pwc
FedEx
Receivables Management Solution Overview
July 2004
Table of contents
Introduction 3
The Receivables Management Challenge 6
Our Experience 12
© 2001 PricewaterhouseCoopers. PricewaterhouseCoopers refers to the individual member firms of the world-wide PricewaterhouseCoopers organisation. All rights reserved.
Introduction
Industry Growth Prospects
Strengthening economy has led to increased volumes
Domestic air cargo revenue expected to rise 8% in 2004
International air cargo expected to rise 10% in 2004
Relevant Trends from a Receivables Management Perspective
Major players are increasingly targeting retail customers through acquisitions such as Kinko’s. Changing customer demographics from these captive retail channels could lead to new AR challenges.
Continued international growth can lead to AR challenges from a regulatory, logistic, linguistic, and customer demographic perspective.
Globally, and within Canada, FedEx operates in an extremely competitive industry with increasing pressure on performance and cost. Key to this is efficient management of working capital
While FedEx Canada has terms of n/15, its current DSO is 32 days.
Though this is significantly below FedEx as a whole, which is operating at a DSO of 43 days, we believe there is still room for improvement.
This presentation outlines our initial thoughts on potential DSO drivers for FedEx Canada and an approach to developing a strategy to improve DSO.
Industry Overview
Working Capital Management – A Holistic Approach
Working Capital Management tends to be thought of as a Finance-related issue…
However, the role of effective Working Capital Management extends beyond the traditional Finance Department
Finance’s role is typically limited to financial gatekeeper and scorekeeper -
Successfully managing working capital requires the coordinated efforts of the operations, sales, marketing, and corporate departments.
Specifically for Receivables Management, this means understanding the operational and financial levers to manage bad debt and DSO – those both internal and external to the Receivables Management function.
Customer
Svc
Distribution
Sales
Marketing
Inventory
Plant &
Equip.
Product
Dev.
R&D
Cash
Finance
Revenue
Bad Debt
Expense
Avail. Cash Flow
ST Debt
LT Debt
Treasury
Int. Income
Int. Expense
Traditional Working Capital View
Historic Visibility
and Influence Gap
Working Capital Benchmarks – A Look at DWC*…
WCM efficiency measures vary widely by industry…
By definition of “what’s good”
Yet, a high level of consistency exists between sector “best of class” and sector “average”:
Utilizing “worst of the best” vs. sector average
Implying that savings opportunities are similar, regardless of the industry differences
Calculated using publicly available information:*
Data normalized to maintain business to business consistency
DWC = (AR + Inventory – AP) / (Net Sales / 365)
Transportation and logistics is an industry sector where we see significant variance between best-in-class and the average performer. We continue to see substantial room for improvement within this industry.
Source: CFO Magazine, Sept. 2003
* DWC – Days Working Capital
The Receivables Management Challenge
Seamless integration of business processes and cross functional hand-offs between risk and credit management, cash remittance, collections, and claims management
Cross functional leverage of tools and infrastructure to deliver the right information to the right individuals
Impact of credit decisions are not visible for 60+ days
Balancing costs of greater control with the backend cost of customer payment failure and related revenue impacts
Effectively segmenting and managing customers across the value chain to drive DSO down and manage bad debt.
Ineffective front-end controls lead to unnecessary back-end disputes
Poor dispute prioritization and resolution
Resulting backlog of disputed claims and dollars
Poor workflow and rep productivity
High cycle time around cash posting
Poor process around unapplied cash
No centralized cash remittance process
Limited options around payment methods
Failure to align collection strategies with risk
Billing system becomes collection system
Cash is “king” methodology is not deployed
Poor OCA management process
Failure to articulate risk tolerance relative to sales objectives
Ineffective risk identification and measurement
Inappropriate structuring and/or pricing relative to risk
Limited customer segmentation
Risk &
Credit Mgmt
Cash
Remittance
Collections
Operations
Customers
Claims Management
The challenge of effectively directing and controlling disparate activities that are highly inter-related and highly dependent on one another.
Receivables Management Drivers Impacting DSO
Drivers impacting DSO
Terms & Credit
Cash
Collections
Settlement
Payment terms
Credit policy
Credit scoring
Order processing
Sales incentives
Payment flexibility
Cash processing
Unapplied cash
Collection strategy
Placement process
OCA reconciliation
Dispute resolution
Incentives
Write-off policy
Recovery
Legal action
Factoring analysis
Reconciliation
Solutions
Payment systems
Lockbox expertise
Cash reconciliation
Collection success
analysis
Automation
OCA auditing
Training
Bad-debt forecast
Policy analysis
Litigation analysis
Reconciliation
expertise & tools
Credit assessment
systems
Scoring validation
Workflow tools
Analysis
Treasury analysis
Risk management
Data expertise
Data quality
Cash requirements
Risk tolerance
Reporting
Metrics
DSO Cost-Benefit Model
Costs of DSO Sustainability
Fixed
IT Hardware
IT Maintenance
Property
Variable
Headcount
Outsource Costs
Software Licensing
Credit Scoring
Telephony Costs
Intangible
Customer Service
Sales Impact
Opportunity Cost
Is the Current DSO Level Worth its Cost?
