Edito. Gilles Bogaert Managing Director, Finance. Pierre Pringuet Chief Executive Offi cer. Dear colleagues,

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1 Edito Dear colleagues, Pierre Pringuet Chief Executive Offi cer Gilles Bogaert Managing Director, Finance Performance management has always been a key element in Pernod Ricard s culture, decentralized business model and way of working. It has allowed to deliver consistently strong results over time, with a good level of predictability. That said, it has been mainly focused on profi t. We need to enlarge our P&L culture to a true cash and value creation culture, among the whole group, beyond the fi nance function. Clearly, the best way to generate cash is to grow the top line and then the bottom line. But there are many other parameters that also have to be monitored. Cash generation is the main criteria used by investors for the valuation of our company. It is also required to reduce the debt (still at a high level), ease our refi nancing needs and generate the headroom to allow investments and, in the future, potential acquisitions. We are clearly not starting from scratch. But there is signifi cant room for improvement in cash forecasts accuracy, in cash performance monitoring and, above all, in the activation of the cash levers at all levels and in all areas of the organization. As a consequence, cash management has been one of the key projects among the Agility global initiative. one of the deliverables is the cash toolkit, a good practices handbook (prepared by people from all areas) that will allow all functions to better understand cash generation cycles and drivers to boost our performance. A cash toolkit by function has been sent to all CEos with a guideline to cascade it down to the respective functional departments. As CFos, you will play a key role to drive these initiatives in your respective businesses, educate people on cash and make sure the cash toolkit is actually used by all departments. You will benefi t from the support of the International Treasury Department. We are now at the end of the second phase of Agility 2, delivering the tools to you to raise our game in our approach to cash generation. The key to success is now to ensure a closer link to the business and your active involvement in pursuing the implementation of the recommendations and good practices you will fi nd in the cash toolkit. Best wishes Pernod Ricard / Cash Management / 1

2 April 2011 April 2011 April 2011 April 2011 April 2011 FinanCE CashToolKit Cash Management EXECuTivE summary CashToolKit Cash Management Why? supply Chain CashToolKit Cash Management sales The Cash Toolkit was created to meet two key objectives: improve commitment to cash generation across pernod ricard and make cash a subject shared and understood by all company functions, activate cash optimization levers and monitor improvements with relevant kpis. CashToolKit Cash Management purchasing / marketing CashToolKit Cash Management What? Cash Toolkit by function CashToolKit Cash Management April 2011 Cash Toolkit by process cycle (for CFOs) The Cash Toolkit is a cross-functional good practices handbook that links each company function with related cycles that have a direct impact on cash generation. It includes a checklist of operating levers that can be activated to stimulate cash generation, as well as relevant KPIs to monitor changes over time. In order to facilitate the use of the Cash Toolkit, two versions have been prepared, including the same good practices, but presented differently. The Cash Toolkit by function => sub-booklets Purchasing / Marketing, Sales, Supply Chain" and Finance to be distributed separately to the corresponding departments. The Cash Toolkit by process cycle => full Cash Toolkit presenting the entire process cycles perspective "Purchase to Pay", "order to Cash", "Forecast to Fulfill" and "Treasury operations". Pernod Ricard / Cash Management / 2

3 Executive summary the Cash Toolkit In three keys questions Who? Cash Toolkit by function CEOs of all Pernod Ricard affiliates receive a Cash Toolkit by function and are responsible for its deployment to the relevant departments: the CEO is the sponsor of this project within the affiliate. Practically, the CEO cascades the appropriate section of the Cash Toolkit to his Management Committee. Each Management Committee member is then expected to push down the document into his team, enabling the good practices to be spread and become part of the normal way of working. The Cash Toolkit by process cycle CFOs of all Pernod Ricard affiliates receive a Cash Toolkit by process cycle and are responsible for ensuring that the relevant operating levers are properly activated across the different departments. The CFO coordinates the implementation of local initiatives, assists and supports the other departments: the CFO is the driver of this project within the affiliate. Pernod Ricard / / Cash optimization Management // 43

4 PURCHASING leverage items strategic items Exploitation of purchasing power Diversify, balance or exploit non-critical items Bottleneck items Efficient processing Volume assurance Supply risk Pernod Ricard / Cash Management / 23 PURCHASING 1% 9% 90% 29% 16% 55% Pernod Ricard / Cash Management / PURCHASING Cash 30 days net 30 days EOM 31 days EOM on 10th 45 days EOM 60 days net 60 days EOM Others Pernod Ricard / Cash Management / 21 how? The Cash Toolkit is structured according to two different perspectives: The process view (e.g. Purchase to Pay, order to Cash, Forecast to Fulfill, Treasury operations ) to show how the different company functions should work together to achieve high level targets. Cash Toolkit process cycle structure Negotiate with customers orders Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage AR & process period end EnaBling processes and systems order to Cash purchase to pay Negotiate with vendor Process invoices Process payments Maintain vendor master data Process purchase orders Receive goods and services Manage AP & process period end Maintain stock master data Manage Brand Company forecast & planning Manage Market Company forecast & planning Manage orders from Market Companies to Brand Companies Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing Forecast to Fulfill Treasury operations Liquidity management Intercompany financing 4 week cash forecasting Cash-in / Cash-out forecasting Banking Netting Foreign Exchange Detailed good practices Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Diversify supplier relationship based on risk and impact Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY perform a/b/c purchases category optimization Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY register and control contractual terms in vendor master data objectives Increase profits and cash flow for non critical items Diversify supply risk key performance indicators OR analysis Definition: The quadrants of the kraljic matrix can be described as follows Non-critical items: small quantity baseline, wide supplier range Leverage items: small quantity baseline, many suppliers, big order quantity / volume Bottleneck items: multiple suppliers, critical for value chain / production Strategic items: few suppliers, own business depends on them Impact on profi t Purchase portfolio matrix (Kraljix Matrix) good practices Classify supplier relationship analyze your relationship with each of your suppliers and classify this relationship in terms of impact on profit and supply risk Give each supplier a classification and fill in the purchase portfolio matrix (Kraljic Matrix) implement and monitor the portfolio matrix Take appropriate action with regards to each quadrant Non-critical items: optimize the processing of purchasing and exploit the competition between your suppliers Leverage item: use your purchasing power and competition to optimize purchase terms Bottleneck items: define and manage safety stock level, manage proper delivery frequency, identify suppliers for item substitution Strategic items: optimize the relationship with those suppliers and consider strategic partnerships as well as back-up solutions to ensure availability of critical items objectives Assess cash opportunities to partner efficiently with your purchasing team (tariffs, rebates, payment terms, etc.) Standardize payment terms to optimize working capital Streamline suppliers portfolio key performance indicators OR analysis kpi: a/b/c analysis example Weight of the top 350 vs. low 1,500 suppliers in 8mFY10 (total suppliers: 2,912) Share of the 79.9m purchases in value Definition: The a/b/c categories are defined as follows A: 80% purchases from 20% of all suppliers B: 15% from 30% C: 5% from 50% good practices Share of 15,972 invoices received in number of invoices Ensuring efficiency of supplier base Perform a/b/c purchases analysis to determine potential optimization of the supplier / purchases base (see KPi box for further explanation) Ensure that your purchasing team is involved in order to provide expertise in the sourcing and procurement processes for category a and B negotiate proper payment terms assess the opportunity to streamline the category c supplier portfolio Ensure that budget holders apply to standard terms for all category c suppliers top 350 suppliers Remaining suppliers smallest 1,500 suppliers objectives Ensure that suppliers contractual terms recorded in ERP system are updated to reflect the real contractual payment terms optimize cash flow forecast Reduce risk of automatic early payment or cash payment Align payment date versus due date Reduce cost of payment processing by higher standardization key performance indicators OR analysis Number and share of supplier master data with an incomplete set of contract terms structure of contractual payment terms (see example chart): NB of invoices % of payment terms structure < 30 days in ERP or procurement tool good practices overview of purchase invoices by contractual term of payment over FY09 and 8mFY10 use one single supplier database create one single supplier database and one account set up per vendor Define a procedure to create and to update master data related to the vendor: contact details, payment terms, etc. consider using a workflow when creating or updating vendor master data involving relevant departments (i.e. finance, legal, marketing) Establish Electronic Data interchange (EDi) with major suppliers wherever possible with access to suppliers product references and tariffs create a vendor portal for vendor to access own account Ensuring all payment terms are set in your system Once a year, run a report to determine that all payment terms are set in your system and perform test to ensure that they are in line with actual contractual terms and conditions negotiated with suppliers On a yearly basis the contracts terms registered in the vendor master should be reviewed and different payment terms compared to standard payment terms should received and approval from the purchasing and financial department Proper categorization of supplier type (e.g., cash vs. negotiated.) Cash payment exposure at the beginning of each semester, run a report focused on suppliers with cash contractual terms and perform test to avoid cash payments by default whereas delay of payment where negotiated with suppliers in millions cumulated value FY09 cumulated value 8mFY10 Nb of invoices FY09 Nb of invoices 8mFY10 Pernod Ricard / Cash Management / 4

5 ExEcutivE summary the cash ToolkiT how is it structured? The company function view (e.g. Purchasing/Marketing, Sales, Supply Chain, Finance ) to emphasize whose is the responsibility for the management of the Good Practice. Each department receives only the related section of Cash Toolkit. Example of a table of contents for one process cycle process cycle Table of contents PURCHASE To pay negotiate with vendor Consider the scope of the purchasing function, and relevant rules and procedures (e.g. bidding, contracts, etc.) use standardized payment terms and align multiple payment terms from a single supplier optimize payments cycle by negotiating longer payment terms or early payment discounts based on business needs maintain vendor master data process step register and control contractual terms in vendor master data perform a/b/c purchases category optimization Diversify supplier relationship based on risk and impact process purchase orders ask the supplier to indicate the purchase order number as well as a breakdown of services on the invoice manage a maximum number of purchases orders in procurement tool or Enterprise resource planning (Erp) automate purchase order processing and use enabling technologies receive goods and services integration between procurement tool and accounting system only accept goods / services receipt corresponding to an outstanding purchase order process invoices manage a single entry point for invoices Ensure supply has corresponding purchase order to match the invoice Consider more effective billing mechanisms process payments list of good practices per process step plan periodic payment campaigns (use a payment schedule) to optimize Days payable outstanding (Dpo) implement controls to prevent early payments integrate accounts payable system with banking system manage a/p & process period end perform inventory and valuation of claims for provisions perform an annual review of actual payment terms versus contract payment terms monitor accounts payable (a/p) ageing balance Compare actual with target Dpo good practices for marketing negotiate with vendors and formalize of the business relationship implement follow-up and monitor procedures regarding budget versus actual spend PURCHASING MARKETING Pernod Ricard / Cash Management / 17 responsible company function (recipient of the good practice) Pernod Ricard / Cash Management / 5

6 the cash ToolkiT how is a good practice presented? Each page presents one good practice and provides (1) information on the objectives, (2) a detailed description of activities to be performed when implementing, (3) corresponding Key Performance Indicators (KPIs) to assess the impact over the time. Example of a good practice process step of each good practice is highlighted Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Consider the scope of the purchasing function, and relevant rules and procedures (e.g. bidding, contracts, etc.) good practice objectives objectives of the particular good practice optimize cash generation by leveraging the PR Purchasing organization key performance indicators OR analysis Benchmark 5% possible savings in purchases linked to the extension of the purchasing function and the appliance of a tendering process kpis Number of purchasing categories (e.g. wet or dry goods) managed by your purchasing team / total number of your purchasing categories Purchasing turnover managed by your purchasing team / total purchasing turnover of your entity Number of purchase orders related to purchasing contracts / total number of purchase orders Number of catalogs available for your budget holder recommended list of kpis good practices Empower the purchasing organization connect your purchasing team with holding and regional teams to manage efficiently and leverage existing purchasing contracts consult your regional legal or finance department before signing contracts consider purchasing categories which could be managed at regional level (cross-countries) assess market opportunities to coordinate purchasing contracts and procurement processes (cross-entities) refine the scope of services of your purchasing team assess the coverage of your purchases supported by your local purchasing team consider new purchasing categories which could be sourced and procured by your purchasing team Monitor the level of savings with your purchasing team Define procedures and provide catalogs in order to authorize budget holders to manage independently some of their purchasing Detailed activities to be performed Communicate the purchasing rules to your budget holders Remind the points of contact for each purchasing categories to your budget holders (holding, region, your entity) communicate the appropriate purchasing authorization and delegation to your budget holders set-up common savings and compliance to payment terms objectives to budget holders and purchasing team sign contracts with key suppliers whenever possible, in order to: clearly state terms of agreement between vendors & PR affiliate and, Mitigate the risk of disputes (timing of the price revisions / agreed payment terms / respective responsibility in case of quality issue / detailed description of the technical spec. for raw material, etc.) implement bidding processes when possible, in particular for Point of sales (POs) vendors and suppliers of services (media, PR, training, consultants, etc.) PURCHASING Pernod Ricard / Cash Management / 18 responsible Company Function (recipient of the good practice) Pernod Ricard / Cash Management / 6

