FEI - Fort Worth Chapter Working capital optimization: Leading practices to better manage and simplify the cash cycle June 13, 2017

Agenda Working Capital Perspective Case Study and Lesson Learned Key Takeaways Q&A

WELCOME…

Working Capital Leading Practices: Back to the Basics… Our discussion today is focused on working capital improvement opportunities and how to implement improvements that free up cash and generate significant annual savings and impact to the bottom line. Decrease DSO (Days Sales Outstanding) Reduce Invoice Error Rate Reduce Unauthorized Deductions Reduce Uncollectible A/R Working Capital Value Drivers Procure-to-Pay Order-to-Cash Inventory Increase DPO (Days Payable Outstanding) Payment Structure - Terms/Discounts/Rebates Maximize Discounts Reduce Financial Leakage Decrease DIO/Optimize Inventory Reduce Carrying Costs Reduce Excess and Obsolete Reduce Inventory Write-Offs Leading Practices

Tackling Accounts Receivable Cycle Management… When it comes to Accounts Receivable, how you set up and maintain customer contracts impacts the entire value cycle and how cash will ultimately be collected. Sales has no incentive to improve AR performance Salespeople use innovative and generous terms to win business, resulting in different sales terms across customer segmentation Some salespeople block collections contact with their customers In some cases, salespeople are involved in collections Sales / Terms Formal documented credit policy is not enforced Credit limits are set in the field then reviewed by corporate, sometimes after the order has been completed Instances of branches “working around” corporate credit Field AR has the authority to block shipments for overdue accounts. Credit Clear order entry policies, with backup and double checking at point of entry; order entry owns quality Majority of orders received via antiquated technology, very little by phone, no web enablement Salespeople can modify prices; market pricing control functionality is not widely used; Order Entry Billing delayed by sales and branch management reviewing pricing prior to bills being sent out; Field Ops claim no billing delays, although analysis revealed many instances Receipt of supplier invoice for direct shipments can delay billing of customer Invoicing is mostly paper-based, decentralized Billing

Indicators You Have a Working Capital Problem 60% of new customers are not set up timely, causing them to be delinquent on first bill 100+ clerical specialists split into siloed processing duties (e.g., Visa processor, AMEX processor, ACH payment specialist) Annual budget requests included headcount growth linear with revenue growth Limited productivity measures on customer setup, invoicing, collections, processing accuracy, etc High ancillary costs surrounding accounts receivable functions like shipping costs (overnight mailing from branches for new customer paperwork), customer set- up latency requiring inflated support on customer service, etc.)

The Customer Initiation Paperwork Journey Error-prone activities in capturing accurate customer information in the field result in significant downstream back-office processing… Delayed customer information and applied cash Support costs associated with manual efforts of paperwork Fluctuations in labor and workload activities Multiple manual hand-offs Excess shipping, preparation, and storage costs Functional silos within Accounts Receivable Delayed customer information for analysis Inefficient data for customer transactions Customer Field Technician Branch / Office Coordinator Shipping Audit Manual Paperwork / Payment ACH / EasyPay™ Bar Coding Preparation Imaging Storage Headquarters The Customer Initiation Paperwork Journey Customer initiation paperwork available for analysis, processing, and correction Sales Consultant 2-10 Days 1-3 Days 1 Day 2 Days 2-4 Days

…and these activities have created an order of magnitude disparity in payroll costs associated with Accounts Receivable and Collections A benchmark comparison cost analysis was performed to gauge the company against other business to consumer organizations and provide an indication of the median target levels. Accounts Receivable and Collections Payroll Cost Cost Driver Root Causes Inefficient process organization of AR team activities (i.e., functional silos) Continued to “throw” resources at the process back end to correct/ reconcile information from the front end “Peak and valley” workloads within AR are driven from branches sending paperwork once (1) a week to NSC on an inconsistent basis Inaccurate customer information captured at the time of service call/install, and then submission to NSC Lack of “Non-Conformance” management in place for the field to “Get it right the first time” Issues related to customer queries result in significant workload for research and reconciliation ~ $3.9M Budgeted Cost BENCHMARK2 Avg. Payroll Cost for companies under 1 billion in Revenue is 0.2% of total revenue or ~ $680 (000’s) AR Collections 0.2%1 Revenue Requisitioning >$3M Potential Cost Gap 1.4%1 Revenue Receiving Accounts Payable 1Assumes annual revenue of $340 million 2Based on 2016 APQC benchmark data

What we did… Built new end-to-end business process for receivables management and collections cross training staff to do all processing functions Centralized exceptions research into one discipline and team structure Implemented imaging and scanning into the “front end” of the process and sequenced how work would be distributed Non-conformance management for paperwork exceptions; added productivity measures Implemented core monitoring metrics for performance management around AR and Collections Developed comprehensive change management plan for training of new processes and communications to those impacted across the functions and overall organization Results…. Reduced FTE count by over 60%, resulting in $2M recurring savings Increased customer satisfaction and interaction given significant decrease in new account set-up and billing Scalable business processes around order to cash that are managed through performance metrics with activity targets Increased interaction between customer service, field operation and back-office finance to better manage dependencies Reduced exceptions on billing decreasing DSO and increasing cash position

Final Thoughts and Key Takeaways Make working capital an executive suite obsession. Segment your customers and vendors, and take the best care of the customers and vendors that you need the most. Incent teams for reducing corporate working capital. Automate cash processes in a manner that establishes and enforces good working capital management practices, especially for lower value transactions. Leverage next-generation technologies to improve visibility and collaboration with vendors and customers.

Questions?