Reaping the Benefits of Better Cash Flow Management at Solectron by Guy Rabbat
Summary
The electronic contract manufacturer Solectron flourished by offering outsourced manufacturing services for the burgeoning high technology industry during the late 1990s. With the bursting of the high tech bubble in the early 2000s, the company was caught by falling markets but still had to maintain its global business and take steps to bring it back to profitability. This article describes how a core team implemented a three-fold initiative - a Shared Services program, consolidation of business processes and the employment of Emagia's cash flow management platform - enabling the firm to reduce its cash cycle by 55 days and make significant savings of upwards of $15m in interest expenses. The productivity gains resulted in over $1m reduction in direct expenses, and the cash flow acceleration reduced Solectron's borrowing costs by more than $14m globally.
As the market continues to remain challenging and corporate attention becomes focused on profitability and cash flow performance, companies are shifting their efforts towards aggressive cost containment strategies in an effort to maintain business performance. A critical part of running a high performance business is to manage cash flow carefully in order to drive much needed operational efficiencies and properly manage working capital. Many companies have developed an approach based on business process consolidation, Shared Services organizations and cash flow management solutions offered by software providers to address these issues quickly.
We were one such company, (a $12bn electronics contract manufacturer), that undertook a significant initiative to streamline our cash flow processes. Solectron originally came to prominence by offering outsourced manufacturing services for the burgeoning high technology industry during the late 1990s. As Original Equipment Manufacturers like Cisco, Dell and IBM were realizing that their core competencies were product development, sales and marketing, these same OEMs began to engage contract manufacturers like Solectron to take over complex and frequently capital intensive functions like sourcing, printed circuit board assembly, final assembly and aftermarket support services. In addition, many OEMs divested themselves of the actual facilities and organizations by selling off these assets to the contract manufacturers. As a result, companies such as Solectron saw significant revenue growth and expanded their operations with rampant acquisitions, typically on a global basis to take advantage of lower cost resources.
The bursting of the high tech bubble in the early 2000s significantly changed the business climate for Solectron. With the sudden decline in market demand as well as the accompanying margin erosion, Solectron was forced to look at alternative methods to cut costs and maintain profitability. "We were in an unenviable position of being trapped between two difficult forces," said Perry Hayes, Vice President and Treasurer at Solectron. "On the one hand, our market was dropping and on the other we had this global business to run effectively. As our margins began to diminish, and customer orders began to decline, we knew that we had to take immediate action to ensure that the business would redirect itself towards profitability."
Choosing the right path to profitability
A key initiative identified as a cornerstone of this return to profitability was streamlining the cash-to-cash cycle. Initially, Solectron's cash-to-cash cycle, a key indicator of how well cash flow was being managed in the company, was in the 100s. This was at a time when Solectron's top competitors were operating with cash cycles in the 40s, implying a dramatically higher level of financial performance. Solectron's management team identified a source of untapped operational efficiencies within the cash-to-cash cycle, which could, if properly harnessed, drive much needed results to the bottom line. The core team charged with the initiative identified three key processes within the cash-to-cash cycle that were in need of attention. The first was the cash inflow process, of which receivables management was a major component. The second was the cash outflow process which spanned procurement of materials through payables management and disbursement processes. The last was the overarching cash-to-cash process, which would in effect tie both sides of cash flow together within a comprehensive working capital solution.
After carefully assessing the options, Solectron decided to focus first on the cash inflow processes for a number of business reasons. First, the cash flow acceleration to be gained by automating receivables management functions was seen to be able to deliver high impact results onto the balance sheet. In addition, the customer-facing functions were prime candidates for a Shared Service organizational framework, which would enable Solectron to deal with customers in a centralized and consistent fashion. Lastly, the focus on receivables was also seen as a quick hit project with a very rapid Return On Investment and could in turn fund the subsequent phases of the cash flow initiative.
The core team attacked this problem by first studying the initial cash inflow process and identifying its broken elements. With a carefully constructed methodology, the core team found that Solectron's receivables management process was suffering from a multitude of issues including revenue leakages and excessive operational expenditures. The phenomenon of revenue leakages was especially worrying as the core team's assessment indicated that as revenue had decreased, the margin losses attributed to revenue leakages increased considerably, at times reaching as high as 7 per cent. This clearly showed that from a collections point of view, a significant portion of invoices were not being paid by customers in a timely manner, and in many cases, not paid at all. Revenue leakages were considered to be a prime target to be addressed by the improved cash flow processes. "By accelerating the velocity at which cash flows into the organization, Solectron could reduce borrowing expenses, minimize foreign currency exposure and bad debt write-offs and collect interest on the extra cash on hand," added Hayes.
A sustainable platform for cash flow management
Solectron decided on establishing a comprehensive solution to address these issues. The three components that comprised the solution were a solid foundation of Shared Services, consolidated business processes and the utilization of a leading-edge cash flow management platform from the software provider, Emagia. The move towards Shared Services was seen as a natural organizational shift that would allow a smaller, specialized staff to service Solectron's global requirements. A team of highly seasoned and experienced collectors was assigned to the Shared Service organization for Solectron's receivables. In this manner, Solectron could continue to conduct collections activities with customers at a reduced cost of operations. In addition, with individual members of the Shared Services team focused on globally distributed customers, Solectron could ensure that transactions were carried out in a consistent manner, thereby ensuring higher levels of customer satisfaction.