7 Chivas

8 Executive summary Overview The purpose of the Executive Summary is to provide CEOs and CFO a simplified checklist of the key good practices to be implemented for every process cycle, as well as a suggestion of the main Key Performance Indicators (KPIs). We recommend that CEOs, CFOs and other involved departments periodically review the implementation status of the good practices and monitor the KPIs. Implementation of the relevant good practices contributes to optimization of the affiliate cash generation, and therefore to a continuous improvement in the group Net Debt / EBITDA ratio. Functions: Account Management Field Management Sales Administration Finance Sales cycle, from the development of customer relationships to the receipt of cash (The Accounts Receivable Cycle) Working Capital levers Procurement of services, and the payment of those services (The Accounts Payable Cycle) Functions: Purchasing Marketing Budget Holders in other departments Finance Order to Cash Purchase to Pay Functions: Demand Planning Logistics Industrial Finance Ordering raw materials and inventory to fulfill product demand, to the management, and reporting of inventory Forecast to Fulfill Treasury Operations Drive optimal Cash Conversion Cycle Cash optimization and the best utilization of working capital that considers the impact of the cycles on Purchase to Pay, Order to Cash, Forecast to Fulfill, plus a strong centralized treasury process that facilitates debt minimization Functions: Finance Pernod Ricard / Cash Management / 8

9 Executive summary Purchase to Pay (Accounts Payable Cycle) DIRECT CASH IMPACT Optimize payments cycle to maximize your business liquidity: - Negotiate longer payment terms or early payment discounts based on business needs - Plan periodic payment campaigns (use a payment schedule) Maintain vendor master data by ensuring that contractual terms are current Ensure that all invoices have one single point of entry Monitor accounts payable (A/P) ageing balance Compare actual with target Days Payable Outstanding (DPO) INDIRECT CASH IMPACT Consider the scope of the purchasing function and its impact on working capital needs Manage a maximum number of purchase orders in procurement tool or Enterprise Resource Planning (ERP) Significant kpis EUR million Aug Sep Oct Nov Dec BUD Dec Jan Payable vs. DPO Feb Mar Apr May Jun LE Jun BUD Jun Payables vs. DPO Days Trade payables Non group FY 10/11 Trade payables Non group FY 09/10 DPO Non group FY 09/10 DPO Non group FY 10/11 '000 EUR Apr 08 May 08 Jun 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 FC BUD +180 days days 0-90 days not impaired and not due Aged Accounts Payables Pernod Ricard / Cash Management / 9

10 Executive summary Order to Cash (Accounts Receivable Cycle) DIRECT CASH IMPACT Optimize receipts cycle to maximize your business liquidity: - Standardize and renegotiate payment terms with customers - Consider factoring to manage cash vs. working capital Analyze aged accounts receivables Implement formal dispute resolution mechanism Compare actual versus target Receivables & Days Sales Outstanding (DSO) INDIRECT CASH IMPACT Partner with (larger) customers to streamline ordering, receipt and payment process Set-up credit policies and define credit limits for all customers Create effective automated controls to prevent staff from overriding set credit limits Register customer master data in your sales & distribution tool or Enterprise Resource Planning (ERP) Manage 100% of orders in Sales Administration tool or ERP Significant kpis EUR million Aug Sep Oct Nov Dec BUD Dec Jan Receivables vs. DSO Feb Mar Apr May Jun LE Jun BUD Jun Receivables vs. DSO Days Trade receivables (before Factoring) Non group FY 10/11 Trade receivables (before Factoring) Non group FY 09/10 DSO (before Factoring) Non group FY 09/10 DSO (before Factoring) Non group FY 10/11 '000 EUR Apr 08 May 08 Jun 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 FC BUD +180 days days 0-90 days not impaired and not due Aged Accounts Receivable Pernod Ricard / Cash Management / 10

11 ExEcutivE summary Forecast to Fulfill (inventory management) DirECT Cash impact Standardize and rationalize product portfolio Calculate seasonality influences Develop policies and procedures for goods storage and handling Perform regular physical inventory count and ensure the posting of inventory differences in your warehouse/inventory management and accounting Compare actual versus target Days Inventory on-hand (DIo) Calculate and monitor inventory carrying/ holding costs indirect Cash impact Maintain stock master data Design and deploy processes to manage stock and forecast for new products or end of life products Coordinate large promotion orders from retailer to Market Company (MC) and Brand Company (BC) Use an inventory tracking process significant kpi EUR million Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Aug 11 Sep 11 Oct 11 BUD Dec 11 LE BUD days trade goods - non group trade goods - group Finished goods Other inventories Non aged wet goods Dry goods Inventory vs. DIo other kpis Value of slow moving inventory including obsolescence Evolution of number of Stock Keeping Units (SKUs) Pernod Ricard / Cash Management / 11

12 Executive summary Treasury Operations DIRECT CASH IMPACT Concentrate cash with Corporate Treasury as soon as possible Calculate a global cash position on a daily basis Perform cash-in / cash-out forecasting Make every effort to join the netting system, and utilize it to offset all agreed intercompany balances each month No external borrowing facilities are to be established without approval from Corporate Treasury Bank only with the core financing banks for cash management purposes INDIRECT CASH IMPACT Entities should investigate how to integrate the group financing process (cash pool, treasury convention, etc.) Communicate immediately all non-functional currency invoices above 350k (outside of netting system) to Corporate Treasury front-office via e-treasury Significant kpi Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Cash Position Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 Cash - Non Group Gross Debt - Non Group Debt/Cash Group Net Debt Total Other kpis Cash Forecast vs. Actual Foreign Exchange (FX) results on current operations Pernod Ricard / Cash Management / 12

13 Executive summary Notes Pernod Ricard / Cash Management / 13

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15 PURCHASE to PAY Procurement of services, and the payment of those services (The Accounts Payable Cycle) Ricard

16 PURCHASE TO PAY Accounts PAYAblE CYclE Enabling processes Order to Cash Purchase to Pay Purchasing and Finance Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage Accounts Payable & process period end Forecast to Fulfill Treasury Operations Toolkit split by Function Toolkits by function Purchase to Pay Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Toolkit split by Cycle Sales Purchasing Marketing Supply Chain Finance Purchase to Pay Negotiate with vendor Maintain vendor master data Receive goods and services Process invoices Process payments Manage Accounts Payable & process period end Pernod Ricard / Cash Management / 16

17 Table of contents PURCHASE TO PAY Negotiate with vendor Consider the scope of the purchasing function, and relevant rules and procedures (e.g. bidding, contracts, etc.) Use standardized payment terms and align multiple payment terms from a single supplier Optimize payments cycle by negotiating longer payment terms or early payment discounts based on business needs Maintain vendor master data Register and control contractual terms in vendor master data Perform A/B/C purchases category optimization Diversify supplier relationship based on risk and impact Process purchase orders Ask the supplier to indicate the purchase order number as well as a breakdown of services on the invoice Manage a maximum number of purchases orders in procurement tool or Enterprise Resource Planning (ERP) Automate purchase order processing and use enabling technologies Receive goods and services Integration between procurement tool and accounting system Only accept goods / services receipt corresponding to an outstanding purchase order Process invoices Manage a single entry point for invoices Ensure supply has corresponding purchase order to match the invoice Consider more effective billing mechanisms Process payments Plan periodic payment campaigns (use a payment schedule) to optimize Days Payable Outstanding (DPO) Implement controls to prevent early payments Integrate accounts payable system with banking system Manage A/P & process period end Perform inventory and valuation of claims for provisions Perform an annual review of actual payment terms versus contract payment terms Monitor accounts payable (A/P) ageing balance Compare actual with target DPO Good Practices for Marketing Negotiate with vendors and formalize of the business relationship Implement follow-up and monitor procedures regarding budget versus actual spend PURCHASING MARKETING Pernod Ricard / Cash Management / 17

18 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Consider the scope of the purchasing function, and relevant rules and procedures (e.g. bidding, contracts, etc.) OBJECTIVES Optimize cash generation by leveraging the PR Purchasing organization KEY PERFORMAncE INDicAtors OR ANALYSIS Benchmark 5% possible savings in purchases linked to the extension of the purchasing function and the appliance of a tendering process KPIs Number of purchasing categories (e.g. wet or dry goods) managed by your purchasing team / total number of your purchasing categories Purchasing turnover managed by your purchasing team / total purchasing turnover of your entity Number of purchase orders related to purchasing contracts / total number of purchase orders Number of catalogs available for your budget holder GOOD PRActicEs Empower the purchasing organization Connect your purchasing team with holding and regional teams to manage efficiently and leverage existing purchasing contracts Consult your regional legal or finance department before signing contracts Consider purchasing categories which could be managed at regional level (cross-countries) Assess market opportunities to coordinate purchasing contracts and procurement processes (cross-entities) Refine the scope of services of your purchasing team Assess the coverage of your purchases supported by your local purchasing team Consider new purchasing categories which could be sourced and procured by your purchasing team Monitor the level of savings with your purchasing team Define procedures and provide catalogs in order to authorize budget holders to manage independently some of their purchasing Communicate the purchasing rules to your budget holders Remind the points of contact for each purchasing categories to your budget holders (holding, region, your entity) Communicate the appropriate purchasing authorization and delegation to your budget holders Set-up common savings and compliance to payment terms objectives to budget holders and purchasing team Sign contracts with key suppliers whenever possible, in order to: Clearly state terms of agreement between vendors & PR affiliate and, Mitigate the risk of disputes (timing of the price revisions / agreed payment terms / respective responsibility in case of quality issue / detailed description of the technical spec. for raw material, etc.) Implement bidding processes when possible, in particular for Point of Sales (POS) vendors and suppliers of services (media, PR, training, consultants, etc.) PURCHASING Pernod Ricard / Cash Management / 18

19 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Use standardized payment terms and align multiple payment terms from a single supplier OBJECTIVES Monitor and align trade terms Optimize working capital and cash conversion KEY PERFORMAncE INDicAtors OR ANALYSIS Number of payment terms (see example chart) 30 days net 63% 5%: 256 suppliers 15%: 96 suppliers Immediately 16% due net 80% of volume 34 suppliers Target group for renegotiation Number of payment terms per supplier and potential opportunities for improvement via negotiations GOOD PRActicEs Standardize and align payment terms Analyze at least once a year the number of payment terms per supplier and the reason for different payment terms Ensure that standard terms are stored centrally Determine the potential working capital improvement Define and communicate standard terms of payment Renegotiate the payment terms starting with suppliers promising the biggest improvement potential and negotiate towards the favorable payment term Purchasing and accounting systems apply to standard terms PURCHASING Pernod Ricard / Cash Management / 19

20 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Optimize payments cycle by negotiating longer payment terms or early payment discounts based on business needs OBJECTIVES Optimize payments cycle Improve payment terms KEY PERFORMAncE INDicAtors OR ANALYSIS Number and purchase volume of suppliers with whom longer payment terms by paying a premium makes sense (see example chart) Value Opportunity in [Currency]s Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 GOOD PRActicEs Consider the payment terms before ordering and include finance in the discussions Consider negotiation of longer payment terms by paying a premium or early payment with a respective discount, based on the optimal terms for your business Identify suppliers with whom longer payment terms (by paying a premium) or early payment discounts can be negotiated Select items for which a premium could be paid to obtain longer payment terms Assess / consider the trade-off regarding Earnings Before Interest and Taxes (EBIT) vs. the cost of working capital Negotiate longer payment terms or early payment with selected vendors PURCHASING Pernod Ricard / Cash Management / 20

21 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Register and control contractual terms in vendor master data OBJECTIVES Ensure that suppliers contractual terms recorded in ERP system are updated to reflect the real contractual payment terms Optimize cash flow forecast Reduce risk of automatic early payment or cash payment Align payment date versus due date Reduce cost of payment processing by higher standardization KEY PERFORMAncE INDicAtors OR ANALYSIS Number and share of supplier master data with an incomplete set of contract terms Structure of contractual payment terms (see example chart): NB of invoices Cash 30 days net 30 days EOM 31 days EOM on 10th 45 days EOM 60 days net 60 days EOM Others in millions Cumulated value FY09 Cumulated value 8mFY10 Nb of invoices FY09 Nb of invoices 8mFY10 Overview of purchase invoices by contractual term of payment over FY09 and 8mFY10 % of payment terms structure < 30 days in ERP or procurement tool GOOD PRActicEs Use one single supplier database Create one single supplier database and one account set up per vendor Define a procedure to create and to update master data related to the vendor: contact details, payment terms, etc. Consider using a workflow when creating or updating vendor master data involving relevant departments (i.e. finance, legal, marketing) Establish Electronic Data Interchange (EDI) with major suppliers wherever possible with access to suppliers product references and tariffs Create a vendor portal for vendor to access own account Ensuring all payment terms are set in your system Once a year, run a report to determine that all payment terms are set in your system and perform test to ensure that they are in line with actual contractual terms and conditions negotiated with suppliers On a yearly basis the contracts terms registered in the vendor master should be reviewed and different payment terms compared to standard payment terms should received and approval from the purchasing and financial department Proper categorization of supplier type (e.g., cash vs. negotiated.) Cash payment exposure At the beginning of each semester, run a report focused on suppliers with cash contractual terms and perform test to avoid cash payments by default whereas delay of payment where negotiated with suppliers PURCHASING Pernod Ricard / Cash Management / 21

