The challenge

In a six-year strategic plan released by Olam earlier this year, it set a clear goal of being a global food and agri-business that delivers food, feed and fibre, along with innovative solutions to its customers within the next five years.

In recent years, Olam’s business model has been evolving. With its core differentiated offering of being a farm gate to dinner table service provider, it has conventionally had an elongated cash conversion cycle. It sources goods right at the origin and initiates its value-add, while retaining the goods in its own supply chain right until the sale to the end consumer.

Olam needed to improve its capital structure to support growth. Over the last 18 months, Olam’s treasury has delivered on this strategic ask from senior management by raising perpetual equity, diversifying into new markets via revolving credit facilities (RCF) in Europe and the Samurai loan market in Japan.

The nature of the business meant that there is a limited window of three-to-four core months for procuring the best quality agri-commodities which will then be sold over the next eight-to-ten months. A competitive landscape meant that end clients were demanding longer/customised pay terms.

These challenges compelled Olam to look for reliable options to generate sustainable long-term free cash flows with working capital improvement solutions without leveraging debt.

The solution

Olam set up three hubs for receivables in Singapore, the US and Europe to help achieve faster AR realisation and risk diversification and act as a sales enabler.

To accelerate overall cash flows, the treasury worked with the sales teams and three key banking partners to set up an electronic workflow to reduce paper movement and improve automation in the Receivables Monetisation programme.

For payables, the treasury team worked with the procurement team and banking partners to roll out a supplier financing programme based on credit ratings, transaction volumes and relationship history. This helped suppliers secure liquidity at an attractive pricing, thereby strengthening the relationship between Olam and its suppliers and also helped Olam optimise its working capital cycle.

Best practice and innovation

Managing the diverse set of stakeholders and delivering the solutions within a short time frame was the most notable aspect of this success story. Olam’s treasury team worked with multiple internal and external stakeholders including banking partners, business teams, country teams, finance, legal and tax to successfully implement these solutions.

As an Asia-parented corporate, Olam is setting new benchmarks for best practices in an industry which was historically dominated by US/Europe based agri-majors. The programmes launched by Olam have delivered on the key working capital objectives and helped strengthen the business. While working capital optimisation is a multi-year journey, Olam has made considerable progress in a short 12-24 month period, improving cash conversion cycle by US$1.7bn.

Key benefits

The progress on working capital optimisation has essentially resulted in a new way of working and has generated tangible benefits for the company in the last 24 months:

• Robust and scalable – all the initiatives across the breadth of this strategy were devised to generate scale.
• Flexible and bespoke approach – a combination of centralised USD scale solutions, coupled with targeted in-country local currency solutions, allowed for increased customisation and higher conversion rate for different types of end clients and suppliers.
• Net impact – the cash conversion cycle was reduced from 150 days to 76 days with actual working capital reduction of around US$1.7bn in 18-24 months.