The largest gathering of manufacturing finance executives came together to examine how their organisation’s accounts function is transforming at Manufacturing Finance Summit 2018.
The role of the ‘finance director’ or ‘finance manager’ in British industry is changing, driven in response to new approaches to risk management, capital investment, digital technology and innovation.
How should your business account for risk across increasingly complex supply chains, or more commonly referred to as ‘value chains’? What impact will new funding models have on your CapEx? Why is the finance function central to a once-in-a-generation transformation of people, processes and systems?
These were the key issues explored and debated at Manufacturing Finance Summit 2018, which took place in Oxford on 16 May.
The Manufacturing Finance Summit’s innovative format revolved around a series of intimate roundtable sessions – enabling decision-makers to sit next to the experts and have their questions and concerns addressed first-hand.
Roundtable sessions took in managing FX and capital risk; working capital efficiency; supply side trade finance; access to finance; capacity planning; data management & analytics, among other topics, and delegates had the opportunity to sit at five tables throughout the day.
The Manufacturer has a number of upcoming ‘summits’ which follow the same interactive format:
- Manufacturing Innovation Summit – 20 June, Liverpool
- Woman & Diversity in Manufacturing Summit – 21 June, Liverpool
- Manufacturing Robotics Summit – 11 July, Birmingham
- Manufacturing Leaders Summit – 14-15 November, Liverpool
Morning Roundtable Sessions
The first roundtable I sat on was hosted by Sage and explored ‘finance transformation’. Innovation for manufacturers is often thought of in terms of technology and operations, with finance taking a back seat, noted table host Andrew Spence, solution consulting director for UKI enterprise at Sage, who was joined by Martin Hyman, finance director of packaging manufacturer TrakRap
However, back office technology is now allowing manufacturers to strip out inefficiencies and streamline their operations, Spence explained. Such a proposition raises a key question for executives, Is their business ready to embrace (largely technological) change in their back office?
The challenges being faced by the manufacturers sat around the table could largely be summed as ‘growth challenges’, such as transitioning from declining legacy products to developing new, higher margin goods, scaling traditional processes to meet rising demand, or reducing accounts payable / accounts received (AP/AR) mistakes as businesses expanded into international markets.
It was generally agreed that growth could quickly create new process bottlenecks unless organisations invested in and successfully leveraged the capabilities of technology, for example reducing ‘touch time’ of invoices by putting them in email and using optical character recognition (OCR), or using artificial intelligence to route transactions through an enterprise-wide ‘decision tree’.
They also agreed that businesses had to have their separate CRM, ERP, BI, SCM and finance systems talking to one another, though several delegates raised the issue of building a business case for ‘known unknowns’ i.e. the returns that could be generated via more streamlined, automated processes when existing errors in the front-end still existed.
In 2018, there is no need for data to have to pass through a myriad of disparate systems. By integrating a financial system with ERP, both sourced from a single vendor, could eliminate 90% of errors, Spence claimed.
“How ERP is delivered has changed dramatically over the past decade. The cloud, for example, has increased deliverability and placed more emphasis on the importance of a strong relationship with your technology partners.”
On the topic of drawing up a business case, Spence’s advice was to focus on the details, “It sounds like a no-brainer, but before you write a big cheque, you need to have a detailed business case, which also includes the cost of doing nothing.
“You need to be able to justify £100,000 on integration versus investing in a new sales team member who could increase your sales by £1m. Streamlined financial systems may initially cost you £100,000 over six months, but if they reduced inventory by £500,000 and you’re a £6m turnover businesses, the proposition becomes clear.”
My second roundtable was hosted by Investec and explored ‘managing FX & commodity risk’. Even small changes in exchange rates or commodity prices can make or break a manufacturing firm, warned Kiran Russell, an FX risk management specialist at Investec, who was joined by Neil Anderson, managing director of Caterpillar Skinningrove.
The key question was delegates to debate was, how does a finance leader protect their company from fluctuations and economic shocks without compromising on flexibility and efficiency?
According to the manufacturers sat around the table, their primary concern around FX risk was that, despite a business performing well, a one-off fluctuation or shock could transform what may have been a successful quarter or year into one that fell short of expectations.
Yet, despite its ability to impact an entire organisation should it be mismanaged, several at the table admitted that the topic of FX risk was generally avoided in management meetings. The businesses represented also tended to avoid breaking exposures and hedging as it prolonged the decision-making process, adopting an ‘avoid it, don’t address it’ mindset.
Risk management, such as performing a SWOT analysis, helps determine, understand and quantify risk, Russell noted. Potential future exposure (FPE) analysis also helps organisations see their maximum exposures going forward and to plan for the contracts they agree accordingly.
When it comes to FX risk, Russell continued, it is important to implement a strategy that regularly reviews any policies you have in place, say every quarter.
One manufacturer said that their business has a clause in every contract that states that if there is a currency swing of 5% or more during a period of three months, then the business can renegotiate the pricing models. That helps negate the need to hedge, but conversely could lead to smaller margins in favour of the customer.
My third roundtable was hosted Oracle|NetSuite and explored ‘capacity planning’. We all know the consumer landscape has radically changed, but what does this mean for the way manufacturers plan and model for peaks and troughs in demand and supply?