22 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Perform A/B/C purchases category optimization OBJECTIVES Assess cash opportunities to partner efficiently with your purchasing team (tariffs, rebates, payment terms, etc.) Standardize payment terms to optimize working capital Streamline suppliers portfolio KEY PERFORMAncE INDicAtors OR ANALYSIS KPI: A/B/C analysis example Weight of the top 350 vs. low 1,500 suppliers in 8mFY10 (total suppliers: 2,912) 1% 9% 16% 90% 29% 55% Top 350 suppliers Remaining suppliers Smallest 1,500 suppliers Share of the 79.9m purchases in value Share of 15,972 invoices received in number of invoices Definition: The A/B/C categories are defined as follows A: 80% purchases from 20% of all suppliers B: 15% from 30% C: 5% from 50% GOOD PRActicEs Ensuring efficiency of supplier base Perform A/B/C purchases analysis to determine potential optimization of the supplier / purchases base (see KPI box for further explanation) Ensure that your purchasing team is involved in order to provide expertise in the sourcing and procurement processes for category A and B negotiate proper payment terms Assess the opportunity to streamline the category C supplier portfolio Ensure that budget holders apply to standard terms for all category C suppliers PURCHASING Pernod Ricard / Cash Management / 22

23 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Diversify supplier relationship based on risk and impact OBJECTIVES Increase profits and cash flow for non critical items Diversify supply risk KEY PERFORMAncE INDicAtors OR ANALYSIS Definition: The quadrants of the Kraljic Matrix can be described as follows Non-critical items: small quantity baseline, wide supplier range Leverage items: small quantity baseline, many suppliers, big order quantity / volume Bottleneck items: multiple suppliers, critical for value chain / production Strategic items: few suppliers, own business depends on them Impact on profit Leverage items Exploitation of purchasing power Non-critical items Efficient processing Strategic items Diversify, balance or exploit Bottleneck items Volume assurance Supply risk Purchase portfolio matrix (Kraljix Matrix) GOOD PRActicEs Classify supplier relationship Analyze your relationship with each of your suppliers and classify this relationship in terms of impact on profit and supply risk Give each supplier a classification and fill in the purchase portfolio matrix (Kraljic Matrix) Implement and monitor the portfolio matrix Take appropriate action with regards to each quadrant Non-critical items: optimize the processing of purchasing and exploit the competition between your suppliers Leverage item: use your purchasing power and competition to optimize purchase terms Bottleneck items: define and manage safety stock level, manage proper delivery frequency, identify suppliers for item substitution Strategic items: optimize the relationship with those suppliers and consider strategic partnerships as well as back-up solutions to ensure availability of critical items PURCHASING Pernod Ricard / Cash Management / 23

24 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Ask the supplier to indicate the purchase order number as well as a breakdown of services on the invoice OBJECTIVES Increase control on purchase orders Increase efficiency of accounts payable (A/P) process KEY PERFORMAncE INDicAtors OR ANALYSIS Number and share of invoices i.e. open items that could not be matched to a purchase order (see example chart) Volumes Jan Feb Mar Apr Invoices not matched Invoices matched Number and share of items posted to a suspense account GOOD PRActicEs Contact suppliers Contact every supplier not indicating the purchase order number on the invoice and communicate the wish for indication Ensure that the format can be recognized Consider refusing the payment if the supplier does not cooperate Breakdown of services on the invoice Ask the supplier to provide a breakdown of services (e.g. per service type, progress) or cost types (e.g. fees, traveling costs, etc.) on the invoice in order to properly match the service performed to the invoice. This reduces the risk of overpayment or fraud PURCHASING Pernod Ricard / Cash Management / 24

25 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Manage a maximum number of purchase orders in procurement tool or ERP OBJECTIVES Ensure that purchase orders are compliant with purchasing terms and conditions Ensure the completeness of commitments to improve cash forecasting KEY PERFORMAncE INDicAtors OR ANALYSIS Number of requisitions approved vs. number of purchase orders (see example chart) 10% requisitions, not approved 90% requisitions, approved 60% 40% Purchase orders with approved requisition Purchasee orders without requisition Number of requisitions approved vs. total number of requisitions Number of blanket orders GOOD PRActicEs Set-up requisition approval levels Define rules & responsibilities with regards to requisitions Integration of materials management Integrate purchasing with materials management to improve inventory levels Blanket orders Make proper use of blanket orders with key suppliers Monitoring and controlling purchase orders Ensure that 80% to 90% of your purchase orders are recorded in your procurement tool / Enterprise Resource Planning (ERP) to obtain a clear view of the overall number and value of purchase commitments PURCHASING Pernod Ricard / Cash Management / 25

26 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Automate purchase order processing and use enabling technologies OBJECTIVES Increase control on purchases orders Efficient purchase order process Increase profits and cash KEY PERFORMAncE INDicAtors OR ANALYSIS Definition Electronic Data Interchange (EDI) can be formally defined as the transfer of structured data, by agreed message standards, from one computer system to another without human intervention' E-ordering: electronic ordering is the sending of purchase orders by electronic means, i.e. transmission or making available to the recipient and storage using electronic equipment for processing (including digital compression) and storage of data KPIs Time spent to approve purchase orders Number of people with authorization to approve purchase orders Share of purchase orders being transferred electronically Number of suppliers using EDI Number of available online catalogues GOOD PRActicEs Automate purchase orders processing Define the scope of employees being able to create and approve purchase orders Define the workflow and authorization limits Consider workflow functionalities of your procurement tool or Enterprise Resource Planning (ERP) to support the approval process Consider the use of enabling technologies Encourage the use of EDI with key suppliers to accelerate the processing time Consider e-ordering for remaining suppliers Implement online catalog for key suppliers to allow more informed purchasing decisions to be taken PURCHASING Pernod Ricard / Cash Management / 26

27 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Integration between procurement tool and accounting system OBJECTIVES Ensure the completeness of accruals to improve the accuracy of cash forecasting KEY PERFORMAncE INDicAtors OR ANALYSIS Purchase orders receipt of the period vs. total number of purchases orders in progress (see example chart) 200 Volumes PO received for the period Total PO in progress GOOD PRActicEs Accruals Ensure that goods or services receipt is evaluated in the procurement tool and updates the accounting system Ensure that a procedure for the posting of accruals exists Consider configuring your systems to create an accrual automatically at the goods / services receipt PURCHASING Pernod Ricard / Cash Management / 27

28 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Only accept goods / services receipt corresponding to an outstanding purchase order OBJECTIVES Ensure that receipt of goods or services are compliant with the purchase order Increase accuracy of accruals and cash forecasting KEY PERFORMAncE INDicAtors OR ANALYSIS Number of rejected deliveries (see example chart) Number Rejected deliveries Q Q Q Q4 Number, value and share of approved variances, purchase order vs. goods/services receipt GOOD PRActicEs Match the goods/services receipt to an open purchase order Ensure that deliveries (in terms of quantity) have been ordered and requisitioned Consider configuring your system to require an open purchase order to post the goods / services receipt Reject deliveries where no corresponding purchase order exists Tolerance limits Define tolerance limits for quantities and prices to prohibit unreasonable variances Approval Create an automatic workflow for the approval of variances and posting with a missing purchase order PURCHASING Pernod Ricard / Cash Management / 28

29 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Manage a single entry point for invoices OBJECTIVES Ensure the completeness of reception, storage and entry of all invoices Prohibit duplicate invoice processing and payments KEY PERFORMAncE INDicAtors OR ANALYSIS Number of locations / departments being able to post invoices Invoices processed per day GOOD PRActicEs Single entry point Define, construct and communicate a single entry point, managed by the accounts payable department Ensure that a delivery address and a unique invoice address is communicated while ordering Identify suppliers not indicating the purchase order number on their invoice and communicate the matter to your purchasing function Define approval process Define the scope of employees being able to approve invoices Implement a formal communications process (workflow) of invoices across multiple departments such as finance, legal and marketing Define the authorization approach Apply escalation procedures or guidelines around payment limits Assess the opportunity to use enabling technology Consider scanning invoices to manage invoice processing and archiving and to maintain one repository for paper invoices Consider an automatic workflow to process (scanned) invoices to reduce the time spent until the invoice is approved and posted in the system with respect to your approval process Avoid double payment Verify if your accounts payable system has a facility to recognize duplicate invoices to prevent duplicate payment PURCHASING Pernod Ricard / Cash Management / 29

30 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Ensure supply has corresponding purchase order to match the invoice OBJECTIVES Increase control on purchasing process Improve cash flow forecasting KEY PERFORMAncE INDicAtors OR ANALYSIS Definition 2-way-match describes the process of verifying that purchase order and invoice information matches within accepted tolerance levels. The two-way match is based on the following criteria matching: invoice price = order price and quantity billed = quantity ordered 3-way-match verifies additionally to the 2-way-match if the quantity billed is equal to the quantity received KPI Number and share of invoices without goods / services receipt without purchase order without goods / services receipt and missing purchase order GOOD PRActicEs Match the incoming invoice to the purchase order and compare quantity and prices (2-way-match) and to the goods / services receipt and compare its quantities (3-way-match) Consider implementing preventive and/or detective controls Configure your procurement tool or Enterprise Resource Planning (ERP) to require an open purchase order to post the goods / services received Monitor cases where the 2 or 3-way match was not possible and analyse root causes PURCHASING Pernod Ricard / Cash Management / 30

31 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Consider more effective billing mechanisms OBJECTIVES Streamline invoicing and payment process Optimize payment terms negotiation outcome Improve operational expenditure benefits (e-invoicing avoids some costs: paper, mailing etc.) KEY PERFORMAncE INDicAtors OR ANALYSIS Definition Electronic invoicing is the sending of invoices by electronic means so that the recipient can read, store or process within their system KPI Number of invoices received per supplier (see example chart) Number of invoices Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6 Supplier 7 Supplier 8 Supplier 9 Supplier 10 Supplier 11 Most invoices are received from supplier 6 and 9: E-invoicing from these suppliers would bring the most advantages Number of invoices GOOD PRActicEs Consider electronic invoicing Analyze which suppliers could be suitable to request e.g. suppliers from whom the most invoices are received Consider the possibility to implement e-invoicing between affiliates Contact these suppliers and discuss the possibility for e-invoicing Make sure to consider relevant legal and tax requirements for e-invoicing In case of implementation, ensure that e-invoices are properly archived Consider self-billing Analyze which suppliers could be suitable for self billing; the most trusted and long-term suppliers are eligible for this Ensure that the reception area works properly in terms of incoming goods inspection Contact these suppliers and negotiate agreements on self billing, point out the advantages for suppliers If possible, combine self billing with e-ordering to fully automate the process (even less handling and less errors) PURCHASING Pernod Ricard / Cash Management / 31

32 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Plan periodic payment campaigns (use a payment schedule) to optimize Days Payable Outstanding (DPO) OBJECTIVES Smooth and optimize cash outflows and forecasting Use favorable payment methods KEY PERFORMAncE INDicAtors OR ANALYSIS Number, share and volume of payments per period that are paid according to its due date could be grouped and paid according to a defined schedule GOOD PRActicEs Define payment campaigns Define a schedule for payment campaigns (twice a month) Negotiate periodic invoicing (e.g. blanket order), combining various orders received Analyze the breakdown of the different payment methods Monitor results of payment campaigns Monitor the impact on the DPO and cash flow forecast Monitor and inform the payment method used after every campaign Analyze current status of used payment methods Create a list of all payment methods in use Analyze which suppliers can be paid by using a favorable payment method Negotiate towards favorable payment methods Reduce check payments and negotiate towards electronic payments processing Avoid petty cash payments to reduce administration costs and potential fraud Negotiate the favorable payment method Monitor on a regular basis if favorable payment methods are used PURCHASING Pernod Ricard / Cash Management / 32

33 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Implement controls to prevent early payments OBJECTIVES Optimize cash flow and forecasting Control payment process KEY PERFORMAncE INDicAtors OR ANALYSIS Actual amount of early payments Example of process: Early payments value and early volume in terms of number of invoices to be managed on a monthly basis Administrator Prepare payment Cashier Purchase Y Goods Y Invoice Y Payment order (PO) received and received and date same Y available? same as PO? same as PO? as invoice? N N N N Contact Administrator Contact Administrator Contact Administrator Contact Administrator Authorize and execute payment GOOD PRActicEs Analyze existing controls (measures / activities) to prevent early payments Analyze the early payment purchase value and volume and identify root causes to determine if the amount could be decreased in the future Analyze existing controls such as segregation of duties or system configurations Implement controls to prevent early payments, e.g. Ensure segregation of duties between the accounts payable (A/P) department (invoice processing) and Treasury or other departments processing the payment, e.g. access or change of A/P master data files should not be permitted for employees processing payments Ensure that the accounts payable system determines the due date automatically according to the payment terms Analyze on a regular basis if early payments still occur and find root causes Formalize the controls by communicating them internally with clear roles & responsibilities and automating them in your systems PURCHASING Pernod Ricard / Cash Management / 33

34 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Integrate accounts payable system with the banking system OBJECTIVES Increase transparency over payments processing Reduce the risk of manipulation and fraud Automatic balancing of open items KEY PERFORMAncE INDicAtors OR ANALYSIS Time spent to balance open items after the receipt of the bank statement Example of an in-house regional payment factory: Cash Settlements Centre Remittance Info Suppliers Company Payments Banking System External Payments Reporting Bank(s) Reporting In-House Bank Reporting Corporate Treasury Operating Parameters GOOD PRActicEs Interface your accounts payable systems with the banking system regarding the in- and outflow of information Streamline the format and process of your electronic payments processing Interface the two systems to avoid the usage of portable drives/discs Consider processing the electronic bank statement Analyze if your system can process an electronic bank statement to balance open accounts payable items automatically Workflow for payment authorization Create an automatic workflow for the authorization of payments to reduce the time spent until the payment is processed at the bank Depending on the payment volume, define authorization limits and configure your workflow system accordingly Limit the number of people having access to that system Payment factory Consider building regional payment factories allowing to net and bundle payments, lowering the number of transactions and related transaction costs as well as to streamline the payment process PURCHASING Pernod Ricard / Cash Management / 34

