As credit continues to dry up in the wake of the ongoing eurozone crisis and continued macroeconomic uncertainty, multinational companies need to ensure that their distributors and channel partners in emerging markets can weather the storm, purchase inventory, and fund operations. In my previous post, we looked at some of the strategies companies can use internally to shore up their collections efforts and reduce days sales outstanding. In this post, we will focus on three strategies for helping external distributors and channel partners manage their working capital more efficiently.
External Focus: Three Strategies for Helping Partners Manage Working Capital
1. Off-load inventory holding costs by arranging smaller, more frequent shipments to distributors
The retail industry has been among the industries most impacted by the global economic downturn. To help its local distribution partners weather the crisis, one FSG client in the apparel industry has emphasized its flexibility to local distribution partners by reducing minimum order sizes while ramping up the frequency of shipments. This approach has the added benefit of enabling a more rapid response to changing fashion trends, which boosts sales and prevents distributors from accruing stockpiles of unsold (and out-of-fashion) inventory.
2. Provide a shared IT platform to improve efficiency and monitor business health
A FSG client that is a leading manufacturer of white goods has provided its local distribution partners with a shared IT platform that facilitates the free flow of high-value information. The system allows for the sharing of real-time sales data, pricelists, product information, macroeconomic data, and market trends among the company and its distributors. The company gains in-depth insight into the health of its partners’ businesses and can take action to recommend efficiency improvements or recognize early warning signs of looming trouble.
3. Forecast demand and actively manage inventory
Many FSG clients have reported their local partners’ tendency to inefficiently manage inventory, which ties up working capital that could be more effectively allocated to revenue-generating activities. One client in the construction equipment industry has provided its local partners with a software-based demand forecasting system for spare parts that strikes a balance between customer satisfaction (parts availability is critical for minimizing customer downtime) and working capital optimization. After securing buy-in from its partners by demonstrating this win-win relationship, the Council member is able to exert more control over managing inventory levels at the individual dealer level.
In the current economic environment, generating free cash flows and reducing risk continue to be top priorities for MNCs in emerging markets. The current climate provides not only a sense of urgency, but also a window of opportunity, to implement better working capital management practices. If and when we see a return to robust growth in global markets, companies that have established these good habits will be sure to yield more profitable growth than their competitors that have not been so diligent.
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