Capacity isn’t just about your supply chain and ability to fulfil orders, it also encompasses people, product and technology, noted Oracle|NetSuite’s solutions specialist Robert Klein, who was joined by Ryan McCormick, director of manufacturing at industrial digital inkjet technology manufacturer Xaar.
One delegate noted that much of the PLM software being used is determined by what the next-generation is using in colleges and universities. This has created a technological gap between what new entrants to industry are used to and expecting, and the traditional methods of tracking products and materials still commonly being used today.
Having excess capacity is as much of a business issue as not having enough, Klein said; so, how can a business who has expanded factory footprint accommodate the slack created by an overnight ability to produce X% more product?
The other key question raised by delegates was around scenario planning. Scenario planning is critical, many agreed, but with a multitude of different software and methodologies, how can you guarantee consistency across a supply chain when there’s volatility across different sites, countries and/or cultures?
A panel discussion followed lunch, focused on determining the ‘future of the manufacturing finance function’.
All three of the guest speakers explained how the finance function had changed within their organisation. In the case of TrakRap, the business had moved it from the back office to the leading side, and changed its revenue model to pay-per-use, rather than a one-off piece of machinery or solution, said Martin Hyman.
The finance function at Millers Oils had become increasingly operational in its perspective, according to CEO, Jan Ward. “Finance directors need to understand the full operational processes as they can often be the ones driving changes through,” Ward added.
“Operational teams often think CapEx is a given, noted Caterpillar Skinningrove’s Neil Anderson, “so, now finance director are actively educating operations about CapEx.”
Investing in the ability to automate financial processes has quickly become a ‘no-brainer’; but how can manufacturers safely implement changes without affecting the day-to-day running of the business?
The secret, according to Ward, was to work with a provider that understands your unique business needs and what it is you’re struggling to do and/or what to achieve. “You drive the project, not them,” she advised.
Hyman concurred, adding that “all parties need to be clear on the objectives from the outset; finance is integral to every area of the business, not just the back office, so get input and communicate.”
All three manufacturers were collecting, storing and analysing their financial data and all agreed on the importance of getting the right data to the right people at the right time, without overburdening them with information.
Hyman raised the importance of everyone having access to the right data, one ‘version of the truth’, to avoid the “first half of board meetings being spent arguing over whose figures to believe”.
Ward raised the need for the human element of analysis, “Often, data is taken to be perfect, but you have to drill down and analyse what it means, to see behind the headlines and determine how your business will make the best use of it.”
My fourth roundtable was again hosted by Investec and explored ‘working capital efficiency’. For many cost-sensitive businesses, working capital (WC) is front of mind month to month; but the ways which manufacturers innovate the management of WC hasn’t changed in years.
‘Is your business as liquid as it could be?’, asked Investec’s origination director for asset-based and cashflow lending, Steve Ive, who was joined by Belinda Smith, finance director at Agrimech – a leading manufacturer of end of line weighing, bagging and palletising systems.
The conversation was largely dominated by two key questions, how to make the most out of what you already have, and how to onboard debt in order to enable growth.
More often than not, there is a disconnect between the finance department and those making the deals in sales. Trying to reign in the payment terms being offered can be challenging, but it is crucial step in planning your WC.
“Allowing flexibility in payment terms can open up a whole can of worms when it comes to planning WC,” one delegate noted. Another adding that, “One of the most important and simple ways to ensure your WC is in order is to make sure that the payment terms in contracts are to your advantage. One client told me they would pay in 90 days, but I told them to go elsewhere if it wasn’t in 30.”
All agreed that having a plan in regard to WC represented a clear competitive advantage in the marketplace, and was of particular importance during a takeover or acquisition. Several delegates extolled the virtues of capital expenditure reports, but reinforced the need for them to be regularly audited in order to become a truly valuable tool.
My final roundtable of the day revolved around ‘access to finance’ and was hosted by UK Export Finance (UKEF).
Manufacturers, particularly SMEs, can find government funds difficult to access and any funds which are secured can often be delivered after they are most needed to bridge the gap between buyers and suppliers, noted Craig Green, export finance manager at UKEF.
That’s where the nation’s export credit agency, UKEF, comes in. Its mission is to ensure that no viable UK export fails for lack of finance or insurance, working closely with the Department for International Trade, both here in the UK and globally.
Export Finance to the Middle East and many parts of the African continent can still be exceedingly difficult, Green added. A situation made more frustrating by the fact that many lenders don’t consider any due diligence done by the manufacturing businesses to be noteworthy, one delegate added.
That’s another area where UKEF can offer a great deal of support, having pioneered recent partnerships with the Gulf Cooperation Council (GGC) and Iraq, among other challenging jurisdictions.
One SME manufacturer noted that the biggest issue facing “almost every other business I speak to of a similar size to use” is 60 or 90-day payment terms. “There is no legislation to mitigate this and it seems the government is reluctant to support SMEs in case they upset the OEMs,” he added.
Last year alone, UKEF provided £3bn worth of support to more than 220 companies, Green noted, 80% of which were SMEs. Support took the form of export credits for their customers, guaranteeing bank finance for buyers and the working capital needed for exports, and credit insurance to protect exporters in the event of customer default.