35 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Perform inventory and valuation of claims for provisions OBJECTIVES Improve cash flow management and forecasting Improve closing process KEY PERFORMAncE INDicAtors OR ANALYSIS Number, share and value of claims per supplier (see example chart) 150 Number of Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6 Number of PO Number of Claims Development of provisions Time to prepare the period-end closing GOOD PRActicEs Estimation of provisions (managed by accounting) Perform inventory and valuation of claims for provisions Analyze root causes to reduce the number of claims Ensure all goods and services received are invoiced and accrued (e.g. enter all receipts to enable accounts payable to match all outstanding invoices) PURCHASING Pernod Ricard / Cash Management / 35

36 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Perform an annual review of actual payment terms versus contract payment terms OBJECTIVES Reduce risk of early payment Optimize payment date vs. due date KEY PERFORMAncE INDicAtors OR ANALYSIS Actual Days Payable Outstanding (DPO) vs. master date, target DPO and working capital potential (see example chart) W/C Improvement ('000 EUR) Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier Supplier DPO (Days) Potential WC Actual DPO Master data DPO/ Target DPO GOOD PRActicEs Periodically analyze payment terms Make sure the actual invoice terms are aligned with the terms as stated in the contract Register contract terms in the supplier master data (refer to: "Register contract terms in vendor master data") Make a periodic analysis (minimum once a year) of actual invoice terms versus contract terms (for example: see chart) Determine how many invoices (and at which value) have been paid before the standard terms due date Determine the working capital improvement potential Take appropriate action (e.g. by registering schedule payment terms in the master data) PURCHASING Pernod Ricard / Cash Management / 36

37 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Monitor accounts payable (A/P) ageing balance OBJECTIVES Improve cash flow management and forecasting Improve closing process KEY PERFORMAncE INDicAtors OR ANALYSIS A/P ageing balance (see example chart) '000 EUR Apr 08 May 08 Jun 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 FC BUD +180 days days 0-90 days Not impaired and not due Aged Accounts Payable GOOD PRActicEs Ageing balance Ensure that due dates are derived or entered when an invoice is posted Configure your system to be able to retrieve an ageing balance for accounts payable Analyze the root causes for items that have not been paid in a reasonable time frame Monitor the A/P ageing balance on a regular basis PURCHASING Pernod Ricard / Cash Management / 37

38 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Compare actual vs. target Days Payable Outstanding (DPO) OBJECTIVES Monitor the DPO trend to ensure that targets are met Optimize working capital KEY PERFORMAncE INDicAtors OR ANALYSIS Payables vs. DPO (see example chart) EUR million Days Aug Sep Oct Nov Dec BUD Dec Jan Feb Mar Apr May Jun LE Jun BUD Jun Trade payables Non group FY 10/11 Trade payables Non group FY 09/10 DPO Non group FY 09/10 DPO Non group FY 10/11 Payables vs. DPO GOOD PRActicEs Cash Dashboard Issue a Cash Dashboard in each reporting period Compare the actual vs. target accounts payable balance & DPO Analyze the reasons of changing A/P balance compared to last month Determine whether differences can be optimized Take appropriate action if targets cannot be met PURCHASING Pernod Ricard / Cash Management / 38

39 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Negotiate with vendors and formalize the business relationship OBJECTIVES Provide Marketing team with some key and simplified guidelines in order to ensure a purchasing process (media, PR event, etc.) consistent with the company policy exists Mentioned good practices apply also to all other budget holders (budget in structure costs) who can engage the company resources directly (training, consultant fees, PR, etc.) KEY PERFORMAncE INDicAtors OR ANALYSIS N/A GOOD PRActicEs Negotiate with vendors and formalize the business relationship Implement a bidding process when the negotiation with the vendors is local (challenge your vendors even though the relationship has existed for a long time) Ask your finance department some guidance regarding the payment terms before making an agreement with the supplier (advance payments should be limited to very specific situations) Formalize the key partnerships with contracts and involve your legal department Follow the rules and approval process of your business when creating and/or updating master data related to the vendors (name, address, contact point, payment term, etc.) Establish some clear and objective criteria for accepting the rendered services Follow-up Prepare and communicate every quarter a summary of the next 3 months activities / action plans and related budgets for all the brands (timeline) Monitor your Advertising & Promotion (A&P) budget by project (budget / schedule / progress) and appoint one single responsible person for every project even though the project is cross-functional (e.g. marketing + trade marketing) The internal rules of the game to reallocate the saving at the end of a given project to another project should be discussed and agreed with your finance department For the in progress action plans, liaise with your finance department to make sure the end of month accruals are consistent with the real progress Make sure the received invoices are communicated to the accounting department in a timely manner. Posting the invoices does not prevent from blocking the payment (in that case an information to your accounting / treasury department is needed) Ask the supplier to provide a breakdown of services (e.g. per service type, progress, etc.) or cost types (e.g. fees, traveling costs) on the invoice and ask for back-up if needed (e.g. travel & expenses spending) Point of Sales material should be followed as an inventory (at least in quantity) PURCHASING MARKETING Pernod Ricard / Cash Management / 39

40 Negotiate with vendor Maintain vendor master data Process purchase orders Receive goods and services Process invoices Process payments Manage A/P & process period end PURCHASE TO PAY Implement follow-up and monitor procedures regarding budget versus actual spend OBJECTIVES Provide the on-trade team with some key and simplified guidelines in order to ensure that the cash impact of the business decision to support iconic / image venues or outlets are considered in the business decision KEY PERFORMAncE INDicAtors OR ANALYSIS Return On Invesment (ROI) analysis GOOD PRActicEs Negotiation When a decision to support an iconic / image venue or outlet is made, assess the opportunity of drafting a contract mentioning the expected counterparty for your entity (volumes target, listing new products, party sponsorships, bar styling, etc.) with the support of your legal counsel or team If the support is granted through the payment of a dedicated Trade Advertising & Promotion (A&P) budget, the cash-out should be phased as much as possible (e.g. payment in one single exhibition at the beginning of a 1 year engagement should be avoided) If the support is granted through some longer payments terms (in case of direct sales to venues / outlets), your internal credit policy rules apply When the counterpart is tangible and measurable, a Return On Investment (ROI) style analysis is needed (ask your finance team to support you) Prior to beginning the negotiation process regarding payment terms with new or ongoing vendors, make sure you are compliant with your entity's internal policy. If an exception exists, follow the proper approval process Follow-up The progress of the commitments of the venue / outlet should be monitored on a regular basis till the termination of the contract or the agreement PURCHASING MARKETING Pernod Ricard / Cash Management / 40

41 PURCHASE TO PAY Notes Pernod Ricard / Cash Management / 41

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43 Order to Cash Sales cycle, from the development of customer relationships to the receipt of cash (The Accounts Receivable Cycle) Jameson

44 ORDER TO CASH Accounts Receivable Cycle Sales and Finance Negotiate with client Manage credit Maintain client master data Process orders Process invoices Process receipts Manage collection & disputes Manage AR & process period end Order Enabling processes to Cash Purchase to Pay Toolkit split by Function Forecast to Fulfill Treasury Operations Toolkit split by Cycle Order to Cash Negotiate with client Manage credit Maintain client master data Process orders Process invoices Manage collection & disputes Toolkits by function Sales Supply Chain Purchasing Marketing Finance Order to Cash Negotiate with client Manage credit Maintain client master data Process receipts Manage collection & disputes Manage AR & process period end Pernod Ricard / Cash Management / 44

45 Table of contents Order TO Cash Negotiate with customers Minimize the total of payment terms and conditions offered Offer differentiated payment methods Negotiate automated remittance Align payment terms with customer importance Renegotiate payment terms with small customers Partner with (larger) customers to streamline ordering, receipt and payment process Manage credit order Set-up credit policies and define credit limits per customer category Relate payment terms with credit rating Consider accounts receivable credit insurance Create effective automated controls to prevent staff from overriding set credit limits Maintain customer master data Register customer master data in your sales & distribution tool or ERP Analyze customer portfolio Process orders Provide electronic and/or automate ordering Manage 100% of orders in Sales Administration tool or ERP Offer Automatic Stock Replenishment (ASR) or Vendor Managed Inventory (VMI) to key customers Hold repeat orders (or block deliveries) if invoices are more then X days overdue Process invoices Consider electronic data interchange (EDI) to invoice key customers Send invoice early in the process (at order receipt or confirmation) Process receipts Automate reconciliation of payments with invoices Consider providing online access to customer accounts and invoices in order to ease and accelerate payments Manage collection & disputes Diversify your follow-up procedures Implement formal dispute resolution Assign collectors to specific customers Provide collection and operations staff incentives for collection / dunning Manage A/R & process period end Consider bad debts write-off and related tax reimbursement Review invoice terms versus contractual terms Analyze suspense accounts to ensure all received payments are allocated and to be invoiced orders are invoiced Analyze ageing accounts receivable Compare actual versus target receivables & Days Sales Outstanding (DSO) SALES Pernod Ricard / Cash Management / 45

46 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Minimize the total of payment terms and conditions offered OBJECtives Improve working capital by optimizing the payment terms and conditions KEY PERFORManCE INDICatoRS OR ANALYSIS Number of payment terms and conditions offered GOOD PRACtiCes Payment terms and conditions Assess the opportunity to harmonize date of payment conditions for on-trade customers, and for large off-trade customers and their affiliates Ensure that your trade terms and conditions allow your entity to require prompt payments in case of suspicion of customer payment default Consider the trade-off between Earnings Before Interest and Taxes (EBIT) and working capital to implement (by exception) early payments agreements for large customers Consider offering to your large customers online access to their detailed balance account in order to ease and accelerate their payments Where the sales force is incentivized from cash collections, provide Days Sales Outstanding (DSO) to help them set key payment term targets and collection cycles SALES Pernod Ricard / Cash Management / 46

47 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Offer differentiated payment methods OBJECtives Assess the efficiency and effectiveness of payment methods applied to customers KEY PERFORManCE INDICatoRS OR ANALYSIS 100% 80% 60% 40% 20% 0% Check Credit Card EFT Volume Value Volume and value of invoices by payment methods Volume Value in K Payment Cumulative Cumulative Cumulative Cumulative Volume % Value % methods Volume % Value % Check 98,098 98,098 89% 89% 255, ,098 54% 54% Credit Card 8, ,649 8% 97% 140, ,085 30% 84% EFT 3, ,058 3% 100% 77, ,072 16% 100% Total 110, % 474, % GOOD PRACtiCes Differentiate between payment methods used Assess the most efficient payment methods Determine the ranking of preferred methods Effective / efficient payment methods Analyze the volume and value of invoices per payment method at least once a year Determine which methods should be added, based on customer feedback Determine which methods are most effective / efficient for your operating company: try to make this method more attractive to customers Take appropriate actions accordingly SALES Pernod Ricard / Cash Management / 47

48 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Negotiate automated remittance OBJECtives Enhance the cash forecasting accuracy by reducing the lead time to process the receipts KEY PERFORManCE INDICatoRS OR ANALYSIS Volume and value of invoices by payment methods (see example graph) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Check Automated Credit card EFT Volume Value GOOD PRACtiCes Automated remittance Investigate current payment methods used per customer Determine which customer(s) would be suitable for automated remittance payments Contact these customers and negotiate automated remittance Arrange automated remittance payments with bank SALES Pernod Ricard / Cash Management / 48

49 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Align payment terms with customer importance OBJECtives Improve the Days Sales Outstanding (DSO) with an alignment of payment terms depending on customer segment KEY PERFORManCE INDICatoRS OR ANALYSIS Definition DSO is a measure of the average number of days that an entity takes to collect revenue after a sale has been made kpis DSO (see example chart): A B Exemplary definition of customer categories: Category A: large customers Category B: medium customers Category C: small customers Category D: inactive customers Days C D Target DSO / terms are practically the same for each segment Actual DSO Target DSO GOOD PRACtiCes Payment terms Analyze the customer categories Review the actual and target DSO per customer segment at least once a year Determine whether the target DSO is adequately related to the customer s relevance (customer segment) Determine the gaps between actual and target DSO / term per segment If needed: take appropriate action to better align terms with customer segments and payment behavior SALES Pernod Ricard / Cash Management / 49

50 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Renegotiate payment terms with small customers OBJECtives Improve the Days Sales Outstanding (DSO) on the small customer segment by reducing payment terms to the minimum Ensure that exceptions are reflected by sales with higher margins KEY PERFORManCE INDICatoRS OR ANALYSIS Current terms, small customers (see example chart) Renegotiated terms, small customers (see example chart) '000 EUR Cash Net EOM EOM Net EOM Total Current Terms Small customers Sales Target W/C EOM: End Of Month '000 EUR Cash Net EOM EOM 60 Net EOM Total Renegotiated Terms Small customers Sales Target W/C EOM: End Of Month GOOD PRACtiCes Payment terms with small customers Analyze the sales and payment terms for the smaller customers at least once a year Determine where the largest improvement potential is Leverage your power as a supplier to negotiate better terms with these smaller customers SALES Pernod Ricard / Cash Management / 50

