A firm grip

Feature | 30 November 2016
Michelin_case_study

Michelin was lagging behind the market average with 57.5 days payable outstanding, and implemented a supply chain finance programme to improve its working capital. Clarissa Dann reports

While none of us can predict the weather, one can prepare for it. Tyre manufacturer Michelin claims that, with its new CrossClimate tyre that fuses summer and winter technologies, it "gives people the keys to face unexpected road conditions whatever the sky throws at them".

As this particular campaign gets underway in the run-up to Christmas in the UK, I am reminded that not a single one of my Lexus RX tyres are Michelins because the UK fitters never had them in stock. In my case, it wasn't the sky that was the problem but the nails scattered in the North London side roads. However, a more positive recollection is of tea in Paris earlier in the year with the French giant's Bernard Gerardin, financial manager, worldwide purchasing group. The supply chain finance (SCF) North America pilot they had launched in 2014 with PrimeRevenue had worked out well and it was an opportunity to hear more about Michelin's supplier management strategy and improved cash flows.

Supplier scale and financial performance

Headquartered in Clermont-Ferrand in France's Auvergne region with a 14% share of the world tyre market (2015 revenues were €21.2bn), Michelin produces more than 184 tyres in 68 production facilities in 17 countries. In 2014 it had spent €12.4bn on procurement, sourcing natural rubber (10%), 200 different types of raw materials (30%), services (30%), industrial purchases (25%) and energy (5%). This had the challenge of generating 1.6 million purchase orders, paying two million invoices from 55 countries and keeping on top of some 60,000 suppliers from all over the world.

These suppliers range from small growers in Brazil1 to multinational corporates supplying highly specific machinery and metals. "Tyre building is a very specific business," explains Gerardin.

However, the company was behind its peers when it came to its days payable outstanding (DPO), and Michelin paid its invoices more quickly than its main competitor Goodyear. While this ensured the supply chain was loyal and kept suppliers happy, it meant there was less working capital available. Michelin had DPO of 57.5 days compared to the market average of 58.3 days and top quartile of 70.4 days (the top or upper quartile is the middle value between the median and the highest performer). Having announced "Ambition 2020"2 with the third item being "secure our financial performance", with the delivery of €1bn in structural free cash flow per year as from 2010 and 15% return on capital employed (ROCE), it needed a solution.

By way of background, the automotive sector is one of the main users of supply chain finance along with retail, telecommunications and the food and beverage industries. It was Toyota which led the introduction of just-in-time (JIT) manufacturing in the 1970s, which had a transforming impact on the Japanese manufacturer's efficiency as well as working capital with low inventory levels. As a natural step, the automotive manufacturers started to implement SCF programmes to further improve their working capital management.

Other examples in the automotive industry, which implemented SCF programne include: Volvo Cars, Volvo Trucks, Nissan, Scania, Pirelli, Fiat, BMW, Navistar, and Mann+Hummel.

Roll-out of the SCF programme

Gerardin explains that the roll-out of the PrimeRevenue SCF programme was taken "step by step". This meant starting with local suppliers in the US to ensure that the programme really could add value for them as well as Michelin. Around 20 suppliers were onboarded at first with a further ten added later. This involved working with the purchasing, treasury, legal, accounting and IT departments and the platform being integrated into Michelin's Oracle enterprise resource planning system.

Gerardin acknowledges that a key success factor of the whole operation was the quality of the cooperation Michelin had with PrimeRevenue throughout the programme. "We felt that in PrimeRevenue we had a true advocate, a collaborative partner with the right people, the right solutions, and the right leadership to ensure a seamless implementation and outstanding results. We are now very confident in our ability to optimise our liquidity while at the same time providing considerable value to our supplier base," he says.

But going forward with larger suppliers Michelin is aligning itself to be in a position to offer the programme in all the countries of that supplier's operation, putting it on track to become one of the largest SCF programmes in the world. "It was not really possible until September 2014 to onboard a worldwide supplier." While Michelin is relatively decentralised from an authority perspective, with a lot of the operational procedures and working capital objectives pushed out to the operating companies, the management of groups of suppliers is quite centralised and particularly concentrated in raw materials - the largest single supplier being around €200m worth of spend a year.

The main criteria applied by Michelin for PrimeRevenue's solution were:

  • an independent bank platform guaranteeing long-term stability;

  • a multi-banking solution achieving best pricing from a pool of 50 funders; and

  • a global target and multi-regional deployment of the programme with defined phases.

"We have a good platform with a good level of credibility that is working," beams Gerardin, and at four months of full implementation suppliers were getting paid in ten days and cash flow had improved by €65m.

It is entirely down to the supplier whether they wish to use the pool of financial institutions in the programme to sell their receivables and get paid early or not. If they do, then PrimeRevenue takes part of the discount - the platform provides complete transparency of what is getting to the supplier by the financial institution or by Michelin.

Next to banks, PrimeRevenue also opens
the supply chain finance market to capital
market investors who can also purchase the supplier receivables via its London based entity. "We take the invoice and create an asset in
the capital markets," says PJ Bain, the SCF provider's CEO.

 

Learning points

Almost two years on, the programme has grown steadily, freeing up more than US$65m in working capital. The secrets of success seem to be fairly straightforward - full support from the top, listening to what suppliers and all the buyers want, ensuring multi-funding, multi-country and multi-currency functionality, fast and easy supplier onboarding, and invoice approval and complete transparency.

As for my motley collection of SUV tyres, I have an open invitation to the Auvergne and an admission that Michelin's market share was an area for development in the UK. I look forward to the perfect four.

Clarissa Dann is editor-in-chief of TFR

References: 

 

  1. See http://michel.in/2eBXCje for an example of ethical supply chain management

  2. http://michel.in/1KAxJqs

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