Costs of Aggressive
DSO Policy
Benefits of More Aggressive
DSO Policy
Benefits of More Liberal
DSO Policy
Costs of More Liberal
DSO Policy
Higher cash flows
Stronger balance sheet
Lower external financing needs
Higher fixed costs utilization
Higher variable costs
Customer service impact
Possible revenue erosion
Marketplace differentiator
Lower variable costs
Lower cash flows
Weaker balance sheet
Lower fixed costs utilization
What DSO Level Optimizes Cost and Benefit?
Has DSO Been Considered Within the Context
of Market Strategy and WCM?
Working Capital Management Solution - Overview
PricewaterhouseCoopers believes that Working Capital Management improvement is a strategic objective and a series of tactical exercises:
Requiring organizational prioritization and focus
Obtaining short-term and long-term savings
The PricewaterhouseCoopers Approach
Four Guiding Principles of Working Capital Management
Contain
Isolate and contain the issues
Operate
Establish control of on-going operations
Recover
Recoup outstanding opportunities
Enable
Build solid foundation/systems/practices
Operate
Recover
Enable
Contain
Order to
Cash
Purchase to
Payables
Prod Fcst’g
To Distribution
Cash Fcst’g
To Funding
Human
Assets
Operational
Processes
Technology
Enablers
Receivables Management – Our Approach
Phase V
Controls &
Benefits
Realization
Phase IV
Implement &
Operate
Phase III
Construct
Phase II
Design to
Improve
Phase I
Assess,
Measure &
Analyze
Phase I –
Industry benchmark analysis
Global Best Practices scorecard
Opportunity matrix and ROI scale
Phase II –
Conceptual design analysis compared to industry best practices
Initial Receivables Management scorecard of the current operations
Overall savings identified and quantified
Detailed design for the organization
Implementation plan for people, process and systems
Quick wins methodology deployed
Ascendant Implementation methodology
Transition methodology to enable and sustain the operations
Quantified results
Recurring receivables management scorecard
Our Approach utilizes an holistic approach to RM, focusing on organization, processes and systems.
Key tasks in Phase 1 focus on gaining a granular understanding of the current environment:
Understand the customer population:
Develop aged trial balance reports to segment A/R by customer type
Investigate DBO, bad debt and A/R aging profile (., % current, % 180+) for each segment and analyze data trends
Prioritize customer segment(s) and perform pareto analysis of accounts
Understand customers’ reasons for non-pay (., bankruptcy, litigation, fraud)
Understand the collections environment:
Assess collections process and capabilities, including systems interfaces, hand-offs and cycle times
Assess account prioritization strategy
Assess management of outside collections agencies and their collections effectiveness
Determine effectiveness of collection and A/R reporting systems
Evaluate measures of collections effectiveness/ efficiency and assess balance of inbound and outbound calls
Understand influences outside Receivables Management:
Review cross-functional roles and responsibilities and escalation procedures including involvement of sales force
Evaluate billing cycles, cash application process and terms of trade
Collection Operations Analysis
Phase One focuses on quantitative and qualitative analysis around Collections Operations, as well as Credit and Dispute Management.
In this phase we will review the existing processes, establish the drivers impacting FedEx Canada’s DSO, and determine strategies to shift these drivers to improve DSO.
Receivables Management Approach - Phase 1 (Discovery)
Output:
Granular understanding of historical and current environment impacting Receivables Management and DSO
Detailed knowledge and analysis of levers impacting DSO within FedEx Canada
Strategies for improving Receivables Management:
Accelerate cash inflows
Reduce lost bad debt revenue
Realize enhanced billing accuracy and reduce customer service support
Obtain balance sheet and P&L improvement
- Resulting in optimized DSO.
Benefits
The discovery phase generally runs for three – four weeks, dependent on scope, size of operations and any research / analysis already performed by the client.
Timeline
Our Experience
Company C
Company A
Situation
Outcome
Started to work with client in Feb’03
Developed integrated ops. plan to link improvements and investments to benefits
Provided collector efficiency model to support staffing decisions
Management executing PwC improvement plan – reduction in UE from % to % - in year benefit of $75m
Increasing bad debt for Business, Wholesale and Gov’t sectors
2002 – %
2001 – %
Revenues in steep decline
Organizational disarray – credit, disputes and collections orgs were passed around
Staff productivity was low – Small Bus collection reps avg. 35 calls per day and no focus on credit
Limited communication and management of customers crossing
Increasing bad debt
2000 -
2001 –
2002 –
Increasing cost to support A/R operations – in 2002 - $89m
Average DSO = 54
A/R year over year = Flat
Org. model decentralized
BU leadership determined investments in A/R programs
Worked with client over 18 month period
Focused on Retail, Wholesale and Publishing BU’s
Worked with management to reduce UE to % - reducing UE from $370m to $250m
Company B
Presently working with client in one BU to address lagging performance
Engaged in Jan ’04 and BU CFO already reporting success to Corp. CFO – lowered UE run rate by 250 basis points equaling $60m in expense savings
Lower UE in FY03 than FY’02 resulting from improved collections and additional customer deposits
Wholesale, Enterprise Small Bus. and Publishing lagging industry performer
Centralize org. model from domestic retail telecom, but decentralized for other operating segments
Working Capital (Receivables) Management Contacts
Paul Gaynor – Partner and Practice Leader
678-419-1674 @
Suneet Dua – Senior Manager, Northeast Region
646-394-1658 @
Sarah Laidlaw – Manager, Northeast Region
646-394-4159 @
Patrick Leger – Senior Consultant, Northeast Region
646-394-9322 @