51 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Partner with (larger) customers to streamline ordering, receipt and payment process OBJECtives Improve cash generation by developing partnership approaches with our large customers, and using enabling technologies where appropriate Ease the cash forecasting exercise with better completeness and reduced lead time to manage the volume of transactions of large customers Improve working capital with stock reduction initiatives KEY PERFORManCE INDICatoRS OR ANALYSIS KPI Scope of stock managed through partnership / total stock Definition Electronic Data Interchange (edi) can be formally defined as the transfer of structured data, by agreed message standards, from one computer system to another without human intervention Automatic Stock Replenishment (ASR) is an online system which produces automatically an order and an invoice each scheduled period with agreed levels of stock (minimum and maximum) Vendor Managed Inventory (VMI) is a process where the vendor creates orders for their customers based on demand information that they receive from the customer. The vendor and customer are bound by an agreement which determines inventory levels, fill rates and costs. This arrangement can improve supply chain performance by reducing inventories and eliminating stock-out situations Cross docking: unloading one truck and loading of another truck without putting the goods into an interim storage (commissioning according to customers needs) GOOD PRACtiCes Develop partnership approaches Define common strategy and planning of promotions to reduce out of stock and to increase sales Define common strategy and planning of new product launch to secure the related forecasted sales Consider cross-docking initiatives to streamline your distribution network and reduce your level of stock Assess opportunities to optimize deliveries (frequency, transportation optimization) Consider Multi-Manufacturers / Multi-Customers logistics to reduce the level of stock Use enabling technologies Consider the implementation of edi for orders, invoices and payment flows to speed-up the lead time to manage information Consider ASR or VMI initiatives to reduce the stock level of your customers Consider data synchronization initiatives of product master data to reduce error and disputes Consider providing online access to detailed balance accounts and invoices to your customers to ease and accelerate their payments SALES Pernod Ricard / Cash Management / 51

52 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Set-up credit policies and define credit limits per customer category OBJECtives Secure and improve cash generation by granting credit limits to your customers according to their ratings KEY PERFORManCE INDICatoRS OR ANALYSIS Days sales credit granted / days sales outstanding (by customer or by rating) GOOD PRACtiCes Credit rating and credit limits of your customers Segment customers by importance and payment history and manage their credit terms accordingly Set customer credit limits in accordance with credit ratings when available; consider the opportunity to automate the integration of published credit ratings directly into your customer master data When public rating is unavailable, use internal data to develop credit rating indicators for your clients Set collection rules in accordance with credit ratings (refer to: Manage collection & disputes ) Establish formal credit check for all new customers Review and refine at least once a year the credit ratings granted to your customers Implement a cross-functional credit approach Ensure up-front involvement of credit personnel in teams whose decisions may have downstream credit implications Physically locate credit managers with sales and marketing managers to enable close coordination SALES Pernod Ricard / Cash Management / 52

53 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Create effective automated controls to prevent staff from overriding set credit limits OBJECtives Ensure that customers are served and delivered only if their credit limit is respected Manage efficiently the customer stock position financed by the entity KEY PERFORManCE INDICatoRS OR ANALYSIS Customers exceeding credit limits with new orders (see example chart) Days Client 1 Client 2 Client 3 Client 4 Client 5 Client 6 Client 7 Client 8 Client 9 Client 10 Outstanding balance current Outstanding balance with new order Credit limit GOOD PRACtiCes Prevent staff from overriding credit limits Determine credit limits per customer Investigate whether the order intake registration system supports comparison of customers outstanding invoices with credit limit Flag customer orders as credit limit exceeding when processed, remind customers of the credit limit granted and the outstanding balance Set system to release customer orders only after the check: credit limit > current balance of outstanding invoices + new orders Establish credit management reporting by exception SALES Pernod Ricard / Cash Management / 53

54 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Relate payment terms with credit rating OBJECtives Improve the Days Sales Outstanding (DSO) and decrease risk by adjusting payment terms related to credit rating KEY PERFORManCE INDICatoRS OR ANALYSIS Maximum payment term and overdue days per credit rating category (see example chart) days 10 0 Low Medium High days average days overdue GOOD PRACtiCes Relate the maximum payment term and/or payment method to client s credit ratings For example: require full payment prior to delivery from customers with the lowest credit ratings Periodically review the average overdue days per credit rating category If needed: adjust the maximum payment term and/or payment method for certain categories SALES Pernod Ricard / Cash Management / 54

55 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Consider accounts receivable credit insurance OBJECtives Secure your business against customers insolvency, bad debts, overdue, commercial risks and political risks Optimize your cash flow requirements Lower your bad debt provision Reduce the cost of bad debts KEY PERFORManCE INDICatoRS OR ANALYSIS Cost of insurance / Cost of [insolvency, bad debts, overdue, commercial and political proven risks] GOOD PRACtiCes Accounts receivable credit insurance Consider credit insurance company offerings in your business scope Contact audit at holding to verify if the group insurance policy may cover your customers Assess the trade-off between the cost of insurance and your current and potential costs related to customer insolvency, bad debts, overdue, commercial risks and political risks Define the criteria determining when a customer or segment of your business should be insured Assess the opportunity to implement a procedure with the insurance 3 rd party to challenge the rating of specific customers SALES Pernod Ricard / Cash Management / 55

56 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Register customer master data in your sales & distribution tool or ERP OBJECtives Reduce the customer complaints related to master data inaccuracy (address, tariffs, rebates, etc.) Improve the collection process with proper system setup of credit and collection rules for each customer KEY PERFORManCE INDICatoRS OR ANALYSIS Number of customer complaints related to master data Total costs of customer complaints related to master data GOOD PRACtiCes Customer master data Define rules of organization and processes in place to govern your master data Define a procedure to create and to update master data related to customers: Contact details Trade terms Discount policy Credit level and credit risk rating Collection rules (if automated) Review and refine customer master data at least once a year SALES Pernod Ricard / Cash Management / 56

57 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Analyze customer portfolio OBJECtives Standardize payment terms to optimize working capital Streamline the invoice process to improve your cash forecasting KEY PERFORManCE INDICatoRS OR ANALYSIS KPI (see example chart for on-trade customers) Sales 150 m Transaction 100,000 Cat. #1 Cat. #2 Weight of Cat.#1 vs. Cat.#2 On-Trade customers Definition: Customer Pareto Analysis Category #1 : 20% of customers represent 80% of Sales Category #2 : 80% of customers represent 20% of Sales GOOD PRACtiCes Ensure efficiency of customer base Perform customer Pareto Analysis (see KPI box for further explanation) to determine potential optimization of the customer / sales base Ensure the payment terms granted to category #1 customers reflect a sustainable and profitable level of partnership Ensure that standardized trade terms are applied to category #2 customers Assess opportunity to streamline the number of sales transactions in each customer category to improve the lead time of invoice processing SALES Pernod Ricard / Cash Management / 57

58 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Provide electronic and/or automated ordering OBJECtives Smooth your Days Sales Outstanding (DSO) level with less erratic ordering Reduce process cycle time KEY PERFORManCE INDICatoRS OR ANALYSIS Definition Electronic Data Interchange (edi) can be formally defined as the transfer of structured data, by agreed message standards, from one computer system to another without human intervention kpis Customer ordering pattern (see example graph) Customer Customer inventory - usage From Customer Order Order receipt Processing Customer ordering pattern in one year Pernod Ricard Good delivery To Invoicing No. days time Customer ordering pattern in one year quantity Ordering methods in use time quantity time GOOD PRACtiCes Negotiate with customers Partner with customers to determine needs for deliveries in quantity and timing, consider whether ordering can be done automatically Re-negotiate delivery, payment terms and service offering Ensure processes at the customer and at Pernod Ricard are adjusted to fit and use the same information, order quantities, timing and quality Balance the ordering across the month in order to avoid the end of month bottleneck (non optimized logistic costs / no time left for an in depth credit analysis if needed, etc.) Consider electronic data exchange Analyze your number of orders per customer and per ordering method, e.g. Letter, Fax, Phone, , edi Investigate possibilities for electronic ordering for simple transactional / repetitive products Automated ordering: investigate patterns in ordering moments and quantities for large customers; understand their business and production cycle, obtain insight in their inventory levels and (production) forecasts SALES Pernod Ricard / Cash Management / 58

59 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Manage 100% of orders in sales administration tool or Enterprise Resource Planning (ERP) OBJECtives Ensure that sales orders are compliant with trade terms, conditions, credit policies and rules Ensure planning reliability, completeness of sales orders to improve cash forecasting KEY PERFORManCE INDICatoRS OR ANALYSIS KPIs Number, share and value of orders not managed in the systems Number and value of accepted sales orders from customers with an overdue balance GOOD PRACtiCes Monitor and control sales orders Ensure that 100% of your sales orders are recorded in your sales administration tool or erp to obtain a clear view about the overall number and value Verify if your sales order administration tool is able to recognize duplicate sales orders to prevent duplicate production / delivery / invoicing Check that sales amount is lower than the credit limit Block sales if credit limits are exceeded Ensure following an escalation process Integration with accounting system Integrate information from your accounting system to prevent the acceptance of orders from customers with overdue invoices / payments Integration of materials management Integrate sales administration with materials management to improve inventory levels and the ability to supply SALES Pernod Ricard / Cash Management / 59

60 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Offer Automatic Stock Replenishment (asr) or Vendor Managed Inventory (VMI) to key customers OBJECtives Reduce the level of stock by a set of rules and technologies enabling continuous replenishment Reduce the cost of deduction related to out of stock Reduce the cost of delivery with optimized transportation Reduce the cost of handling with optimized order planning and preparation KEY PERFORManCE INDICatoRS OR ANALYSIS KPI Key customer Days Inventory On-hand (DIO) Definition Automatic Stock Replenishment (ASR) is an online system which produces automatically an order and an invoice each scheduled period with agreed levels of stock (minimum and maximum) Vendor Managed Inventory (VMI) is a process where the vendor creates orders for their customers based on demand information that they receive from the customer. The vendor and customer are bound by an agreement which determines inventory levels, fill rates and costs. This arrangement can improve supply chain performance but reducing inventories and eliminating stock-out situations GOOD PRACtiCes Assess the opportunity to offer Automatic Stock Replenishment (ASR) or Vendor Managed Inventory (VMI) to your key customers (see definitions) For customers with asr or VMI Define and implement a procedure for optimizing the transportation of an agreed level of ordered quantities within the best transport conditions Define and implement a procedure for smoothing the handling of orders in the distribution centers Define and implement a procedure in order to proactively propose substitution products in case of out of stock SALES Pernod Ricard / Cash Management / 60

61 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Hold repeat orders (or block deliveries) if invoices are more then X days overdue OBJECtives Increase controls pertaining to the sales order process Improve cash collection Avoid accepting sales orders from customers with overdue items KEY PERFORManCE INDICatoRS OR ANALYSIS Number of customer master data set without a credit limit (see example chart) Number of customers AAA AA A BBB BB B CCC CC Overdue days per customer credit rating category C D Total number of customers Customers w/o credit limit GOOD PRACtiCes Communication with sales department Ensure that the sales department is informed about customers with overdue items of more than [x] days Define exception rules Define a rule (including roles & responsibilities) if a sales order has to be placed in spite of one or more overdue items, e.g. strategically important customers System configuration Consider adjusting your sales and distribution system so that the sales employee is notified if he/she wants to enter a sales order for a customer with overdue invoices of more than [x] days SALES Pernod Ricard / Cash Management / 61

62 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Consider electronic data interchange (EDI) to invoice key customers OBJECtives Reduce process cycle time Streamline invoicing process Improve operational expenditure benefits (avoid costs such as: paper, mailing etc.) KEY PERFORManCE INDICatoRS OR ANALYSIS Definition Electronic Data Interchange (edi) can be formally defined as the transfer of structured data, by agreed message standards, from one computer system to another without human intervention kpi Number of invoices per customer (see example chart) 300 Number of Invoices Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Customer 6 Customer 7 Most invoices are sent to customers 3 and 5. edi exchange with these customers could bring the most advantages GOOD PRACtiCes Consider electronic data exchange Analyze which customers could be suitable e.g. customers to whom the most invoices are sent Ensure that necessary software and equipment are available, administered and can be handled by staff Negotiate with customers Contact those customers and discuss the possibility for edi Make sure to consider relevant legal and tax requirements for edi In case of implementation, ensure that e-invoices are properly archived SALES Pernod Ricard / Cash Management / 62

63 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Send invoice early in the process (at receipt or confirmation) OBJECtives Optimize cash flow and its forecasting KEY PERFORManCE INDICatoRS OR ANALYSIS Example of analysis A set of sales orders is recorded Friday, September 30 Standard payment terms are 30 days end of month Invoicing process is carried-out by night batch As a result, your invoices will possibly be invoiced on Monday, October 3 and you will receive cash at the end of November (instead of end of October if invoices had been issued on Friday, September 30) GOOD PRACtiCes Portfolio of sales orders Analyze your portfolio of sales orders and check whether there are some end of month sales orders that could be invoiced in the current accounting period Consider invoicing at the receipt or confirmation of the sales order with regards to cash collection - while respecting the trade terms Consider this practice to be managed by exception SALES Pernod Ricard / Cash Management / 63

