Today the pressures to cut costs are relentless. Manufacturing is one industry that has spent quite a while in the cost vise. Emulating Wal-Mart’s success, retailers have been forced to follow suit, putting substantial pressure on manufacturers to lower their prices in order to remain competitive.
Where is there a place to cut costs? Manufacturers have already automated their production lines and relocated some of their factories offshore. They’ve cut their sales and general administration (SGA) costs to the bone; implemented sophisticated ERP (enterprise resource planning) systems; consolidated divisions; and outsourced their human resources departments.
In addition, a number of manufacturers have outsourced the accounts receivable process to reduce the balance of overdue receivables; which can add significant working capital to the balance sheet. Today manufacturers are shifting their focus to better control the order-to-cash cycle because their shareholders are looking critically at their cash flow and working capital numbers.
So, one of the best places left is to somehow lower the amount of working capital required. Consumer manufacturers dealing with mass retailers have large sums tied up in receivables and their finished product inventory. In addition, high profit leakage due to customer deductions, short pays, and chargebacks; inefficient process execution; limited visibility to customer information; and drains on customer satisfaction are some of the pain points. High working capital requirements are considered a standard cost of doing business. But should they really be that high?
Outsourcing the order-to-cash process offers new alternatives that can cut working capital requirements, reduce profit leakage, and decrease the direct cost-to-serve. Today suppliers like Equitant have developed systems, processes, and people to manage the order-to-cash process more effectively. Christine Gattenio, senior vice president, marketing and sales for Equitant, says the order-to-cash process is the “largest value generation opportunity” for manufacturers.
Improving Hand-offs Across Functions
Managing the hand-offs across functions is the biggest challenge they have, she reports. “In many companies, critical business information resides in silos that don’t talk to each other,” she says. In addition, companies have tried to find cost savings within these functional silos, which doesn’t allow them “to fully optimize the potential value generation opportunities,” she adds.
Manufacturers routinely offer promotional programs to move their products. According to Cannondale Associates, consumer product companies spend up to 17.4 percent of revenues on trade promotions. “That large amount requires close scrutiny,” points out Gattenio. In addition, the Credit Research Foundation reports that 65% of companies write off 70% to 100% of deductions/chargebacks. According to Gattenio, most companies find it difficult to track the high volumes of deductions/chargebacks because their software and processes don’t provide the much-needed visibility to effectively manage this process. “Our research shows that these manufacturers have the opportunity to drive 0.5% to 1.0% of revenues to the bottom line by reducing profit leakage. Now that’s value generation!” states Gattenio.
Why? The dispute resolution process is generally labor intensive, with little systems support. Proper expense recognition often makes it difficult to aggregate the deductions in a presentable manner on a timely basis, which means many manufacturers are forced to write off the issue rather than incur additional expense to manually research and negotiate the settlement. The problem with this approach is that retailers have become more aggressive, knowing they are winning the battle by transferring costs to the manufacturer. Consequently, manufacturers need a laser focus on the root cause of each deduction/chargeback to drive behavioral change at the source that will impact process, policy, controls, timely reporting, and information access and availability.
Gattenio estimates that 70% to 80% of all deductions/chargebacks are sourced to sales, order management, logistics, and billing activities. Assigning stronger accountability back to the source is necessary but rarely practiced.
Adding Visibility to the Process
Outsourcing offers solutions by providing visibility into the order-to-cash process. Gattenio notes that Equitant captures granular information about the reason for the dispute, then analyzes the data to isolate the root cause and source of the issue. The ability to target change down to the lowest level of the organization is powerful. Drill-down capability to isolate pricing disputes to the specific sales person, for example, provides needed visibility to both the finance and sales organizations to maximize efficiency and effectiveness.
According to Gattenio, CFOs are increasing their focus on order-to-cash outsourcing options for another reason: Many companies are linking executive incentive compensation to management of cash flow and working capital. It’s not about just the profit and loss (P&L) anymore.
The Equitant executive says her firm discovered another operating benefit to outsourcing the order-to-cash process: improved customer satisfation. Identifying payment disputes earlier in the payment cycle and resolving these disputes promptly reduces friction and frustration between the manufacturers and retailers. “If there is a way to make both parties more efficient, everyone wins. In the end, happy customers pay!” she says.
Outsourcing allows a third party to arrive on the scene, install its software and processes, and force the silos to communicate. The new processes reveal the holes in the old process where the cash is leaking out, then provides the tools to staunch the bleeding. Suppliers can provide a 1,200 feet aerial view as well as a granular look at the order-to-cash process. It is the newest way to help manufacturers cut costs and improve customer care.
Lessons from the Outsourcing Journal:
- Manufacturers remain under extreme cost pressures. They have done most of the obvious things. Outsourcing order-to-cash is a new way to help them cut costs by lowering their working capital and reducing profit leakage.
- Most manufacturers operate across multiple silos. They incur higher costs and profit leakage when the handoffs are poorly managed.
- Outsourcing allows a third party to install processes and systems that tie the entire process together.
- CFOs are interested in order-to-cash outsourcing because their compensation is now linked to capital management.