Treasury Today Country Profiles in association with Citi

Supply chain efficiency: does it pay to incentivise?

Photo of a man reaching for a dangling carrot

Four years ago, when the financial crisis was at its destructive peak, companies began using pay incentives to hit working capital targets. Heineken USA, for example, initiated a scheme they called ‘Hunt for Cash’. As part of the scheme, departments across the company – finance, treasury, commercial, supply chain, and production groups – each had cash generation incentives built into their pay. The scheme, which was strategically launched in 2007, a year before the crisis hit, gained impetus when the company took on a large amount of debt with its purchase of Scottish and Newcastle in 2008, just as credit markets had begun drying up.

The initiative was, unquestionably, a success – ingraining best practices across each department with an involvement in the financial supply chain and enabling the company to hit ambitious cash targets. However, not all incentive schemes to improve working capital are as successful as Heineken’s. What was it that the company had done to produce such impressive results? And why are some incentive initiatives still falling short of their objectives?

The answer, some experts believe, is largely down to where within the company the incentives are targeted. Responsibility for inventory reduction initiatives, for example, typically resides with finance, treasury, or supply chain departments. But such initiatives are unlikely to be very successful when those who can really make a difference to inventory reduction (even if indirectly), such as sales managers, are not incorporated into incentive schemes.

Fiona Swainston, Senior Director and Global Operations Director at REL Consultancy, sees this as one of the main reasons why some incentive schemes sometimes do not produce the desired effect.

“What you find is that most companies think that working capital is in most cases finance driven. So they don’t see that incentivising operations staff is going to get them anywhere. But according to our experience, over the 30 or 40 years that we have been doing this, it is absolutely key that operations staff understand, are communicated with, and have knowledge of the working capital impacts of their own particular role or responsibility.”

Broadening horizons

Veronica Heald, director at REL consultancy, agrees that companies need to be looking beyond senior management and the finance department when seeking to incentivise better supply chain practices. “Typically what we would recommend to our clients is that incentives should extend all the way down through management levels to those functions that play a role in managing or impacting working capital and that, of course, extends well beyond finance,” she says.

That doesn’t necessarily mean that all departments should receive the same incentive package regardless of their contribution to better working capital, however. “I have seen instances where companies will put a different weighting on the working capital incentive based on whether that individual is within the finance function or another operations function – the finance function incentive might be a little higher weighted than the operations managers might be. So for instance, finance might have 40% of their incentives weighted to working capital, whereas operations might have only 10%.”

However, one difficulty that may arise when attempting to incorporate other departments is that the participant might not know how best to impact it. As Heald explains, “A sales manager might have a component of their incentives tied to working capital but they might not actually know how their actions are going to influence that figure. As such, they might be more concentrated on the other pieces of the incentive plan which they feel they can more directly influence”. So, she adds, it is vital that when applying incentives to areas of a company that are perhaps unaware of how they influence working capital, they receive some sort of action plan, so that they understand how to achieve those goals.

Swainston agrees. “I think it is about awareness – awareness of which parts of the business flow their job will have an impact on downstream and upstream”, she says. “I’ll give you an example. Procurement is often incentivised on driving down costs. So procurement staff will do deals with suppliers and they will double up an order, for example, to get the cost down. They have done exactly what they were asked to do because obviously the incentivisation will drive behaviours, to a certain extent. But what that can create is then a problem for warehousing, who have got to manage all of that stock, and then there’s insurance and so on.”

This is where driving awareness of such programmes across the organisation is absolutely key.

Many parts make a whole

Often though, as Heald explains, departments within a company will have other, sometimes competing, priorities, which can make collaboration difficult. But REL’s research indicates that working capital incentives do offer a means for achieving cross-collaboration. When used and targeted in the right way they can produce a culture within the company which will make sustainable, long-term impacts on working capital.

In a study looking at the success factors and drivers of sustainable working capital improvement projects, published in March this year, incentives featured prominently. Of the respondents who indicated that they had incentive schemes in place at their company, the sustainability of the working capital improvements they had made increased to 100% after incorporating working capital incentives as a permanent component of their incentive plans.

So, with recent reports showing that inefficient cash management could be costing Europe’s largest companies near to €800 billion last year alone, perhaps more companies need to be following Heineken’s lead and initiating their own ‘Hunt for Cash’.

Find out more about incentivising treasury in the November-December 2012 edition of Treasury Today.