Chapter 2 Understanding working capital management
of manufacturing process it operates. In
most cases this requires some degree of
anticipation of future demand, although
some companies manufacture to order.
Even in the case of companies which
manufacture to order, there will need to
be some degree of demand forecasting
to allow the company to anticipate, for
example, likely staffing requirements and
necessary warehouse space.- Identify production inputs.
Once the company has produced a
forecast of demand, it needs to identify
its required production inputs. This will
also vary from company to company and
across industry sectors. The lead time
for semi-finished inputs may be greater
than the lead time for other inputs.
The key is for all producers to plan for
predicted demand. - Determine approved suppliers.
Most companies will maintain a list of
approved suppliers. To appear on the
list, suppliers may have to commit to
providing goods in a particular format and
to a specific standard. Most companies
will encourage dynamic changes in
the approved supplier list as a critical
tool to protect against unnecessary
counterparty risk. No company will want
to be dependent on a single supplier. On
the other hand, a company may decide
to guarantee a certain level of purchases
from suppliers on its approved list as a
tool to maintain the relationship and as
an incentive for the supplier to invest
in equipment or processes to ensure
minimum standards can be met. - Select supplier.
For each transaction the company will
need to select its supplier. If the company
operates an approved suppliers list,
there are many different approaches to
selection. Some will simply select on
price, on the assumption that all approved
suppliers will guarantee the prescribed
quality level. (Depending on the nature
of the supplier relationship, buyers from
the company may inspect goods in the
supplier’s warehouse before goods
are accepted.) Others will ensure all
suppliers on the approved list receive a
minimum level of orders over the course
of the year, perhaps by offering contracts
in strict rotation. Company policy may
dictate that competitive tendering is used.
For public authorities or quasi-public
bodies within the EU, there is a legal
requirement for an open procurement
process and publication in the Official
Journal (OJ).- Agree credit terms.
Once the preferred supplier has been
selected, credit terms will need to be
agreed. If an approved supplier is chosen,
it is likely the credit terms will have been
pre-agreed. If a new supplier is selected,
negotiations may take longer, especially
if the transaction is international. The
company’s ability to enforce preferred
credit terms on its suppliers relies on the
relative strengths of the two parties. - Authorise procurement of goods.
The previous few stages can be
concentrated into an automated process,
although this will depend on the nature of
the goods and the relationship between
the parties. However, once the preferred
supplier has agreed credit terms, there
does need to be a clear process for the
authorisation of the procurement of the
goods. Care should be taken at this
point, as there is the potential for fraud.
Companies will often have rigorous
procedures around payments. In fact,
the placing of an order sets in train the
obligation to make a payment, so should
be subject to equally tight controls. This
authorisation should be entered into
the cash flow forecasting system as an
expected cost – although the precise
timing may not be available. - Accept delivery.
The company needs to have an
appropriate procedure for accepting
delivery of the goods. This should include
a check of the goods before delivery
is accepted, to include a process for
ensuring no damage has been suffered in
transit. (In some cases, such as textiles,
the quality control process may be
undertaken at the supplier’s warehouse.)