Recently, the MetalMiner team shared a laugh over BMW’s announcement that it would introduce a “subscription service” in certain markets for the use of their cars’ heated seats. While some of us remain avid BMW aficionados, whether or not customers will pay for the right to warm their seat remains unclear. This brings us cash flow.
BMW and other car makers are starting to recognize the overall attractiveness of the subscription model. That is, it’s a huge help when it comes to cash flow. Even Tesla has intimated it would add “software subscriptions” to its cars. But while company representatives didn’t specify when this might happen, recent events suggest sooner might be better than later.
Just last week, the WSJ reported that Tesla’s free cash flow fell from $2.2b during Q1 to $621m in Q2. Shocking as this may be, it’s not due to some avant-garde Muskian business model. Like other car manufacturers, Tesla generates revenue when it delivers its vehicles to customers. Whatever is left over after the company pays its suppliers is profit.
When deliveries grow, cash flow increases. But when deliveries drop, so does the cash flow. Of course, every manufacturer recognizes revenue and generates cash flow a bit differently. Still, the Tesla example serves as a reminder that procurement also plays a strategic role in helping improve or maintain proper revenue streams.
Procurement’s Cash Flow Levers
It’s important to remember that companies have multiple levers to mitigate slowing cash flow. The procurement department “owns” several of these levers and, therefore, must support the business accordingly. Some of these levers include:
- Adjusting Payment Terms – It’s perhaps the oldest trick in the book, but extending payment terms can help improve cash flow. Using various tools such as VenConnect can help suppliers with their accounts receivable while the buying organization extends terms.
- Negotiating Cost Downs as Commodity Prices Fall – MetalMiner has offered up two specific resources to help companies either reduce material costs now or reduce part/component spend.
- Avoiding Buying High Priced Inventory – Many companies fell into the trap of “panic buying” back in 2021 and early 2022. For metal spend, it is possible to never (or rarely) over buy. By correctly reading the short term and long term trends, buying organizations can identify when to buy for “just-in-case” requirements.
- Paying Close Attention to Changes in Demand – Working closely with sales to keep a constant grip on order books, demand shifts, and volumes gives the buying organization a clearer ‘picture of future demand’. In addition, sharing accurate demand forecasts with suppliers also helps ensure the company avoids “over-buying.” The latter, of course, can significantly impact cash flow.
Some of you may remember that Dell Computer founder Michael Dell revolutionized the concept of cash flow through mass customization. This allowed his company to take payment from customers before he built their computers. Of course, most manufacturers can’t operate using this model. That said, by paying close attention to several levers, procurement can play a valuable role in protecting the holy grail of cash flow.
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