Supply Chain Finance Mitigates Seasonal Fluctuations in Cash Flow
Woodstream might not be a household name, but its brands make life more enjoyable for millions of Americans every year. The company produces, markets and distributes a wide range of insect and pest control products, from traditional wooden mouse traps to Wi-Fi enabled zap traps that send mobile alerts when they have successfully killed a rodent. Additionally, Woodstream manufactures electric fencing for livestock containment and is the global market leader in bird feeders. It sells both direct to the consumer online and through major retailers.
All of these businesses are seasonal in nature. “Retailers start stocking our brands in their lawn and garden section in March or April, and then typically wear them through the summer or fall, depending on the product line,” says Andrew Church, CFO of Woodstream. “We make products year round at two factories in the United States. We also use subcontractors, mainly in Asia. Their strong season runs from November to January, preparing us for expeditions that will culminate in the spring. “
This means that every year, business expenses accelerate in the winter, and it takes several months for revenue and customer collections to catch up. “At the start of the year, Woodstream is a net borrower,” Church says. “We are using a seasonal revolving credit facility as we ramp up production. Then, when we start to collect the receivables, the cash inflows exceed the outflows. By mid-spring, we fully paid off our gun debt.
Several years ago, Woodstream was acquired by a private equity firm, which set itself the goal of improving the cash conversion cycle. “We wanted to make acquisitions, and generating additional free cash flow would put us in a position to do so,” Church said. The managers reviewed their four main levers for improving working capital: accounts receivable (A / R), inventory, accounts payable (A / P) and accrued liabilities. They hatched a plan to attack each area, Church says, initially focusing on A / P.
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“The timing of payments is something we have control over,” he explains. “We therefore focused on ways to optimize payment terms with our suppliers, while simultaneously providing them with a stable source of liquidity. We wanted to strengthen our supplier relationships and strengthen the health of our overall supply chain, even as we lengthen our payment cycle. “
Woodstream’s treasury and finance officials determined that a supply chain finance program would meet their needs. They worked with PrimeRevenue to design a program, secure funding from a PrimeRevenue partner institution, and integrate Woodstream’s Enterprise Resource Planning (ERP) system with the PrimeRevenue platform.
Church and his colleagues standardized their contracts to pay domestic suppliers and service providers in 90 days and to pay overseas suppliers in 150 days, two substantial increases from the company’s previous terms, which were as low as 30 days. days with some suppliers. When they introduced this change, they also explained the good news: Suppliers participating in the supply chain finance program can choose exactly when to be paid on each invoice.
When Woodstream’s A / P team approves an invoice for payment, the ERP system automatically uploads it to the supply chain finance platform. Suppliers can log in and see all of their approved invoices, as well as when and how much they can expect to be paid if they do nothing. But they have the possibility of choosing an advance payment between 10 days after the issuance of the invoice and 10 days before the due date of the payment. The financial partner who finances the prepayment is compensated by a reduction in the amount of the payment, calculated at a standard discount rate.
“Everyone on the program gets the same APR [annual percentage rate]Said Ryan Advena, vice president of finance at Woodstream. “They can choose when they want to receive payment bill by bill. Or they can choose to set it and forget about it, and the platform will exchange all of their bills the same number of days before they are due.
Advena says many program participants get a better interest rate than if they tried to borrow against the receivables. “Another way to look at it,” he says, “is to compare it with what’s typical when negotiating prepayment terms. Often times, a supplier will need to take a 1% discount to be paid 30 days earlier. This translates to an APR of 12 percent. The cost to suppliers of our supply chain finance program is well under half. “
Automation is one of the keys to the success of the program. “We didn’t want to start a new process that would require expanding our A / P department,” says Advena. “With this solution, suppliers are always paid on time and everything happens automatically in our system. “
David Ellis, the company’s senior director of global sourcing, adds: “Many of our suppliers have been able to improve their own liquidity by accessing liquidity independent of their banking relationships. Some salespeople were initially a little skeptical, but were pleasantly surprised at the extent to which this program gives them control over their own destiny.
The flexibility of getting paid months earlier was especially valuable for vendors struggling to weather the Covid-19 economy. “Some of our suppliers in Asia have been hit very hard by the supply chain issues resulting from the pandemic,” Church said. “They own the inventory until the goods pass through the transom of the ship at the Asian port or, in some cases, the US port. And there have been times over the past 18 months when the freighters weren’t available or the shipping containers just weren’t there.
“The delay in loading the product onto a boat also delays invoicing and payment,” he continues. “The flexibility of the supply chain finance program can be very important to a supplier’s cash flow when the payment cycle is disrupted by circumstances beyond their control. “
Advena sees the program’s rapid growth during Covid as proof that it has helped some vendors weather the economic storm. “At the end of March 2021, the volume of payments negotiated in our supply chain finance program was 251% higher than the previous year,” he said. “The demand for this solution has exploded during this time. “
Woodstream made the program available to its largest suppliers. Forty vendors, representing approximately 90% of the company’s total inventory spend, have been onboarded so far. On average, participating vendors choose to be paid on day 30. “So compared to our terms before this change, they take their money out for about 30 days,” Church says.
Ellis explains another benefit related to Covid: “With the rise of Covid in online orders for some of our brands, we needed large volumes of products produced faster than usual. Some of our suppliers generally have very long lead times to speed up their production. But by immediately accessing their money through this program, they were able to purchase materials for cash. It helped them manage their costs and they were able to release the product faster to meet our needs.
Due to the benefits of the program for suppliers, Woodstream was able to significantly extend its payment terms without damaging its supply chain. This, in turn, had a huge impact on the working capital of the business. The number of days to pay (DPO) increased by 67%, from approximately 63 days to 105 days.
“We’ve set an initial target of $ 16 million in cash flow gains on all of our $ 90 million annual spend with our leading suppliers,” Church said. “Fast forward to today ‘ hui: After expanding the program to include our tier two and tier three providers, as well as service providers, we actually hit about $ 24 million. We used that money to reduce debt, partially fund dividend to shareholders and make an acquisition.
What did Woodstream learn from this experience? “In the past, when we were looking to create shareholder value, we usually thought about increasing profits and getting a better return on capital investment,” says Church. “Obviously these areas are a great place to start, but it doesn’t make sense to focus exclusively on P&L management. We have learned that to improve shareholder value, we need to devote as much rigor and attention to the balance sheet, especially working capital, as to improving our profit margins.
“In business, sometimes you can have binary results: what is good for Woodstream is not necessarily good for the other party, and vice versa,” concludes Church. “This program, however, has been a win-win for Woodstream and for our supplier partners.”