Supply-Chain Finance Is Smoothing out Seasonal Swings in Cash Flows
Pest-control manufacturer Woodstream ties for the 2021 Bronze Alexander Hamilton Award in the category Working Capital & Payments. Congratulations!
Woodstream may not be a household name, but its brands make life more pleasant for millions of Americans every year. The company produces, markets, and distributes a wide range of insect- and pest-control products, from traditional wooden mouse traps to Wi-Fi enabled zap traps that send mobile alerts when they’ve successfully killed a rodent. In addition, Woodstream makes electric fencing for livestock containment and is the global market leader in bird feeders. It sells both direct-to-consumer online and through major retailers.
All these businesses are, by nature, seasonal. “Retailers begin stocking our brands in their lawn-and-garden section in March or April, then typically carry them through the summer or fall, depending on the product line,” explains Andrew Church, CFO of Woodstream. “We manufacture goods all year long in two factories in the U.S. We also use contract manufacturers, primarily in Asia. Their heavy season is November through January, getting us ready for shipments that will peak in the spring.”
This means that every year the company’s expenditures accelerate in winter, and it takes several months for revenues and customer collections to catch up. “Early in the year, Woodstream is a net borrower,” Church says. “We draw on a seasonal revolving credit facility as we’re ramping up production. Then, when we start collecting on receivables, cash inflows exceed outflows. By mid spring, we’ve totally paid off our revolver debt.”
Several years ago, Woodstream was acquired by a private equity firm, which set an objective of improving upon the cash conversion cycle. “We wanted to make some acquisitions, and generating additional free cash flow would put us in a position to do that,” Church says. Managers reviewed their four major levers for improving working capital: accounts receivable (A/R), inventory, accounts payable (A/P), and accrued expenses. They developed a plan for attacking each area, Church says, with an initial focus on A/P.
“The timing of payments is something we have control over,” he explains. “So we focused on ways we could optimize payment terms with our suppliers—while simultaneously providing them with a stable source of cash. We wanted to strengthen our vendor relationships and bolster the health of our overall supply chain, even as we lengthened our payment cycle.”
Woodstream’s treasury and finance leaders determined that a supply-chain finance program would meet their needs. They worked with PrimeRevenue to design a program, secure funding from a PrimeRevenue partner institution, and integrate Woodstream’s enterprise resource planning (ERP) system with the PrimeRevenue platform.
Church and his colleagues standardized their contracts to pay domestic suppliers and service providers in 90 days and to pay foreign suppliers in 150 days—both substantial increases from the company’s previous terms, which were as low as 30 days with some vendors. As they introduced this change, they also explained the good news: Suppliers participating in the supply-chain finance program can choose exactly when to get paid on each invoice.
When Woodstream’s A/P team approves an invoice for payment, the ERP system automatically uploads it to the supply-chain finance platform. Vendors can log in and see all of their approved invoices, along with when—and how much—they can expect to be paid if they do nothing. But they have the option to choose early payment anywhere from 10 days after the invoice is issued until 10 days before the payment is due. The financing partner that funds early payment is compensated through a reduction in the payment amount, calculated at a standard discount rate.
Advena says many participants in the program are getting a better interest rate than they would if they attempted to borrow against the receivables. “Another way to look at it,” he says, “is to compare it with what’s typical when negotiating early payment terms. Oftentimes, a supplier will have to take a 1 percent discount to get paid 30 days early. That translates to a 12 percent APR. The cost to suppliers in our supply-chain finance program is well under half that.”
One key to the program’s success is its automation. “We didn’t want to launch a new process that would require expanding our A/P department,” Advena says. “With this solution, vendors always get paid on time, and everything happens automatically in our system.”
David Ellis, the company’s senior director of global sourcing, adds: “Many of our vendors were able to improve their own liquidity by accessing cash separate from their bank relationships. Some vendors were initially a little skeptical, but they have been pleasantly surprised by the degree to which this program gives them control over their own destiny.”
The flexibility to get paid months early was particularly valuable to suppliers struggling to weather the Covid-19 economy. “Some of our vendors in Asia were really hard-hit by the supply-chain issues resulting from the pandemic,” Church says. “They own the inventory until the goods pass over the transom of the vessel at the Asian port or, in some cases, the U.S. port. And there have been times over the past 18 months where the cargo ships aren’t available or the shipping containers just aren’t there.
“The delay in getting product loaded onto a boat also delays invoicing and payment,” he continues. “The flexibility of the supply-chain finance program can be really important to a supplier’s cash flow when the payment cycle is disrupted by circumstances outside their control.”
Advena sees the program’s rapid growth during Covid as evidence that it helped some suppliers weather the economic storm. “At the end of March 2021, the volume of payments being traded in our supply-chain finance program was 251 percent larger than just a year earlier,” he says. “The demand for this solution exploded during that time.”
Woodstream made the program available to its largest suppliers. Forty vendors, representing about 90 percent of the company’s total inventory spend, have been on-boarded so far. On average, participating suppliers are choosing to be paid on day 30. “So, compared with our terms before this change, they’re pulling their cash forward by about 30 days,” Church says.
Ellis explains another Covid-related benefit: “With the Covid bump in online orders of some of our brands, we needed large volumes of product manufactured faster than usual. Some of our suppliers usually have very long lead times to ramp up production. But by accessing their cash immediately through this program, they were able to make spot buys of materials. That helped them manage their costs, and they were able to get product out the door more quickly to meet our needs.”
Because of the program’s benefits for vendors, Woodstream was able to substantially extend its payment terms without damaging its supply chain. That, in turn, has dramatically impacted the company’s working capital. Days payables outstanding (DPO) has increased 67 percent, from about 63 days to 105 days.
“We set an initial goal of $16 million in cash flow gains across our $90 million in annual spend with our tier-one vendors,” Church says. “Fast-forward to today: After expanding the program to include our tier-two and tier-three vendors, plus service providers, we’ve actually achieved about $24 million. We’ve used that cash to reduce debt, to partially fund a shareholder dividend, and to make an acquisition.”
What has Woodstream learned from this experience? “In the past, when we would look to create shareholder value, we’d typically think of increasing profits and getting a better return on capital investments,” Church says. “Obviously, those areas are a great place to start, but it doesn’t make sense to focus exclusively on P&L management. We’ve learned that to improve shareholder value, we should dedicate just as much rigor and attention to the balance sheet—specifically, to working capital—as we do to improving our profit margins.
“In business, sometimes you can have binary outcomes—what’s good for Woodstream isn’t necessarily good for the other party, and visa versa,” Church concludes. “This program, though, has been a win-win for both Woodstream and for our vendor partners.”
See also:
- Using Surety Bonds to Secure FBO Funds in Europe
- Multipronged Payment Strategy Boosts A/P Efficiency Across Diverse Supplier Base
- A/P and A/R Netting Nets Benefits in the Millions