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Working Capital Diagnostics
A tier-1 auto components manufacturer discovered significant opportunity to improve its Working Capital through a detailed diagnostic exercise.
Overview
The company, involved in manufacturing intricate automotive iron castings, was facing an adverse working capital situation and was looking for improvements in order to increase overall profitability.Challenges
- Poor working capital situation along with a gradual erosion of EBITDA margin over the preceding 3 years period.
- A high-level review of company financials showed a continual increase in raw material costs and SG&A expenses.
- Stores & Spares cost (as a percentage of Revenue) indicated a 3-fold increase over the same period. Some other cost elements such as Sub-Contracting, were also on the rise.
- A detailed diagnosis conducted later, concluded that Process Governance and Procurement Control were the key drivers of this decline, specifically in indirect spend categories.
Solutions
- Data quality improvement was a key starting point to identify areas of opportunity.
- Deep data analysis on Stores & Spares spend category as well as inventory trends & practices, provided specific target areas for DIO (Days Inventory Outstanding) improvement.
- DSO & DPO improvements were recommended for subsequent phases.
- Data Cleansing & Categorization Improved data quality to identify key areas of opportunity.
- Deep Data Analysis Analyzed company’s working capital variables – DIO, DSO, DPO as well as external industry benchmarks including peer group reviews.
Results
This deep diagnostic enabled visibility into key working capital improvement areas and the underlying drivers including a clear roadmap to achieve the objectives.
Key outcome of this exercise included –
- Opportunity to increase EBITDA margin by a minimum 5%.
- Opportunity to optimize TCO of Stores & Spares category freeing up over USD 1.5M in working capital.
- Significant opportunity to reduce other costs including sub-contracting expenses.
Increase Profitability, Improve Liquidity and Enhance Business processes through Working Capital Optimization
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