64 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Automate reconciliation of payments with invoices OBJECtives Automate balancing of open items Reduce cycle times Improve period-end closing KEY PERFORManCE INDICatoRS OR ANALYSIS Average time to balance open accounts receivable items Average number of items not balanced in the 1st attempt Suspense account balance per month (target: zero balance) GOOD PRACtiCes Ensure the possibility for automatic reconciliation Ensure that your customers notice all invoice details and are encouraged to provide the details (e.g. invoice number) when placing the payment order, enabling you to reconcile the corresponding open item Manage in a timely manner the returns done / requested by the customers and post the relevant accounting entries Electronic bank statement Consider the automatic reconciliation of the electronic bank statement and account receivable Define posting rules for respective business transaction codes (depend on bank) to manage the postings to the sub- and/or general ledger Suspense account Ensure that items that could not be reconciled in the 1 st attempt are posted to a defined suspense account Optimize check receipts Assess the opportunity to implement an automated cash posting process SALES Pernod Ricard / Cash Management / 64

65 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Consider providing online access to customer accounts and invoices in order to ease and accelerate payments OBJECtives Give real time access to your customers to their detailed account in order for them to communicate to you the features of their next payment Improve the lead time of payment process for large customer Improve cash forecasting with better visibility on client's promises of payment KEY PERFORManCE INDICatoRS OR ANALYSIS Number of customer with a real time access to their detailed balance account Number of Accounts Receivables (A/R) transactions processed with real time access to detailed balance account / total number of A/R transactions Value of payment processed with real time access to detailed balance account / total value of payment GOOD PRACtiCes Partner with your customer Assess your large customer portfolio to select those which could be interested by this service Consider to develop an Internet Portal allowing key customers to check their detailed balance account and providing your Accounts Receivable (A/R) team the features of their next payment System and process enhancement Define the procedure to send detailed balance accounts and invoices received (i.e. file format) Assess opportunity to automate the allocation between accounts receivable and detailed proposal of payment made by the customer SALES Pernod Ricard / Cash Management / 65

66 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Diversify your follow-up procedures OBJECtives Lower the overdue level with a proactive collection process made by operations and finance teams supported by technology KEY PERFORManCE INDICatoRS OR ANALYSIS By customer segment (see example chart): Number of slow paying customers / Total number of customers Number of dunning letters sent by month Number and value of deductions (by type) 70 Customer segment Remind before due date? Remind after due date Contacted by Automated notification to First dunning letter A Y 1 day after Sales Sales & Finance 1 week after B Y 1 day after Sales Sales & Finance 1 week after C N 1 day after Sales Sales & Finance 3 days after D N 1 day after Finance Sales & Finance 3 days after E N 1 day after Finance Sales & Finance 3 days after etc. x A B C D E Business rules for A/R collection system-based Value of overdue invoices per customer segments GOOD PRACtiCes Monitor accounts receivable and ageing balance Prepare and communicate accounts receivable and ageing balances reporting to sales and finance teams (for instance off-trade and on-trade reporting) Collection policy / procedure Define a procedure to track and call slow paying customers before the due date Establish a standard collection policy / procedure (per customer segment and/or per customer credit rating category) including: Dunning letter Collection calls Escalation process Establish a cross-functional process to assign deductions related to disputes to the responsible department (Finance, Sales, Logistics) Use accounts receivable and collection outcome to develop a payment profile and credit rating for each customer Periodically assess the overdue value per customer segment and determine whether the system based collection procedures are still up-to-date and correctly prioritized For markets with multiple customers, leverage the sales condition to stimulate the collection (e.g. balance the existing Allowances and Discounts (A&D) scheme between volumes related A&D and collection related A&D) Consider using enabling technology Automate these standard procedures in a Workflow and/or Enterprise Resource Planning (erp) system SALES Pernod Ricard / Cash Management / 66

67 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Implement formal dispute resolution OBJECTIVES Decrease the Days Sales Outstanding (DSO) by reducing the throughput time to manage and solve complaints KEY PERFORMANCE INDICATORS OR ANALYSIS Throughput time per compliant and days overdue on related invoices 50 Complaints Throughput time (days) Complaint 1 3 Complaint 2 21 Complaint 3 14 Complaint 4 1 Complaint 5 7 Complaint 6 35 Complaint 7 19 Complaint 8 8 Complaint 9 20 Complaint 10 5 Complaint 11 7 Average 12,7 Days Complaint 1 Complaint 2 Complaint 3 Complaint 4 Complaint 5 Complaint 6 Complaint 7 Complaint 8 Complaint 9 Throughput time per compliant and days overdue on related invoices Complaint 10 Complaint 11 Throughput time Days overdue on related invoices Disputes by Volume Missing PO Other Incorrect Bill- To Address Pricing Incorrect Incorrect Tax Incorrect Product Incorrect Discount Incorrect PO Incorrect Ship-To Address GOOD PRACTICES Dispute resolution Implement a formal and system based (online) dispute resolution process (that includes an escalation methodology), enabling you to resolve disputes faster and gather management information about disputes more easily Periodically measure the disputes per category (by volume and/or value) the throughput time of solving complaints Determine the root causes for the most important categories Determine the effect of this throughput time on the DSO (overdue days on the invoices related to the complaint) SALES Pernod Ricard / Cash Management / 67

68 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Assign collectors to specific customers OBJECtives Lower the overdue level with a client-oriented team Improve cash forecasting with accurate client's promises to pay KEY PERFORManCE INDICatoRS OR ANALYSIS Number and value of client s promises to pay GOOD PRACtiCes Organize and balance your customers portfolio to create collection segments : by customer type (Off-Trade and On-Trade), by size (Large, Small), and by level of risk Assign dedicated collectors to collection segments Connect dedicated collectors with sales and logistics teams Consider software packages implementation to manage the follow-up of customers and their related accounts, and to assign collection activities to collectors according to your procedures SALES Pernod Ricard / Cash Management / 68

69 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Provide collection and operations staff incentives for collection / dunning OBJECtives Lower the overdue level and improve cash forecasting with efficient incentives schemes KEY PERFORManCE INDICatoRS OR ANALYSIS Number and value of client s promises to pay Number of days delinquent Number and value of deductions GOOD PRACtiCes Define incentives schemes for sales and collection staff depending on customer types (On-Trade / Off-Trade) to manage: Overdue (collection and sales staff) Promises to pay (collection and sales staff) Deductions (collection, sales and logistics staff) Implement a cross-functional monthly report to share progress and benefits of collection activities (Days Sales Outstanding (DSO), ageing balance, etc.) Implement a communication process between sales and credit enabling the credit team to have quick feedback from the field in case of a change in the situation of a customer with potential credit implications (loss of distribution license, tax investigation, etc.) SALES Pernod Ricard / Cash Management / 69

70 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Consider bad debts write-off and related tax reimbursement OBJECtives Improve monitoring of accounts receivables and cash collection Optimize cash flow management and forecasting KEY PERFORManCE INDICatoRS OR ANALYSIS Development of bad debts (see example chart) 600 In thousand [Currency] Jan Feb Mar Apr May Bad debts Cash inflow from bad debts Potential tax reimbursement GOOD PRACtiCes Posting bad debts In consideration of your applicable accounting standard, divide your bad debts from your accounts receivable in a separate balance sheet item Monitor your bad debts regarding particular reasons causing a write-off and ensure its posting at the next period-end closing Monitor your bad debts regarding particular reasons causing tax reimbursements such as insolvency or limitation of claim Obtain tax reimbursements Submit necessary documentation to your financial authorities to obtain tax reimbursements SALES Pernod Ricard / Cash Management / 70

71 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Review invoice terms vs. contractual terms OBJECtives Ensure that customer contractual terms recorded in your system are updated to reflect the real contractual payment terms Optimize collection date versus due date KEY PERFORManCE INDICatoRS OR ANALYSIS Customers getting invoices in which the payment term exceeds the contractually agreed payment terms and working capital improvement potential (see example chart) W/C Improvement ('000 EUR) Customer Customer Customer Customer Customer Customer Customer Customer Customer Customer DSO (Days) Potential WC Invoice DSO Master DSO GOOD PRACtiCes Include all contractual payment terms in the customer master data file Make sure the actual invoice terms are aligned with the terms as stated in the contract (as stated in the customer master data file) Make a periodic analysis of actual invoice terms versus contract terms (for example: see example chart) Determine how many invoices (and at which value) have been issued with a due date above the standard terms Determine the working capital improvement potential Take appropriate action (e.g. by implementing extra controls) SALES Pernod Ricard / Cash Management / 71

72 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Analyze suspense accounts to ensure all received payments are allocated and to be invoiced orders are invoiced OBJECtives Improve open item management of accounts receivable Optimize period-end closing and cash flow forecasting KEY PERFORManCE INDICatoRS OR ANALYSIS Average time to clear the suspense account Average number of items not balanced in the 1st attempt Suspense account balance per month (target: zero balance) GOOD PRACtiCes Provide account details on invoices Ensure that your customers notice all invoice details and are encouraged to provide the details (e.g. invoice number) when placing the payment order enabling you to balance the corresponding open item Analyze your suspense account Analyze items that could not be matched to an open accounts receivable item and find out root causes Consider contacting customers whose payments (i.e. items) could not be matched to an open item repeatedly and encourage them to provide invoice details while placing the payment order Account clearing Ensure that items on the suspense account are cleared before the next period-end closing SALES Pernod Ricard / Cash Management / 72

73 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Analyze ageing accounts receivable OBJECtives Improve the Days Sales Outstanding (DSO) by strengthening and focusing your collection effort on specific customer segments / customers KEY PERFORManCE INDICatoRS OR ANALYSIS Accounts receivable ageing balance (see example chart) '000 EUR Apr 08 May 08 Jun 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 FC BUD +180 days days 0-90 days not impaired and not due Ageing Balance in EUR GOOD PRACtiCes Analyze ageing balance Issue a non-group accounts receivable ageing balance each reporting period by customer segments (i.e. On-Trade and Off-Trade) Analyze your Group accounts receivable by due date and check that your company complies with intercompany policy Monitor the development and outliers of each ageing category Determine the root cause analysis with a cross-functional approach Take appropriate action with accounts receivables, sales and logistics staff accordingly Consider and forecast the proportion of aged accounts receivables that might impact your profit and loss account (write-off) as well as cash and cash forecasting respectively Leverage your information system Configure your system in order to be able to retrieve an ageing balance for accounts receivable on demand Ensure that customer master data contains payment terms to derive a due date when an invoice is issued SALES Pernod Ricard / Cash Management / 73

74 Negotiate with customers Manage credit Maintain customer master data Process orders Process invoices Process receipts Manage collection & disputes Manage A/R & process period end ORDER TO CASH Compare actual versus target receivables & Days Sales Outstanding (Dso) OBJECtives Monitor the DSO trend to ensure the target will be reached Consider factoring extension to improve DSO KEY PERFORManCE INDICatoRS OR ANALYSIS Balance of accounts receivables vs. days sales outstanding (DSO) (see example chart) Receivables vs. DSO EUR million Aug Sep Oct Nov Dec BUD Dec Jan Feb Mar Apr May Jun LE Jun BUD Jun Days Trade receivables (before Factoring) Non group FY 09/10 Trade receivables (before Factoring) Non group FY 10/11 DSO (before Factoring) Non group FY 09/10 DSO (before Factoring) Non group FY 10/11 Receivables vs. DSO GOOD PRACtiCes Cash Dashboard implementation Issue the Cash Dashboard for each reporting period Compare the actual versus the target Receivables & DSO Analyze the average differences and the outliers (e.g. specific customers) and determine the root causes Optimize working capital Compare your DSO with your payment cycle (e.g. excise tax) Impact of factoring Analyze the impact of factoring on Non-Group DSO Determine whether the differences can be reduced Take appropriate action accordingly SALES Pernod Ricard / Cash Management / 74

75 ORDER TO CASH Notes Pernod Ricard / Cash Management / 75

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77 FORECAST to FULFILL Ordering raw materials and inventory to fulfill product demand, to the management, and reporting of inventory Ballantine's

78 FORECAST TO FULFILL INVENtoRY MANAGEMENT ENAbLING processes Order to Cash Purchase to Pay Toolkit split by Function Supply Chain and Finance Maintain stock master data Manage Brand Company (BC) forecast & planning Manage Market Company (MC) forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing Forecast to Fulfill Treasury Operations Toolkits by FUNction Toolkit split by Cycle Sales Purchasing Marketing Forecast to Fulfill Maintain stock master data Manage Brand Company Manage Market Company (MC) Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Supply Chain Finance Forecast to Fulfill Manage inventory & period end closing ALL BC MC ALL: All types of Companies BC: Brand Companies MC: Market Companies Pernod Ricard / Cash Management / 78

