How treasury used a massive supplier chain finance programme to deliver huge free cash flow and productivity improvements
The challenge
Procter & Gamble’s (P&G) treasury team recognised that free cash flow and productivity needed to be improved. External benchmarking of days payable outstanding (DPO) showed that P&G was lagging behind its peers, the company falling into the bottom quartile. The treasury team and purchasing organisation instituted new payment terms with suppliers, mindful that the programme should not result in increased cost of goods.
In the past, term extensions were dictated centrally with little regard to the supplier landscape and lacked a clear strategy. This time, P&G wanted more intentional choices made by a broader multifunctional team to optimise results. The objective was to partner with suppliers in a sustainable way and implement a programme that would empower the businesses to extend payment terms in a way that was most prudent for the industries in which they participate.
The solution
The P&G treasury team began to explore supply chain finance (SCF) programmes as an effective means to achieve its critical objectives regarding payment terms extension. Amongst those objectives, it was imperative that the programme be cash-sufficient, delivering between 90% and 100% cash productivity over multiple years. The programme needed to be sustainable on a global basis and simultaneously available globally. It also needed to be cost-effective for P&G’s suppliers, and be able to meet high stewardship and governance standards. An internal multifunctional team was formed, spanning treasury, purchasing, finance, legal, and shared services with business process and technical experts. The result was P&G’s Cash Acceleration programme, designed to achieve two key business commitments that were made to shareholders: US$10bn productivity improvement, and a US$2bn improvement in incremental free cash flow over three years. P&G partnered with Citi globally and J.P. Morgan Chase and Deutsche Bank regionally to support the programme.
Best practice and innovation
P&G’s Cash Acceleration programme began with a strategic effort to bring stakeholders on board. The treasury team knew that architecting a programme that would not create headwinds from a cost of goods perspective, while delivering payment term extensions, required commitment from management and coordination with procurement.
In the sourcing world, payment terms are less important than price, service, quality and supply chain efficiency. Changing this meant a comprehensive training initiative for P&G’s 1,200 sourcing professionals. A cross-functional approach, including purchasing, finance, treasury, and planning was then adopted, creating a win-win solution for P&G and its suppliers. Suppliers also benefitted from faster visibility on invoice status, leading to earlier issue resolution and lower DSO.
A Cash Acceleration programme was then launched globally, addressing more than 80% of global spend from day one. This required a tremendous amount of manpower to develop a robust solution, yet minimise process change, to transform the source-to-pay process. The team established centralised command to address issues in real-time.
The third step was a cultural shift, obtaining a top-down leadership mandate to reassure all that the Cash Acceleration programme would be sustainable. It also required establishing the metrics by which performance would be evaluated, as well as metrics around cash and term extensions. A data system and tracking capabilities enabled stewardship of the SCF programme throughout. P&G also leveraged its AA credit rating as part of its long-term strategy.
Key benefits
- More than doubled payments terms to date, translating into several billion in free cash flow contributed to P&G across all industries and all regions.
- Supports over 500 country/currency combinations with approximately 1,900 suppliers, providing several billion in low cost liquidity for P&G’s supply chain, as its suppliers leverage the programme.
- SCF programmes in 55 of 73 countries in which P&G operates, covering about 95% of total business transactions.
- Supported even in regions where SCF has traditionally been challenging to introduce.
- Overachieved goals in select markets, reaching 100% cash productivity.