The next part of the solution was to ensure consistency in business processes across the globe. A large part of receivables management at Solectron entails portfolio management, planning and carrying out collections activities, and following up with customers. All of these needed to be carefully coordinated and performed consistently within the Shared Services organization. This is where using the cash flow management solution became critical. The underpinnings of the Emagia solution entailed a consolidated cash flow platform, which integrated data from Solectron's multiple ERP systems. Since Solectron had rapidly grown by acquisition, it had subsequently inherited a patchwork quilt of disconnected systems such as BaaN, SAP and other legacy environments. One of Solectron's key challenges had been the lack of a global view across the receivables portfolio. With Emagia, this consolidated view was readily available, allowing Solectron to construct global collections strategies, perform more accurate cash forecasting and limit foreign exchange exposure.
In addition, many of the best practices with regards to collections activities were already supported by the solution. Another one of Solectron's key challenges, effective portfolio management, had been due to the lack of global visibility across the receivables portfolio. Many of Solectron's customers had multiple manufacturing projects that Solectron was engaged in across the globe within different operating units. Without this consolidated view, Solectron could not determine which customers were most profitable, which were current on payments, which customers were past due, etc.
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"Revenue leakages were considered to be a prime target to be addressed by the improved cash flow processes." |
Also, many of the daily collections activities could now be automated by using the software solution. Collections activities such as faxing or e-mailing invoices, determining which customers to follow up with, and recording and accessing critical account information like dispute notes were also enabled by the solution.
Finally, a great deal of benefit was derived from having access to the flexible reporting available. Previously, in order to develop accurate cash flow forecasts, collectors had to rely on week old data that was compiled from multiple ERP systems. After using the consolidated cash flow management platform, Solectron's Shared Services team could access reports immediately and greatly improve their cash flow forecasting process. "Emagia presents critical data from the different ERP systems in a consistent layout and structure, giving collectors and managers access to real-time information on receivables, customers, aging, cash forecasts and more - all in one Accounts Receivable Manager.
The approach chosen by the core team was perfectly suited for the objectives of the cash flow initiative. With a careful balance between people, process and technology, Solectron was able to achieve significant business benefits. "We chose the Emagia solution because we felt that it had a comprehensive solution that fit the requirements of our cash flow initiative," said Ken Berger, the Solectron Program Manager who was responsible for the Emagia implementation. "The rapid deployment of the solution as well as the built-in best practices allowed us to quickly roll out across the globe in conjunction with our Shared Services implementation. It has played a critical role in the success of this project and clearly helped us achieve our objectives."
Outstanding results to the bottom line
The results of the initiative at Solectron were astounding. The overall result for Solectron was that its cash-to-cash cycle improved dramatically from 116 days to 61 days, a dramatic 47 per cent reduction. As a component of the cash cycle, Solectron's DSO also was significantly reduced from 72 days to 46 days, a number well within range of best in class figures in the contract manufacturing industry. With the improvements in process automation and cash acceleration, Solectron was able to save upwards of $15m in interest expense savings as well as headcount reduction. The productivity gains alone resulted in over $1m reduction in direct expenses. The cash flow acceleration reduced Solectron's borrowing costs by more than $14m globally. This resulted in an extremely rapid payback period of two months. The software is currently used by over 400 collectors at over 20 sites across the globe. Solectron gained not only a powerful cash flow productivity tool, but also a critical profit generator at the enterprise level.
As other companies shift towards squeezing more cash out of their operations, they will greatly benefit from the integrated approach that the Solectron core team devised. As the cash flow initiative was rolled out, a great deal of insight was gained as to how best to carry out these global initiatives.
One key lesson for the team was to start with the proper objectives and metrics in place. It was important to ensure that the right cash flow metrics were used at the right time. For example, in an up market where market demand is rising, it was preferable to use the DSO metric along with percentage over terms. However in a declining market, the metric to use was the raw dollar value of receivables over term. This helped to guide the initiative and set appropriate goals for the team as the solution was implemented. Also, in a global deployment it is very important to ensure that local metrics at the operating unit level are well aligned with global metrics at the corporate level. This in turn enables a consistent measurement of enterprise-wide performance.
Finally, another key lesson was derived from launching a sustainable platform of people, processes and tools. As the Shared Service teams were being launched simultaneously with the cash flow management solution, it was extremely critical to organize local support teams and develop their skills. This included training in cash flow best practices, organizational metrics as well as the software solution. With continuous training, the first line and support teams within Solectron could be self-sufficient and also be able to build sustainable business processes which could be easily rolled out in a repeatable fashion.
The results at Solectron can be easily replicated at other companies. With a clearly defined cash flow initiative mandated by upper management, companies can quickly reap the benefits of streamlining cash flow processes and drive significant results to the bottom line. The recipe for success outlined in this article shows that the correct process, team and tools, if properly utilized, can help companies such as Solectron to maintain competitive advantage and progress forward on the path to profitability.
"Another key lesson was derived from launching a sustainable platform of people, processes and tools."
Author
Guy Rabbat
President of the High Tech Collaboration, LLC
Guy Rabbat is the President of the High Tech Collaboration, LLC. He is a seasoned executive with extensive experience in multiple global industries. He has a proven track record of leading companies to profitability and growth through enterprise wide initiatives, successful major product introduction and information technology deployment. Guy has played an executive role at leading companies such as Solectron, General Electric, General Motors and IBM. In these leadership roles, he has helped these organizations achieve significant operational efficiencies and benefit from better working capital management.
Guy Rabbat holds a Ph.D. in Electrical Engineering from Queens University, UK and sits on the board of eight multinational and start-up companies
Solectron Corporation
Founded in 1977, Solectron Corporation (www.solectron.com) is a leading electronics manufacturing services (EMS) company offering a full range of integrated supply-chain solutions for the world's leading electronics original equipment manufacturers (OEMs). Solectron's integrated design, prototyping and test, manufacturing, packaging, systems assembly, global distribution and post manufacturing services offer customers competitive outsourcing advantages, such as access to advanced manufacturing technologies, shortened product time to- market, reduced total cost of ownership and more effective asset utilization.
