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The Value Of Tightly Managing Your Subsidiary Ecosystem

By improving the metrics in the entire order-to-cash cycle across the subsidiaries, organizations can free up valuable cash that can be used to fund growth.

By improving the metrics in the entire order-to-cash cycle across the subsidiaries, organizations can free up valuable cash that can be used to fund growth.

Large enterprises need to increase the velocity and efficiency of their order-to-cash cycle within their subsidiary network, which can each reach a count in excess of 1,000 subsidiaries for Fortune 500 companies. These subsidiaries include international and local sales and distribution offices, small operating divisions, customer service units, and joint ventures. While most large manufacturing enterprises have implemented ERP systems at corporate and larger divisions/operations, a vast majority of subsidiaries in these companies still use manual or legacy systems to manage their operations.  These manual or legacy systems cause various business processes in their order-to-cash cycle to be inefficient and error prone. By improving the metrics in the entire order-to-cash cycle across the subsidiaries, these organizations can free up valuable cash that can be used to fund growth. Such improvements come from:

  • Streamlining the sales quotation process at subsidiaries to help them rapidly and accurately make and communicate available-to-order and delivery commitment decisions to their local customers, resulting in a larger share of high-value and profitable orders from competition.
  • Rapidly communicating customer demand to corporate, so they can balance supply and demand to make smarter procurement decisions.
  • Coordinate with divisions/HQ to streamline the fulfillment process, so the subsidiaries can meet customer delivery commitments (and delivery metrics) in an efficient manner.
  • Implementing processes to collect account receivables faster. Timely order fulfillment is normally a pre-requisite for faster collections.

Every day that these organizations wait to streamline the order-to-cash processes at their subsidiaries, they are bleeding cash that to the tune of millions of dollars.  According to Aberdeen Group’s 2011 research, best-in-class corporations have 71% lower past due accounts receivables (A/R) and payment time to clear the A/R ledger 80% faster when compared to corporations that are not best-in-class (see Figure 1). These organizations achieve best-in-class metrics by automating major steps in their order-to-cash process at 2.9 times as often as all others.  This automation allows them to:

  • Improve visibility to real-time status of order, delivery and billing information.
  • Standardize procedures for quotation, order management, order fulfillment and delivery, credit management, billing and cash collection.
  • Employ work-flow automation to initiate major process steps; and implement build-to-order, pull-based manufacturing methodologies.

By streamlining the order-to-cash cycle for their subsidiaries, these companies improve a number of their financial metrics.  The biggest beneficiary is the Days-Sales-Outstanding metric (DSO), which can be as much as 40% lower for best-in-class organizations.  In fact our internal research shows that DSOs for top 25% performing companies is 30 days vs. 59.5 days for the bottom 25% - nearly twice as good.  Improvement in DSO frees up cash that can be put to more productive use.  Focus on order-to-cash process also improves cash visibility and forecasting for subsidiaries which allows HQ to identify upcoming deficits or surpluses and adjust short-term borrowing accordingly.  It also makes a subsidiary’s order management, order fulfillment, payments processing and related processes more efficient and reduces costs.  But the benefits do not stop there. Investments in order-to-cash automation also lead to improvements in the subsidiary’s customer-delivery metrics - these metrics have to improve in order to accelerate invoicing and customer payment processes (Figure 2).  As organizations automate to reduce the time elapsed between an order and its delivery (so the order-to-invoice cycle time can be reduced), the supply chain velocity of the organization also increases. This is evident in Aberdeen’s process maturity metrics for order conversion (27% vs. 5%) and order release-to-fulfillment (52% to 11%) for best in class order-to-cash organizations in vs. laggards. Our internal analysis also supports this evidence – top 25% of make-to-stock (MTS) manufacturers we analyzed have on-time-delivery metrics of 97% vs. 86.1% for bottom 25%, and only 2% of the sales orders were backordered in top 25% performing companies vs. 4.9% across all MTS companies we analyzed.   Finally, as organizations implement business systems to improve their order-to-cash process, they also streamline their inventory management processes, leading to lower inventory days-of-supply, which reduces working capital needs.  Reason is that by implementing such systems, these organizations minimize manual intervention, streamline operations and allow that organization to manage by exception rather than by default for the order-to-cash process.

Some companies have subsidiary operations that use manual methods for managing their order-to-cash process.  Others have legacy systems at their subsidiaries that cannot scale to meet the volume and/or process complexity requirements of their order-to-cash process. As a result, such subsidiaries often end up resorting to using spreadsheets, emails and other manual methods for part of their order-to-cash process. By automating the business systems of these subsidiaries, you can automate its order-to-cash process, improve its performance metrics and, as a result, reduce overall working capital needs. Once these subsidiaries that have manual and legacy systems and need a new business system have been identified, your next step is to select the right system for your subsidiary strategy.

Summary and Recommendation

Global Fortune 2000 companies are aggressively setting up new international subsidiaries (or growing existing international subsidiaries) in emerging economies to support their growth objectives. However these companies are also under pressure to lower their working capital needs.  As an IT executive, you’ll want to balance these two needs by ensuring fast order-to-cash cycle within your subsidiary network.  Manual or legacy systems at these subsidiaries come in the way of accelerating order-to-cash process.

Mike Morel is Senior Director of Marketing at SAP and is responsible for marketing the SAP Business ByDesign solution.