The challenge
Microsoft’s supply chain costs have increased as its hardware businesses, Xbox and Surface, have grown. The company uses contract manufacturers to build these products on its behalf. Microsoft historically provided consigned raw material inventory for the build, due to its ability to negotiate better prices. The devices team had to manually plan the procurement of raw materials worth several billion US dollars annually. This presented significant process, material and, ultimately financial risk, to the company given the large volume of purchase orders they needed to manage.
The solution
To address the risks, as well as improve its net cash position, Microsoft implemented a buy/sell procurement model.
Microsoft took one step further by automating netting, impacting both Microsoft’s operations and also those of the Tier 1 suppliers.
Introducing automated AR/AP netting required major influencing to convince the various teams in finance, AP, legal, sourcing and engineering about its benefits as the solution required process changes, investment and IT resources to adjust the ERP functionality.
The company also had to convince its supplier partners to invest in similar projects to ensure the respective projects were coordinated. Not only was IT and operational work required, but supply contracts also had to be amended to reflect the new way of working.
Best practice and innovation
The procurement model allows the devices team to maintain direct supplier relationships where it deems a strategic need to the overall product and/or sourcing model. Execution of material planning is performed through an enterprise level tool managed by the manufacturer. In addition to reducing operational risk, it provides for the consolidation of all raw material purchasing needed to meet the forecast finished goods demand. The company reduced material risk (risk of loss and obsolescence) with existing contractual language to reside with the manufacturer, or suppliers in the absence of a Microsoft purchase order (within lead times). The company also gained the opportunity to leverage component sourcing consistency across different manufacturers and manufacturing models. By introducing automated netting, Microsoft increased operational and financial savings benefiting both itself and its partners.
This solution is a great example how, in today’s global business models and partnerships, major efficiencies can be extracted by extending digital transformation of business processes through the supply chain reaching business partners and their systems. Such integrated finance operations bring material financial and operational benefits to both parties, which they could not achieve alone. This close collaboration also strengthens business relationships with partners and expands innovation and best practice.
Key benefits
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- The cash flow benefit by reclaiming cash tied up in raw material inventory and removing it from the balance sheet during the production process.
- Netting AR with AP reduces balance sheet gross outcomes (large increases to AR and AP) and the AR side reduces cost to collect and risk of non-payment.
- Credit exposure on partners and DSO have been minimised.
- Significantly reduced manual AR/AP reconciliation.
- Resource savings.
- Dispute resolution has reduced from average 180 days to 45 days.
- Supplier’s burden related to foreign currency payments is reduced significantly.
- Netting AR with AP reduces balance sheet gross outcomes.
Annual business volume under this model is several billion US dollars. Peak open AR was up to one billion US dollars.
While this netting solution was initiated to drive operational efficiency, it delivered significant financial benefits for this big volume business model.
“The cash flow benefit by reclaiming cash tied up in raw material inventory and removing it from the balance sheet during the production process is huge. Buy/sell frees up US$400m of raw material inventory annually. By automated netting we and our ODM partners reap material financial benefits and operational efficiencies from this new model,” explains Fanny Niu, Senior Manager, GFS.
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