear that this area remains the main area where value can be identified and unlocked. Practice shows however that this essential part of the supply chain remains a major obstacle for manufacturers as they struggle to systematically reduce their CCC to a negative value, or even to within the timeframe of one or two months. This isn’t a mystery but is instead a common organisational challenge, concludes the M3 Consultancy analysis, which explains why lowering inventories in production industries is hard – and keeping them low even harder.

Performance gap – cash conversion cycle

Chief among them is the fact that raw material and WIP levels are typically born of manufacturing processes which seek to optimise KPIs without considering the amount of inventory created. Similarly, capital targets are not always understood throughout the business, with some departments taking a narrower view of what constitutes success than is needed at management level.

Further along the value chain, because service and finished goods inventory are interconnected, any artificial lowering can pile pressure on customer service levels. It is also true that some customers and suppliers succeed in using the balance sheet of companies to 'store' their products.

Then there is the issue of global sourcing, which trades lower prices for longer material chains with more material in transit and generally fails to take into account the impact on working capital.

Finally, management of inventory levels is often impeded by a short term focus, in which case lowering can do more harm than good – “selling inventory today could lead to service problems and manufacturing complexity that end up driving levels even higher”, M3 Consultancy concludes.

Number of Industry 4.0 deals in DACH region jumps to above 600

26 March 2019 Consultancy.eu

The number of Industry 4.0 deals in the DACH region – Germany, Austria and Switzerland – has boomed last year to over 600, up from 513 in the year previous. “A mere buzzword a few years ago, Industry 4.0 has become today’s reality and is one of the hottest M&A sectors,” said Peter Baumgartner, an advisor at Hampleton Partners.

Industry 4.0 has become an integral part of business for manufacturing and technology players. Companies such as Bosch, Festo, PTC and Siemens are leveraging the benefits of Industry 4.0 to bolster the efficiency and effectiveness of their operations. M&A strategies are playing a crucial role in the development of Industry 4.0 offerings, allowing industry leaders to acquire key technologies to stay ahead of the competition or even reposition themselves in the market, while enabling innovative emerging players to leverage additional funding or strategic partnerships with global industry leaders.

According to data compiled by Hampleton Partners, a mergers & acquisitions and corporate finance advisory firm, heightened interest in Industry 4.0 technologies has lifted deal activity to a record high. “Data management capabilities remain at the core of the smart factory evolution: connectivity, transmission, smoothing, processing, evaluation and storage of data,” explained Baumgartner.

Industry 4.0 deals in the DACH region

Artificial intelligence (AI) and machine learning (ML) has been identified as a major driver of deal activity. With AI, industry players can optimise the use of connected systems (sensorics, IoT, etc.) and pursue breakthrough innovation, while machine learning allows for large quantities of data to be used in making predictions and optimising manufacturing processes. Baumgartner: “Capabilities such as pattern recognition and learning from experience will become integral parts of the smart factory.”

Among the largest deals of 2018 in the Industry 4.0 space were ENGIE’s acquisition of German building automation specialist OTTO Luft- und Klimatechnik (a provider of products in ventilation and air conditioning, cooling technology and building automation), the minority control acquired by private equity firm EMH Partners in Brainlab (a software-based medical technology provider), and Bosch’s purchase of German electro motors manufacturer EM-motive.

Meanwhile, several start-ups and scale-ups received growth funding. Scailyte, a Swiss software developer, received €2.4 million in seed funding from a group of investors in December; WayRay, a Swiss developer of complex augmented reality hardware, received $80 million in a Series C funding round led by Porsche in September; GreenPocket, a German smart metering provider, received €3.1 million in a growth funding round led by DEW21; and Graphcore, an artificial intelligence chipmaker, received $200 million in a Series D round led by Robert Bosch Venture Capital.

“Technologies such as artificial intelligence, robotics, medical technology, cleantech and smart building technologies are key drivers of M&A. Companies in the region are transforming their businesses by buying, funding or partnering with experts in these fields to ensure they are well-positioned for the Fourth Industrial Revolution – Industry 4.0.”

Related: Global merger & acquisition deal value spikes to $3.4 trillion.