Advanced

Capital Employed Optimization for a global organization operating within vastly different operating and cultural environments.

Albertsson, Ted (2008) MIO920
Production Management
Abstract
ABB has identified a potential in decreasing their levels of capital employed and in
particular net working capital, NWC. To release tied up capital from the balance
sheet, a decision was taken to start an initiative with focus on NWC. The focus area is
to reduce NWC as percentage of revenues and to reduce the levels of overdues. The
objective of this report is to describe a methodology for decreasing NWC, based on
the ABB Capital Efficiency initiative.
The methodology used in this report is called “Action Research” which means that the
report was written while simultaneously working in the “Capital Efficiency
Management”-team. This report is based on literature, data analysis and in particular
interviews with senior management... (More)
ABB has identified a potential in decreasing their levels of capital employed and in
particular net working capital, NWC. To release tied up capital from the balance
sheet, a decision was taken to start an initiative with focus on NWC. The focus area is
to reduce NWC as percentage of revenues and to reduce the levels of overdues. The
objective of this report is to describe a methodology for decreasing NWC, based on
the ABB Capital Efficiency initiative.
The methodology used in this report is called “Action Research” which means that the
report was written while simultaneously working in the “Capital Efficiency
Management”-team. This report is based on literature, data analysis and in particular
interviews with senior management and mangers running parallel or past projects. The
timeframe covered is six months.
First part of this report consists of an assessment of the development in ABB and the
situation compared to its peers. It is shown that the development within the group is
under control and in difference to the analysis done by ABB; this peer group analysis
does not indicate a large difference to ABB peers. The conclusion drawn from the
assessment of the present situation is that; support for long term sustainable
improvement is valuable but there is no need to enforce urgent changes.
Inspiration from past and present projects combined by interviews with senior
management was used to develop a methodology for how to decrease working capital.
The first step in the reduction of overdues was targets that all regions accepted for
year end. “Overdue Collection Management” processes have been developed to
support long term improvements. To support the countries in their own projects there
are templates provided which describes a working process in four phases:
1. Startup, preparation and responsibility delegation.
2. Data analysis to identify improvement areas and a self assessment to find the
weak processes and possible improvements.
3. A blueprint where actions for the country are agreed.
4. Implementation.
Other functions in ABB such as Shared Accounting Services, Operational Excellence
and Supply Chain Management are involved to support with all the expertise needed.
Internal benchmarking becomes another tool of high importance which is now made
available to the entire group. Lessons learned and function specific information is
gathered on a web-portal. The Initiative is communicated with workshops in all
regions, from which this report covers the first workshop. Follow up, support and
distribution of information is done through mail and monthly telephone conferences
with all regional CEM-responsibles.
In five months, the overdues decreased 17% which means that the target of a 26%
decrease was not met. However, overdues decreased to a level that was not expected
to be reached without the initiative. The reporting of overdues was made mandatory
which is likely to have caused an increase in reported overdues. Long term actions on
NWC did not result in any immediate changes, as the working capital as percentage of
revenues increased slightly on yearly basis. The result in NWC is likely to appear first
ii
later. It is also too early to say if the short term overdue actions managed to
implement a sustainable improvement or only year end results.
The approach taken by ABB is suitable for companies that are not in an urgent need
for cash but want to achieve sustainable long term improvements without demanding
too much central resources. The approach doesn’t enforce changes, but rather
supports the businesses in their own improvement progress. The approach needs
senior management involvement as this has proven to be a key success factor. The
potential for standardization and low level control is larger in companies with smaller
diversity in respect of business areas and geographical dispersion.