79 Table of contents FORECAST TO FULFILL Maintain stock master data Use consistent master data for all sites (unique SKUs coding) Consider all inventory levels Integrate master data with Sales & Operation Planning (SOP) and accounting Control logistics attributes of items with serial and revision numbers Manage Brand Company forecast & planning Standardize product portfolio Design and deploy processes to manage stock and demand planning for new products or end of life products Consider to recycle excess e.g. maturing stocks Manage Market Company forecast & planning Rationalize product portfolio Calculate seasonality influences Design and deploy processes to manage demand planning for large promotion and events Design and deploy processes to manage stock and demand planning for new products or end of life products Consider to recycle excess e.g. finished products, Point of Sales (POS) Manage end of life / new / discount products Manage orders from Market Companies to Brand Companies Consider the use of a replenishment tool (finished products for MC) Coordinate large promotion orders from retailer to MC and BC Deploy EDI (electronic data interchange) and customer collaborative process Define stock security level in distribution center to calculate replenishment Manage goods in storage Develop policies and procedures for goods storage and handling Use an inventory tracking process Perform regular cycle counts Manage production Assess package size against customer demand Manage distribution & returns Evaluate stock costs versus mass production savings Determine optimal delivery frequencies and quantities Set-up a formal process for goods returned Manage inventory & period end closing Actively assess and sell off obsolete / slow moving stock Calculate and monitor inventory carrying /holding costs Perform regular inventory counts aligning physical count to records, supported by proper reconciliation procedures Determine the net realizable value of your inventory goods Compare actual versus target Days Inventory On-hand (DIO) SUPPLy chain Pernod Ricard / Cash Management / 79

80 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Use consistent master data for all sites (unique SKUs coding) OBJECTIVEs Manage communication around master data between Brand Company (BC) and Market Company (MC) Accurately record the physical existence and location of stock items KEY PERFORMANCE INDICAtoRS OR ANALYSIS Definition SKU, Stock Keeping Unit: warehousing item that is unique because of some characteristics (such as brand, size, color, model) and must be stored and accounted for separately from other items. Every SKU is assigned a unique identification number kpi Total number of SKUs per location GooD PRActICEs Manage items characteristics Complete an identification form for each SKU, recording volume characteristics to better manage inventories Share product nomenclature (BC, MC, retailers, etc.) Periodically review all SKUs and resolve issues Manage visibility on items quantities Share stock availability information Establish the warehouse as a knowledge center for efficient consumer response with real-time inventory information SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 80

81 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Integrate master data with Sales & Operation Planning (sop) and accounting OBJECTIVEs Better synchronize supply with demand and avoid stock excess Improve the visibility of stocks level for other user departments, such as the sales department especially for promotions Provide up to date and accurate information for the management of inventory and to satisfy statutory reporting KEY PERFORMANCE INDICAtoRS OR ANALYSIS KPI Level of inventory per SKU Example illustration Analysis Managerial Decision Making Supply Chain Network Optimization Model ERP and Other Transactionnal Databases Data Extraction and Transformation Descriptive Models forecasting data mining management accounting others S&OP Decision Database GooD PRActICEs Manage visibility on stocks Gather best available data to link sales tracking with production planning Use SOP to support lean supply strategy: as a strong, comprehensive planning tool, SOP serves as an ideal support for lean strategies to balance future demand and supply Ensure coherence between budgetary process based on subfamilies and forecasts based on SKU Manage stocks within distribution centers Centralize stocks of producer distribution centers Implement different types of stocks: for example, inventory to replenish usual sales and safety stock to replenish unexpected sales SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 81

82 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Control logistic attributes of items with serial and revision numbers OBJECTIVEs Maintain up to date logistics attributes to better manage inventory KEY PERFORMANCE INDICAtoRS OR ANALYSIS KPI Rate of slow-moving inventory Illustration of logistics attributes AZ Reference of item Logistics attributes for example : 001 = pallets 002 = picking box GooD PRActICEs Logistics attributes management Define specific logistics attributes for each type of packaging (pallets, lots, picking box, etc.) Manage items Ensure each item within inventory has a serial number and/or revision number Communicate about the number of items per pallet and number of items by pallet board Ensure that you can track promotions with the appropriate attributes Consider using enabler technology Use bar-coding technology to facilitate the use of satellite networks and internet access to determine the exact location of materials throughout the supply chain SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 82

83 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Consider all inventory levels OBJECTIVEs Ensure a clear and real-time visibility of volumes and number of SKUs within stocks KEY PERFORMANCE INDICAtoRS OR ANALYSIS Inventory related costs: warehouse cost, cost of capital, stock-out costs GooD PRActICEs Inventory visibility Consolidate all inventory data within the whole group (distribution centers, production centers, outstanding products, etc.) to encourage Just in Time delivery Leverage visibility systems to manage inventory in transit Use an integrated platform that captures all inventory data from multiple systems and analyze the collective data for better inventory management When ordering, investigate availability and delivery time of the required goods Calculate related costs from external purchase order compared to local inventory, taking into account all related costs (e.g. transport costs, handling costs, labor costs, warehousing costs, etc.) Place purchase order based on outcome of the calculation SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 83

84 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Standardize product portfolio OBJECTIVEs Offer to MC an optimized range of products adapted to local markets Increase turnover made with MC Optimize costs of goods sold KEY PERFORMANCE INDICAtoRS OR ANALYSIS Growth-Share matrix Market Growth Low High Question Marks Dogs Star Cash Cows Low High Market Share Stars: high-growth products competing in markets where they are relatively strong compared with the competition Cash cows: low-growth products with a relatively high market share. These are mature, successful businesses with relatively little need for investment Dogs: products that have low relative share in unattractive low-growth markets. Dogs may generate enough cash to breakeven, but they are rarely, if ever, worth investing in Question marks: products with low market share but which operate in higher markets. They have potential, but may require substantial investment in order to grow market share kpi Number of existing references of products for each brand GooD PRActICEs Evaluate product portfolio Understand competitive dynamics, identify industry trends, customers' changing needs, potential market disruptions, and determine which current products customers prefer and why Analyze product portfolio from a Brand Company perspective based on market share and market growth using a matrix (see definition) with 2 dimensions: On the horizontal axis: relative market share - this serves as a measure of products strength in the market On the vertical axis: market growth rate - this provides a measure of market attractiveness Standardize product portfolio Consider opportunities to standardize your products portfolio (e.g. format, size, labeling, flavor, etc.) Coordinate product portfolio standardization initiatives across the Group Look for enabling technologies that can help deliver standardization and lower the cost of goods sold Measure product value and portfolio performance on a frequent basis SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 84

85 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Design and deploy processes to manage stock and demand planning for new products or end of life products OBJECTIVEs Better manage inventories between new products and end of life products KEY PERFORMANCE INDICAtoRS OR ANALYSIS Product Life Cycle Curve Maturity Decline Sales Growth Introduction Time KPIs Forecast Accuracy (FA) Number of backorders, stock outs and markdowns Finished Goods Stock for Export (STK BO) Distribution of inventories between end of life, new and flagship products GooD PRActICEs Set-up demand planning system Create an integrated demand forecast for sales and production, readily accessible and easily readable for all relevant parties Choose the right forecasting models for the right market and product position (forecast may differ for different life-cycle phases in sales process: introduction, growth, maturity, decline) Establish a systematic and frequent forecasting and planning cadence Track forecast performance Establish a regular schedule for monitoring forecast accuracy Set priorities based on product revenue and forecasting difficulty Set error thresholds to trigger forecast revision Calculate the impact of forecasting error in terms of lost sales opportunities Analyze forecast performance for cause-and-effect relationships between marketing strategies and sales results SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 85

86 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Consider to recycle excess e.g. maturing stocks OBJECTIVEs Find trade-off between cost of inventory for excess of products taking into account their sales forecasts and the possibility to reuse the excess of products KEY PERFORMANCE INDICAtoRS OR ANALYSIS Percentage of obsolete stock (in value) Distribution of inventories between end of life, new and flagship products GooD PRActICEs Obsolete and slow moving stock Determine the definition of obsolete / slow moving stock (e.g. inventory replaced by an alternative and rendered unusable or diminished in value) Evaluate the amount of product which could be recycled Share data among all production sites Communicate about recycle processes Consider all the possible ways to reuse excess of products SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 86

87 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Rationalize product portfolio OBJECTIVEs Offer to customers ranges of products adapted to local markets Increase turnover made with customers Manage product portfolio to fit to market fluctuations and demand KEY PERFORMANCE INDICAtoRS OR ANALYSIS Growth-Share matrix Stars: high-growth products competing in markets where they are relatively strong compared with the competition Cash cows: low-growth products with a relatively high market share. These are mature, successful businesses with relatively little need for investment Dogs: products that have low relative share in unattractive low-growth markets. Dogs may generate enough cash to breakeven, but they are rarely, if ever, worth investing in Question marks: products with low market share but which operate in higher markets. They have potential, but may require substantial investment in order to grow market share kpi Number of existing SKUs (existing = stock >0) Market Growth Low High Question Marks Dogs Low Market Share Star Cash Cows High GooD PRActICEs Evaluate product portfolio Understand competitive dynamics, identify industry trends, customers' changing needs, potential market disruptions, and determine which current products customers prefer and why Analyze product portfolio from a Marketing Company perspective based on market share and market growth using a matrix (see definition) with 2 dimensions: On the horizontal axis: relative market share - this serves as a measure of product s strength in the market On the vertical axis: market growth rate - this provides a measure of market attractiveness Rationalize product portfolio Consider opportunities to rationalize your products portfolio Coordinate product portfolio rationalization initiatives across the Market Company Look for enabling technologies that can help deliver rationalization Measure product value and portfolio performance on a frequent basis SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 87

88 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Calculate seasonality influences OBJECTIVEs Improve forecasts accuracy integrating seasonal impact DEFINITION & ILLUstRATION Definition COS, cost of sales: the cost of purchasing raw materials and manufacturing finished products. Equal to the beginning inventory plus the cost of goods purchased during some period minus the ending inventory. Also called Cost Of Goods Sold (COGS) Illustration Inventory does not seem to be affected by seasonality. The highest stock is found in March There is a clear seasonal demand pattern, with peak steadily growing towards June and a second peak in autumn jan 2005 feb 2005 mar 2005 apr 2005 may 2005 jun 2005 jul 2005 aug 2005 sep 2005 oct 2005 nov 2005 dec 2005 Inventory Euro COGS Euro Working capital can be lowered by tuning the inventory better to the seasonal demand patters GooD PRActICEs Implement a demand planning and sales and operation planning process Make an analysis of the COS (Cost of Sales) versus the inventory Identify factors influencing demand (weather, climate change, etc.) Determine the seasonality pattern for COS (in addition, seasonal indexes can be calculated) Discuss seasonality pattern with various disciplines: sales, production, logistics, purchasing, etc. Determine whether the seasonality patterns can be used to further optimize inventories Gather and cumulate national forecasts to identify average forecasts and apply them to countries without forecasting services SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 88

89 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Design and deploy processes to manage demand planning for large promotion and events OBJECTIVEs Design a clear process to better define forecast for promotion and events, identify roles and responsibilities Improve communication among all various disciplines Implement demand planning and sales and operation planning process KEY PERFORMANCE INDICAtoRS OR ANALYSIS Forecast Accuracy (FA) Finished Goods Stock for Distribution (STK DS) GooD PRActICEs Implicate all stakeholders in the demand planning process Integrate marketing promotion planning with the demand planning process Bring finance, sales, marketing, distribution and manufacturing into the demand planning process Give sales people the resources to develop forecasts and develop the use of confidence ratings to gauge the confidence of their estimate Reward the accuracy of promotion planning Develop systems that allow sales people to refine the planning, thereby accelerating purchases that would otherwise delay or impede on-time delivery Communicate on demand planning Build short-term demand planning on sales force activity, for example tracking the completed steps in the sales process for a given month (contact made with key decision-makers, presentations made, proposals delivered, etc.) Prepare intermediate-term forecasts to guide sales, marketing, and resource-allocation planning Communicate Point of Sales (POS) data via weekly report in order to enable retailers to improve the accuracy of their forecasting efforts SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 89

90 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Design and deploy processes to manage stock and demand planning for new products or end of life products OBJECTIVEs Better manage inventories between new products and end of life products Implement demand planning and sales and operation planning process KEY PERFORMANCE INDICAtoRS OR ANALYSIS Number of backorders, stock outs and markdowns Forecast Accuracy (FA) Finished Goods Stock for Distribution (STK DS) Days Inventory Cover for Distribution (DIC DS) Distribution of inventories between end of life, new and flagship products GooD PRActICEs Implicate all stakeholders in forecasting process Assess the impact of cultural differences on demand forecasting Bring finance, sales, marketing, distribution and manufacturing into the forecasting process Set up regular communication with the sales staff and suppliers Integrate if possible major customer within the new product development process Use historical data to evaluate new products sales forecasts Calculate standard production cost by utilizing software that houses historical data to develop current trends SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 90

91 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Consider to recycle excess e.g. finished products, Point of Sales (pos) OBJECTIVEs Find trade-off between cost of inventory for excess of products taking into account their sales forecasts and the possibility to reuse the excess of products KEY PERFORMANCE INDICAtoRS OR ANALYSIS Percentage of obsolete stock Distribution of inventories between end of life products, new products, flagship products, etc. GooD PRActICEs Obsolete and slow moving stock Determine the definition of obsolete / slow moving stock (e.g. inventory replaced by an alternative and rendered unusable or diminished in value) Evaluate the amount of product which could be recycled Share data among all distribution sites Communicate about recycle processes Consider all the possible ways to reuse excess of products SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 91

