A large distributor of IT and Services had been experiencing consistent growth and had been expanding rapidly into new regions. That is when they noticed an alarming trend, their cash flows were becoming strained due to slower payments from their customers. This shift was posing a very real threat to their growth strategy. Without liquidity, they would have been forced to find new means of financing their expansion.
Q: Our liquidity has worsened in the last quarter, even though our total orders, bookings, and margins have been increasing. How do I find the root cause? A: I think our customers must be taking more time to pay their invoices. I also think our order processing must be taking too long, but I am just not sure how to validate these assumptions.
As I said, we had some assumptions of why things were going wrong, but we did not have reliable facts and figures to prove it. In order to get facts, we used a tool to visualize all orders end-to-end. This gave us a systematic overview of where time was lost in the process and allowed us to drill down into the relevant cases to find out why.
Once we had the data we found out that there were actually only a few customers that were taking too long to pay. We were easily able to reach out to those customers to correct the issues. However, we uncovered a major problem that we had not anticipated; the average time from delivery to first invoice was was way too long - up to 26 days. Digging into the data revealed that most of these cases turned out to be maintenance or repair service orders, which caused significant delays in accounting. It became evident that the reason for this were different service billing models based on hours, milestones or contractual quota agreements, causing confusion and extra work because of poorly maintained, missing and delayed records from the service personnel. On average it took 5-6 days to get the required information from the departments and enter it into our IT-systems. As an immediate measure, we contacted 20 of our biggest clients and standardized the billing to hourly rates and are rolling this out to many more. We also improved IT-based processing – departments are now obligated to enter the service hours provided into our ERP system as soon as they come back from a job. This has already helped us speed up invoicing by more than 40%.
We also found out that many of the orders which were created in the system were later cancelled or rejected. This creates a lot of extra work with no value. A systematic analysis of all rejections revealed that the most common reasons were failed credit checks, lack of inventory, or end of life parts that had actually been replaced by newer part numbers. Most credit checks simply failed because individual customer purchasing limits prevented the seamless processing of orders. Fortunately, the matter could be resolved by setting a higher limit to trusted customers. However, we were surprised to find out that due to a server error, data between the customer interface and inventory system was not exchanged in time to display the real availability of items and replacement part numbers. To ensure that the actual stock levels and part numbers are now displayed, we made some simple modifications to our ordering and inventory systems.
Furthermore, we discovered that many customers were only partially taking advantage of our electronic ordering system. We identified those customers with high transactional volume that were still ordering over the phone, fax, or email and have had great success in helping them adopt our automated systems. This has heavily reduced cycle times and the need for manual processing. The ultimate result was a drop in invoicing from 3 weeks to 10 days from the time we receive the order.Back to the blog