In consideration of the methodology this report presents a remaining potential in
clarifying the reasons for running this initiative, as this would increase the motivation
and dedication for improvements. Further the incentives to encourage improvements
could be stronger. Some tools that are already in place deserve more attention in this
initiative. Especially the use of the available trade-credit policy deserves more
attention as it gives guidelines on terms, priorities, and credit assessments of
customers. The use of targets is very efficient when it comes to overdues, and these
targets are set through the regions and countries. Presently the target for NWC is the
2008 budget set by the divisions. Providing the regions with tougher NWC targets is
likely to help them in their work for improvements. (Less)
Please use this url to cite or link to this publication:
author
Albertsson, Ted
supervisor
organization
course
MIO920
year
type
M1 - University Diploma
subject
other publication id
09/5287
language
English
id
1979198
date added to LUP
2011-06-17 12:44:42
date last changed
2011-06-20 11:19:03
@misc{1979198,
  abstract     = {ABB has identified a potential in decreasing their levels of capital employed and in
particular net working capital, NWC. To release tied up capital from the balance
sheet, a decision was taken to start an initiative with focus on NWC. The focus area is
to reduce NWC as percentage of revenues and to reduce the levels of overdues. The
objective of this report is to describe a methodology for decreasing NWC, based on
the ABB Capital Efficiency initiative.
The methodology used in this report is called “Action Research” which means that the
report was written while simultaneously working in the “Capital Efficiency
Management”-team. This report is based on literature, data analysis and in particular
interviews with senior management and mangers running parallel or past projects. The
timeframe covered is six months.
First part of this report consists of an assessment of the development in ABB and the
situation compared to its peers. It is shown that the development within the group is
under control and in difference to the analysis done by ABB; this peer group analysis
does not indicate a large difference to ABB peers. The conclusion drawn from the
assessment of the present situation is that; support for long term sustainable
improvement is valuable but there is no need to enforce urgent changes.
Inspiration from past and present projects combined by interviews with senior
management was used to develop a methodology for how to decrease working capital.
The first step in the reduction of overdues was targets that all regions accepted for
year end. “Overdue Collection Management” processes have been developed to
support long term improvements. To support the countries in their own projects there
are templates provided which describes a working process in four phases:
1. Startup, preparation and responsibility delegation.
2. Data analysis to identify improvement areas and a self assessment to find the
weak processes and possible improvements.
3. A blueprint where actions for the country are agreed.
4. Implementation.
Other functions in ABB such as Shared Accounting Services, Operational Excellence
and Supply Chain Management are involved to support with all the expertise needed.
Internal benchmarking becomes another tool of high importance which is now made
available to the entire group. Lessons learned and function specific information is
gathered on a web-portal. The Initiative is communicated with workshops in all
regions, from which this report covers the first workshop. Follow up, support and
distribution of information is done through mail and monthly telephone conferences
with all regional CEM-responsibles.
In five months, the overdues decreased 17% which means that the target of a 26%
decrease was not met. However, overdues decreased to a level that was not expected
to be reached without the initiative. The reporting of overdues was made mandatory
which is likely to have caused an increase in reported overdues. Long term actions on
NWC did not result in any immediate changes, as the working capital as percentage of
revenues increased slightly on yearly basis. The result in NWC is likely to appear first
ii
later. It is also too early to say if the short term overdue actions managed to
implement a sustainable improvement or only year end results.
The approach taken by ABB is suitable for companies that are not in an urgent need
for cash but want to achieve sustainable long term improvements without demanding
too much central resources. The approach doesn’t enforce changes, but rather
supports the businesses in their own improvement progress. The approach needs
senior management involvement as this has proven to be a key success factor. The
potential for standardization and low level control is larger in companies with smaller
diversity in respect of business areas and geographical dispersion.
In consideration of the methodology this report presents a remaining potential in
clarifying the reasons for running this initiative, as this would increase the motivation
and dedication for improvements. Further the incentives to encourage improvements
could be stronger. Some tools that are already in place deserve more attention in this
initiative. Especially the use of the available trade-credit policy deserves more
attention as it gives guidelines on terms, priorities, and credit assessments of
customers. The use of targets is very efficient when it comes to overdues, and these
targets are set through the regions and countries. Presently the target for NWC is the
2008 budget set by the divisions. Providing the regions with tougher NWC targets is
likely to help them in their work for improvements.},
  author       = {Albertsson, Ted},
  language     = {eng},
  note         = {Student Paper},
  title        = {Capital Employed Optimization for a global organization operating within vastly different operating and cultural environments.},
  year         = {2008},
}