Comfort for Construction Customers

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x|periences from 29.11.2011 Logistics as Leverage for Liquidity and Profitability Increased pressure on margins, disappointing cash-flow development in times of crisis or lack of capital for growth investment. These issues are more topical than ever. With a comprehensive working capital management program, as a logistics specialist you can significantly improve the financial clout of your company and equip yourself for future growth. Let us first take a look at the text books! If we add the days of inventory outstanding to the days of sales outstanding and subtract the days of payables outstanding, the result is the so-called duration of capital tie-up (see diagram). If we take this formula into consideration, then the relation between financial management and logistics becomes clear. If finance primarily manages the payment periods, then the days of inventory outstanding is predominantly the responsibility of the logistics specialist. If both of them pull together, then capital can be released or liquidity created. Working Capital along Supply Chain Feedstock purchase Feedstock delievery and payment DPO 1) Pay feedstock payment Customer order Start fabrication Inventory outstanding (DIO 3) ) 1) DPO = Days payables outstanding 2) DSO = Days sales outstanding 3) DIO = Days inventory outstanding Source: Schulz & Partner „Rentabilitäts- und Working Capital Analyse 2011“ Finish fabrication Delivery and invoice Expected incoming payment Customer pay the bill Customer (debtors; DSO 2) ) Capital commitment = DIO + DSO - DPO Really incoming payment
x|periences from 29.11.2011 In this context, it is worth taking a look at Roland Berger and Creditreform’s current study „Cash 4 Growth“, which shows significant differences in the duration of capital tie-up depending on the size of the company and type of industry. Hence, larger companies have a significantly shorter duration of capital tie-up. Some of the reasons for this are that larger companies have more success in negotiating their payment terms compared with smaller companies. Furthermore, the target of low working capital has a higher weighting in larger companies and is more highly sought after. Thus companies with a turnover of up to €10m register a duration of capital tie-up of approx. 60 days. Large companies, however, with a turnover exceeding €200m have tie-ups of less than 45 days. More important for logistics specialists is the consideration of the results of the study according to the type of industry. The best working capital performance can be found in telecommunications (19 days), trade (43 days) and IT. Industries in which capital is tied-up for the longest periods are textiles (90 days), pharmaceuticals and engineering (79 days). The difference here is mainly with regard to stocks. Levers for a reduction of stocks or inventories can be found, for example, in production optimisation in order to minimise throughput times and buffer stock. Further potential can be seen in warehousing where safety stocks can be scrutinised and slow-movers can be cleared, or by redesigning the warehousing concept, for example through a VMI concept, direct deliveries or order-related production. The standardisation of parts and processes also provides further leverage for improving stock management. Another important aspect is the improvement of networking in the supply chain with the aim of reducing the build up of inventories in terms of the whiplash effect. Therefore, communication between suppliers, manufacturers, logistics service providers and customers needs to be improved. Catchword ECR: it is no coincidence that trade is the topranking industry with regard to duration of capital tie-up. In addition to IT integration and harmonisation, joint ventures and partnerships can also help to improve networking and thus communication throughout the supply chain. Working capital is one of the main levers for improving liquidity. With strict management of your working capital you can overcome the diverse challenges yourself, without the need for expensive external finance from banks. Only those who have all the parameters in place can secure liquidity and profitability, thus ensuring the long-term success of the company!
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Comfort for Construction Customers

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