CASH MANAGEMENT
To Improve Treasury Management in China, First Look  at Your Supply Chain
October 29, 2009
By Dr. Zening Ge, Managing Partner, SSA & Company Asia

Compared with supply chains in the U.S. and Europe, the supply chain challenges in China are complex and unique. First, there’s the infrastructure. Even though China’s highway system is much improved, the speed, efficiency, flexibility and coverage of the logistic service network is falling behind. Second, most local suppliers lack the sophistication to manage their own supply chains well, which makes them vulnerable to material shortages, bad planning, equipment breakdown and other emergencies. Finally, except in Yangtze River and Pearle River Delta areas, supply chains generally are not concentrated in a manageable area. According to one study, for example, China’s automobile industry has an average of five hours travel distance for parts and components to reach their final assembly plant; in the US, this number is generally below two hours.

Because of these challenges, financing the supply chain in China is a major strategic issue. It requires treasury and cash management professionals to look beyond financial factors such as tax, interest rate, exchange rate, etc., and broaden their focus to analyze additional drivers of the supply chain efficiency, such as Vendor-Managed Inventory (VMI), Days of Sales Outstanding (DSO), and Order to Remittance (OTR), just to name a few. Traditional cash management practices overlook these metrics, leaving tremendous opportunity on the table.

Small to-medium sized enterprises in China (those that employ fewer than 500 people with annual turnover of less than $100 million) aren’t as vulnerable as the larger multinational companies such as Honeywell, GE, and Siemens, which have extremely sophisticated treasury and cash management operations. Even so, most SMEs either outsource their cash/treasury management to banks wholesale or manage only some aspects of the operation (e.g., Accounts Payable and Accounts Receivable), and therefore rarely see the connection between supply chain efficiency and cash management.

Case in point: the China division of a major global telecommunications equipment and service supplier suffered from long Days of Sales Outstanding—on average, as long as 180 days representing €250 million. Most of the operating cash was tied up in the supply chain, and treasury’s main concern was to work with banks to minimize interest payments. For some time, however, finance failed to realize that it was not a departmental issue, but one involving virtually the entire company. Lacking ownership and an effective approach, the finance team could address only relatively trivial causes, such as a slow and error-laden invoicing process, but not solve the problem at its core. Only after the cash management department sponsored a project to reduce DSO, involving staff from sales, manufacturing, supplier management, delivery, and engineering services, did things change. The cross-functional team reduced DSO by 21 percent and unlocked up to 15 percent of its cash.

As this example shows, recognizing that a company’s cash position hinges more on supply chain efficiency than on sophisticated cash management is a critical first step. While it still makes sense for treasury officials to pay attention to risk management techniques such as hedging, the bigger upside lies in wringing cash out of the supply chain.

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