Here’s a challenge (besides the evident one of whether there is actually any growth): is procurement in a period of growth actually any different to purchasing in a period of significant contraction?
This is worth thinking about, because a lot of the fundamental language used can be very similar. For instance, in a period of contracting, there was a lot of focus on risk – risk of failure of supply, of collapsing suppliers, of unexpected currency gaps. In a period of growth, we will be concerned with risk as well. Here, though, we may be looking at some different risks; inability to grow to meet demand, running out of working capital in a period of expansion, running out of skilled people to deliver the growth prospects.
The consequence of this is that, because the same language is being used, we may choose to believe the same issues are in play. However, we might need to look at some different underlying issues, and look at them in a different way.
Let’s take that fundamental issue which provides the ability for businesses to grow in response to increased demand: working capital. All businesses need a steady stream of working capital to fund current business. Without that, suppliers and wages and other bills don’t get paid. As business grows, the need for working capital expands. Some of this will, of course, be internally generated, but if there is a spike of expansion, available working capital will tend to lag behind that expansion.
As such, we may need to look once again for evidence of working capital being available to fund an increase in orders. If a manufacturing business with a typical set up receives an extra $1million in orders, they will need to find around $200000 in additional working capital to fund that increase in orders. This 20% figure for working capital is a good rule of thumb for many manufacturing based organisations, and is there largely to fund the time it takes to collect debts from customers.
We see in the marketplace many companies trying to extend their payment terms to hold cash inside the business. However, the impact of this on suppliers is notable; every increase of 30 days adds another 10% onto the working capital requirement to keep the business running. When we are purchasing for growth, and increasing order volumes, we need to make sure that the supplier will be able to maintain stability. Running out of working capital is one of the things which is destined to kill any business, no matter how profitable they are, and as such we need to make sure we allow for that.
Mark Hubbard thinks about working capital at Positive Purchasing Ltd.