JustOne have worked on a number of Working Capital Improvement and Management Projects over the last 15 years – one example of a working capital management in food industry project we can share involved an Enterprise-wide receivables and payables reduction for a Global Food Ingredients Company.
Terms Reduction
Company – Global Food Ingredients Company
Project Description – Enterprise wide receivables and payables reduction
Location – Head office based in Holland and their business unit in Chicago
Working Capital Issues
- The standard terms for the business were 30 days and most customers had standard terms
- Overdues were 10 days
- Raw materials had risen significantly over the previous year and an average price increase of 10% was required
- During the facilitation workshop for sales staff it was explained that in order to achieve the AR targets, payment terms with some large customers would need to be reduced
- The reaction from the sales team was – “30 days is normal practice in the US, it is what our customers expect. It’s the terms our competition use. If we ask our customers to pay an extra 10% and pay earlier the customers will go to the competition”
- Our consultant recognized that this attitude was a mental model* that would need to be changed before they would believe that a terms reduction was possible
(* Mental models are deeply held internal images of how the world works. – Peter Senge)
Actions undertaken
- Our consultant ran an exercise involving the sales team during the workshop to explore how they would go about a reduction in terms if was essential to their company. (This exercise is known as “scenario planning”. It was a way of getting the sales staff to work together to find a workable approach in a risk fee environment. It is one of four techniques JustOne use for changing mental models)
- To embed the change to their mental model an action was agreed for them to develop a full “terms reduction strategy” identifying each customer where terms reduction would be targeted
- JustOne provided guidance on appropriate negotiation tactics
Benefits
- Within 2 weeks of the workshop the payment terms with one of their largest customers were negotiated down from 30 days to 20 days together with a price increase of 10%
Comments
- The mental models observed with the sales people in this company are common. In every country we hear sales people say “What you are recommending will not work in our country; or in our sector; or with our customers”
- We are convinced that these mental models need to be changed before progress can be made with the new ways of working
We need to change what people think before we change what they do.