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The Impact of Innovative Supply Chain Management Tools on Working Capital

PwC, in its 2018/2019 report titled “Navigating Uncertainty: PwC’s annual global Working Capital Study”, provides a comprehensive overview of global trends in working capital management by region and by sector. The insights and conclusions speak to the impact of using traditional tools to manage working capital. However, the report stops short of addressing the impact of global supply chain management on working capital.

The overall findings on companies’ Net Working Capital (NWC) performance reveal a small improvement this year of 0.4 NWC days. Companies have achieved this by attention to Days Sales Outstanding (DSO) and Days Inventory On-hand (DIO) performance, both of which saw modest improvements of 0.1 and 0.7 days respectively – the first improvement in five years. Days Payables Outstanding (DPO) is still at a high level, representing a potential risk to supply chains at a time when unpredictable trade winds are blowing. To combat this threat, companies are taking a more holistic approach to manage the health of their supply chain. The growing use of supply chain finance can enable organizations to bolster their cash position while also offering a lifeline to their suppliers.

Focus on What’s Controllable

Amid today’s prevailing uncertainty, now is the time for companies to focus on what they can control – including working capital. By improving working capital performance, businesses can navigate the optimal route, simultaneously maintaining operating cash flow (OCF) and freeing up funds for investment

Extending payable has long been the lowest hanging fruit for working capital management. While there is no doubt of the near-term positive impact to this approach, there are hidden costs in terms of goodwill and supplier relationships. Traditional metrics for managing working capital such as Days Sales Outstanding (DSO), Days Inventory On-hand (DIO) and Days Payables Outstanding (DPO) all provide insight but are backward-looking. Companies with global supply chains tend to have a significant amount of their working capital tied up in the aforementioned systems. Traditional methods and tools are not enough to achieve substantial improvements in today’s complex, global supply chains.

Innovative supply chain management technology will spur the next leap forward. Comprehensive, multimodal in-transit visibility is a foundational technology that enables predictive analytics such as accurate ETA, dwell and turn times, and lane and carrier optimization.

Global shippers are finding that data aggregators have oversold the extent of their carrier integrations. This creates gaps that undermine the efficacy of supply chain management. The evolution of low cost, disposable sensors and the impending reality of 5G represent a sea change in supply chain and working capital management. Having end-to-end visibility gives companies the tactical ability to address bottlenecks early enough to minimize the downstream impact of delays. Trends gleaned from historical data allow for continuous improvement throughput. They also provide insights into macro-environmental factors such as weather events and high-risk geographic areas. How does have an effect ibThe impact on working capital is the ability to right-size orders with suppliers, parts in inventory, and finished goods. This will unlock cash.

Enhanced global supply chain management through smarter tools will increase confidence in product integrity which in turn will build goodwill throughout the supply chain ecosystem, delivering value both to companies and to their customers.

Jeff Friedman is Savi’s Chief Financial Officer. He leads the company’s growth financing strategy and is responsible for managing all aspect of the company’s finance and accounting functions. In addition to impressive financial chops, Jeff brings a wealth of expertise in fundraising, investment transactions, exits, and corporate governance.