Optimising Cash and Profit in the Retail Sector

By Matt Crane and Allard Sjollema

Across all industries, effective management of the entire end-to-end value chain can drive significant improvements both in terms of cash flow as well as profits. For retailers, however, the optimal strategy can be even more tightly focused, as cash and profits go hand in hand. The faster stock can be turned, the more profit and cash can be generated. Even so, the aim should not just be about turning stock quickly, but rather about turning the right stock quickly – and knowing how to align the speed of your supply chain to ever changing customer demands.

Our experience shows that businesses who have a lower cash-to-cash days (a measure of cash conversion cycle relative to sales) on average will achieve higher profit margins. Such businesses are more in-tune with customer demands, and can effectively manage their supply chain to satisfy these demands at a lower cost.

A recent analysis of the companies in the Thai SET highlighted that retailers nationwide currently average 36.1 cash-to-cash days, a four year high. This number is equivalent to an additional THB7.5bn of working capital tied up in these retailers’ own balance sheet, and indicates that for many there are significant improvement opportunities available.

We typically recommend retailers exploring the following strategies to optimise working capital and increase profitability:

• Data-driven ordering: Advanced demand forecasting tools are far more accurate than relying on “gut feel”. Re-ordering processes and parameters should be separate from commercial decision making in order to avoid pressure from suppliers to order or pay more than necessary.
• Monitor promotional effectiveness: Promotions should focus on real sales uplift rather than discounts obtained from suppliers. Discounts often fail to translate into higher sales, leading to overstock or margin loss as excess stock is cleared after the promotion. Among the retailers we work with, we have consistently found that 50% of promotions do not lead to a sales uplift if their performance is not effectively monitored.
• Supply chain optimisation: Retailers need to choose carefully between direct to store deliveries, cross-docking or a central warehouse solution in order to achieve the optimal Minimum Order Quantity that balances the need for low logistics cost and adequate stock levels.
• Prompt action on overstock and obsolete stock: Retailers have to ensure that the right behaviour is incentivised when it comes to taking action on overstock and obsolete stock. Failure to take timely action can lead to high stock levels, followed by heavy discounts when action is finally taken as products become unsellable
• Fact based supplier negotiations: Due to the high number of SKU’s that retailers have to manage, suppliers are often better prepared for negotiations than their retail counterparts. This imbalance can create outcomes in which the retailer is pushed to increase purchase levels instead of sales-through, leading to higher stock levels and eventually unfavourable terms. Buyers need to have access to data surrounding promotional effectiveness, sales-through, and stock levels. In our experience, this level of preparation consistently leads to significant improvements in terms when negotiating with suppliers, while simultaneously reducing stock levels. If the retailer is capable of providing sales-through per store, it can consider selling these data to suppliers, creating an additional income stream and enhancing co-operation with suppliers to optimise stock levels.
• SKU optimisation: Product buyers must balance the need to eliminate low-turnover SKUs with the need to maintain a range that satisfies the customer. Advanced customer and product level analytics can identify which SKUs can be eliminated without impacting customer loyalty, and also support the implementation of effective product phase-in and phase-out processes

Through the strategies described above, retailers can ensure that cash flow and inventory management are embedded into the commercial decision-making process, thereby freeing up significant amounts of liquidity. Even aside from improvements in liquidity, this approach also brings other significant benefits.

By considering the cost of inventory in each commercial analysis, retailers will come to understand the true cost of their products – which can in turn be used to develop sensible promotional strategies, while also providing a stronger negotiating position with both customers and suppliers.

In short: Retailers who embed a cash flow mindset to their product management will always be a step ahead of their competitors. They will also find themselves well equipped to take a proactive rather than reactive role when negotiating with suppliers, from a position of knowledge and leverage. Such advantages can bring significant rewards over time, putting the retailer in the driver’s seat for future growth and success.

Matt Crane is a Director at Grant Thornton’s Advisory practice, specializing in working capital and cash flow optimization. Allard Sjollema, is a Partner of Grant Thornton’s Retail Consulting division, and has extensive experience working with and for retailers across Asia to drive enhanced profitability. If you would like an informal conversation to understand more about our experience and approach, please feel free to get in touch.