The Big Squeeze

With debt and equity markets closing for business, it's now time for CFOs to look closer to home for capital.

The challenge for Henderson of KPN is to find even more ways to squeeze cash from existing operations. By the end of 2003, KPN expects net debt to fall to €10.5 billion from around €11 billion today and to generate about €1.5 billion of free cash flow. That’ll be tough, says Rick Deutsch, head of European investment grade credit research at BNP Paribas, given that “the easier, low-hanging fruit has been picked — it’s going to be a lot more difficult going forward.”

Henderson is sanguine. While acknowledging that this year’s working capital reduction “won’t be as big as last year,” he has set his sights on further improvements in purchase-to-payment systems through better deals with suppliers, and through a complete credit risk analysis of all KPN’s customers. The next wave of cash, he says, is just waiting to be tapped. After all, he notes, as a result of last year’s efforts working capital process improvements are now “embedded throughout the organization, with extra checks and balances. It’s never just a one-off.”

Ben McLannahan is a senior staff writer for CFO Europe.

Material Whirl: Vendor-Managed Inventory

Under a typical business model, when a distributor needs a product, it places an order with a manufacturer. The distributor controls the timing and size of the order and maintains an inventory plan. Under a so-called vendor-managed inventory (VMI) model, that traditional trading relationship is reversed: the manufacturer receives electronic data on the distributor’s sales and inventory levels, enabling it to know about every item that the distributor carries as well as receive true point-of-sale data. That lets the manufacturer gain tighter control of the order and stocking process.

According to Maria Jimenez, a Paris-based research director at Gartner, the technology consultancy, VMI software vendors — including i2, JDA, Logility, Manugistics, Retek, and Syncra — expect their business to take off soon. The brutal inventory write-downs of the past few years are leading to “much higher degrees of collaborative planning, forecasting and replenishment,” especially between retail and consumer products manufacturers. European firms already using some form of VMI include Volvo, BMW, Interbrew, Ericsson and the UK’s Co-operative Retail Trading Group (Co-Op).

Borealis has also been a VMI front-runner. The €3.7 billion Danish plastics firm, which produces over 3 million tons of polyethylene and polypropylene a year, began a primitive VMI project in the early 1990s with a handful of bulk customers in the Nordic region. The firm essentially ensured material availability by assuming responsibility for monitoring stock levels on-site at the customers’ premises and for placing orders.

But VMI at Borealis made great strides after the firm set up an extranet in 2001. According to Jan Roed, group head of logistics, around 20 of the firm’s largest European customers are now linked to a website run by Borealis, which provides both parties with near real-time information on current stock levels and consumption rates. Also available is information on historic consumption and planning/delivery efficiency. “It’s now much faster and more reliable,” says Roed, who aims to bring at least another 50 customers onto the extranet. “It’s really a win/win situation — customers don’t have to manage their inventory, while we get the stock off our hands.”

That’s a relief to CFO Clive Watson, who welcomes any initiative to improve forecasting. “Inventory is tough to manage in the business we’re in,” he says. “Plastics is very cyclical, very volatile, characterized by our customers going through stocking and de-stocking phases.” Nonetheless, he notes, VMI helped the firm to take out some 50,000 tons of inventory last year, reducing days inventory outstanding from 48 to 38 days.

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