92 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Manage end of life / new / discount products OBJECTIVEs Determine the best inventory distribution between end of life / new / discount products KEY PERFORMANCE INDICAtoRS OR ANALYSIS Distribution of inventories between end of life products, new products, flagship products, etc. Illustration: evaluate cost of inventory vs sales amounts $ Cumulative % $ in millions $ in millions Cumulative 100% 80% 60% 40% % C9 Not Classified F1 C23 Flagship B1 New Product groups F3 End of life M3 D C9 B1 F1 Flagship New E2 B2 N/A K End of life F3 F2 C8 C23 C6 D2 0% Sales amount by products Cost of inventory by product GooD PRActICEs Evaluate inventory distribution Determine the definition of obsolete / slow moving stock (e.g. inventory replaced by an alternative and rendered unusable or diminished in value) Investigate value of obsolete / slow moving stock as percentage of total stock value per stock keeping unit Analyze the average differences and the outliers and determine the root causes Determine whether the outliers can be reduced Take appropriate action accordingly SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 92

93 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Consider the use of a replenishment tool (finished products for Market Companies) OBJECTIVEs Optimize turnover rate reducing stock levels and supply costs Implement demand planning Implement project CONNECT ILLUstRATION Definition: Economic or Optimum Order Quantity Total Cost Carrying Cost Cost Order Cost Order Quantity Quantity in Inventory Reorder Point Economic Order Quantity (EOQ) or Optimum Order Quantity EOQ Time The order replenishment frequency depend on the order replenishment quantity GooD PRActICEs Adjust demand forecasts using a replenishment tool Use historical data to automatically identify recurring demand Set up replenishment alerts based on historical data Measure automatically demand trend When needed, apply seasonal influence model to forecast demand Use automatic demand forecasts models Define replenishment characteristics Measure automatically the variability of the demand, and use these data to weight the stock security level Define manually the delivery cycle within the tool Define automatically the Optimum Order Quantity based on parameters provided by the supply chain department (ordering cost, stock cost, etc.) Define automatically and by item the stock level Define service level with sales department and enter it manually in the tool SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 93

94 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Deploy EDI (electronic data interchange) and customer collaborative process OBJECTIVEs Optimize stocks distribution between Market Company (MC) stocks and Brand Company (BC) stocks Implement project CONNECT KEY PERFORMANCE INDICAtoRS OR ANALYSIS Definition Electronic Data Interchange (EDI) can be formally defined as the transfer of structured data, by agreed message standards, from one computer system to another without human intervention kpis Percentage of orders done via EDI Number of suppliers or customers using EDI GooD PRActICEs Consider the use of EDI with internal and external distributors Implement a supply chain software system able to coordinate all orders and inventory levels and which is able to alert manager in case of danger of a stock shortage Improve order accuracy by using EDI Shorten ordering process eliminating conversion of work orders and manual control by coordinating and standardizing orders Set up strong partnerships with internal and external distributors Create or improve partnerships between MC and BC for planning and replenishing inventory, focus the collective efforts to optimize performance: Share information and collaborate in planning Maintain a data warehouse as a common source of information Establish common business objectives and process rules Use shared data for joint decision making Set joint goals and performance targets SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 94

95 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Define stock security level in distribution center to calculate replenishment OBJECTIVEs Manage stocks and avoid stock-out or over-stocks in Brand Company (BC) and Market Company (MC) warehouses KEY PERFORMANCE INDICAtoRS OR ANALYSIS KPIs Days sales in inventory Safety stock and obsolete inventory as a percentage of cost of sales and of the inventory balance Finished Goods Stock for Distribution (STK DS) Days Inventory Cover for Export (DIC BO) Days Inventory Cover for Distribution (DIC DS) Illustration: security stock VS. level Security Stock Quantity Illustration for a small variance of demand 5 0 % Service level Security stock vs service level GooD PRActICEs Evaluation of stock security levels Consolidate view on inventory data in order to obtain a clear view on consolidated security stock level Evaluate all costs related to stock management (fix costs, handling costs, taxes, etc.) Communicate with shareholders in order to understand their need and establish stock security level in order to satisfy service level and reduce stock costs Evaluate the best alternative between having high level of security stock to ensure high service level and reducing inventory costs SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 95

96 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Coordinate large promotion orders from retailer to MC and BC OBJECTIVEs Facilitate communication between retailers, Market Company (MC) and Brand Company (BC) Offer clear visibility of customer demand throughout the supply chain Adjust production planning to promotion operations in a flexible way KEY PERFORMANCE INDICAtoRS OR ANALYSIS Delivery time (order > frozen period > delivery) Forecast Accuracy (FA) Days Inventory Cover for Distribution (DIC DS) Days Inventory Cover for Export (DIC BO) Finished Goods Stock for Distribution (STK DS) GooD PRActICEs Define promotion planning Decide where best to package promotions (Market or Brand Company) Use customer demands to drive inventory promotion planning Use an order management system built upon the information available on raw material timing, production flow, work in process and finished goods inventory levels ensuring that orders will be filled on the date promised Assess inventory on hand to manage promotion Set up the latest tracking technology to manage inventory while still in transit: allocate the inventory right en route The combined use of inventory tracking systems, advance planning systems, and communication tools enables companies to direct inventory delivery from trucks, planes, or ships straight to the end consumer Managing and allocating inventory in transit reduces the number of days that inventory sits in a warehouse (commonly referred to as "days of inventory") and shortens lead times to customers Communicate on promotion planning Establish both operational and ordering timetables, keeping up-to-date operations allows to update shipping date reports to impacted departments (e.g. sales and marketing) Set job priorities to maximize limited resources Perform a supply base management practices SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 96

97 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Develop policies and procedures for goods storage and handling OBJECTIVEs Define standard processes among all inventory sites KEY PERFORMANCE INDICAtoRS OR ANALYSIS Definition Warehouse Management System (WMS): primarily aims to control the movement and storage of materials within a warehouse and process the associated transactions, including shipping, receiving, put away and picking. The systems also direct and optimize stock put away based on real-time information about the status of bin utilization kpis Days sales in inventory Percentage of OTIF (number of orders delivered by Brand Company (BC) to Market Company (MC) in full on time / total number of orders) GooD PRActICEs Warehouse process improvement Redesign the block layout to optimize the product flow involving all department concerned (engineering, IT, finance, marketing, customer service, purchasing, manufacturing, and warehouse-operations) Apply ergonomic principles to fit warehouse design to different types of workers Use a WMS to best allocate warehouse resources Benchmark current warehouse operations to establish targets for improvement: how many times is a given item handled as it moves? Are traffic patterns confused? How long does it take for an operator to store an item once it has been received? Minimize materials-handling events at each stage of the warehousing process Warehouse information management Form guidelines on how the warehouse layout should facilitate warehousing operations, what information support the warehouse needs, and who will provide that support Seize every opportunity to practice virtual warehousing for just-in-time (JIT) delivery, for example direct delivery or cross-docking Slotting optimization Use optimal slotting logic to direct the put-away and picking of inventory and practice multiple-order picking (for example, batch picking, cluster picking, or wave picking) Periodically review customer orders and inventory mix to adjust slotting priorities and be sure that the slotting logic accurately reflects current order fulfillment priorities Ensure that service level agreements with supply chain 3 rd parties include such Good Practices SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 97

98 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Use an inventory tracking process OBJECTIVEs Increase visibility on inventory, reduce non value-added inventory, prevent unnecessary reordering of materials and reduce obsolete stocks DEFINITION & ILLUstRATION Definition Radio Frequency Identification Technology (RFID): technology that incorporates the use of electromagnetic or electrostatic coupling in the radio frequency (RF) portion of the electromagnetic spectrum to uniquely identify an object, animal, or person. RFID is coming into increasing use in industry as an alternative to the bar code GooD PRActICEs Consider the use of tracking technologies Consider the use of automated inventory data capture with radio frequency identification technology (RFID) Integrate inventory data from across the enterprise Consider the use manage-by-exception or event management systems to highlight unusual inventory activity Consider the use of bar coding and Radio Frequency technologies: Ensure scanners and barcodes, printers and WMS are compatible Consider the use of Handheld Scanners, or Hands-free Scanners or Bar code readers Ensure that service level agreements with supply chain 3 rd parties include such Good Practices SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 98

99 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Perform regular cycle counts OBJECTIVEs Perform and optimize stock monitoring (physical checks and valuations) KEY PERFORMANCE INDICAtoRS OR ANALYSIS KPIs Inventory turns by stock category Safety stock and obsolete inventory as a percentage of cost of sales and as a percentage of the inventory balance Stock value (by brand) Illustration of Abc analysis Cumulative percent usage Group A Group B Group C Cumulative percent of items GooD PRActICEs Perform regular Abc analysis (based on sales quantities) Classify inventory by quantity of sales: create A, B, and C categories of SKUs, in which the A category contains the fastestmoving SKUs, the B items are medium movers, and the C category consists of the slowest-moving items Adopt management approaches that are appropriate for the value and turnover of the inventory and manage inventories based on their impact on the company's operations: fast-moving A inventory, for example, can be carried in smaller quantities and replenished more frequently. And the slow-moving C items need not be cycle-counted as frequently as the A items Differentiate cycle counts Perform cycle-count inventory by classification Identify and eliminate obsolete and low-value, slow-moving inventory on a regular basis Ensure that service level agreements with supply chain 3 rd parties include such Good Practices Review Point of Sale (pos) material in stock Implement a follow-up in inventory (at least in quantity, not necessarily in value) of the POS material Optimize duty paid stock For Market Companies, optimize the balance between duty free and duty paid stocks SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 99

100 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Assess package size against customer demand OBJECTIVEs Optimize inventory management and reduce volume of low-margin finished products KEY PERFORMANCE INDICAtoRS OR ANALYSIS Number of SKUs Days Inventory Cover for Distribution (DIC DS) Days Inventory Cover for Export (DIC BO) GooD PRActICEs Optimize package size and/or items within warehouses (Periodically) review the average package size inventory of finished products versus average sales per product group Focus your review on what produces the most part of the contribution / benefit Determine which package size inventories are relatively high and /or low Take appropriate action, taking into account the risk of stock-outs Optimize number of finished products: optimize number of specifications to reduce stock items SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 100

101 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Evaluate stock costs versus mass production savings OBJECTIVEs Balance inventory cost and service in optimum way KEY PERFORMANCE INDICAtoRS OR ANALYSIS Inventory level Frequency of production runs (i.e. average time between 2 runs) GooD PRActICEs Optimize replenishment Agree with each supplier the optimum order quantity for each raw material Make sure the Enterprise Resource Planning (ERP) system has the correct parameters (for calculating carrying / holding cost and order cost) Use the optimum order quantity as a guideline for purchasing raw materials Use the optimum order quantity in combination with the optimum reorder point to maintain correct stock levels Optimize manufacturing process Increase the flexibility of the manufacturing process and ensure employees can easily switch between internal orders SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 101

102 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Determine optimal delivery frequencies and quantities OBJECTIVEs Find balance between reducing number of deliveries and offering high flexibility to customer KEY PERFORMANCE INDICAtoRS OR ANALYSIS Average order cycle time (from customer order to delivery date) Number of customer complaints Injury rate (number of deliveries with damage / total number of deliveries) GooD PRActICEs Optimize truck loading Improve the coordination of warehouse staging and loading with transportation availability and performance Load trucks with multiple types of flows, for example flows for stocks and for cross-docks Optimize deliveries Use trailers with tie rings to separate loads destined for different customers Use translucent roof to enhance visibility and reduce injury rates and claims costs SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 102

103 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Set-up a formal process for goods returned OBJECTIVEs Optimize route to market costs Optimize returned goods process management Improve tracking of returned goods KEY PERFORMANCE INDICAtoRS OR ANALYSIS Number of goods returned Characteristics of goods returned (SKU, volume, cause of return, etc.) GooD PRActICEs Optimize deliveries Find a balance between reducing number of deliveries and offering high flexibility to customers Optimize returned goods process management Draw a flowchart of the current process for handling returns Analyze the chart and determine where it can / must be improved, to shorten and simplify the process If needed, adjust the process for handling returns Formalize the new process by communicating it internally (incl. clear roles and responsibilities) and externally Track specific reasons for deficiencies and classify them using a Pareto analysis Form action teams to root out the underlying reasons and address them in future shipments SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 103

104 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Actively assess and sell off obsolete / slow moving stock OBJECTIVEs Minimize the obsolete / slow moving stock Optimize cash and its forecasting Reduce the impact on your profit & loss account KEY PERFORMANCE INDICAtoRS OR ANALYSIS Obsolete stock as percentage Obsolete of total stock (see as % example of total chart) stock 35 City 1 City 2 City 3 City 4 City 5 City 6 % of obsolete stock City , ,000 City 8 650, ,000 Stock value per factory Obsolete stock as % of total stock GooD PRActICEs Assess obsolete / slow moving stock Investigate value of obsolete / slow moving stock as percentage of total stock value per stock category / stock keeping unit Determine the value of accruals for obsolescence and review the relevance with Supply Chain Challenge Supply Chain to review the action plan to recycle slow moving stock Consider recycling Point of Sales (pos) stocks with specialized 3 rd party SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 104

105 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Perform regular physical inventory counts aligning physical count to records, supported by proper reconciliation procedures OBJECTIVEs Increase control on inventory Manage the impact on profit & loss account and working capital due to inventory differences KEY PERFORMANCE INDICAtoRS OR ANALYSIS Quantity and value of inventory differences (positive/negative) per financial year and stock category (see example chart) per warehouse or per SKU Value Dry Goods Non aged wet goods Wine Ageing spirits others GooD PRActICEs Physical inventory count procedure Ensure that a physical inventory count procedure exits and was communicated at every inventory managing entity Ensure that the procedure covers all stock categories (including Point of Sale material) and provides a methodology regarding the count of each stock category Ensure that the physical inventory count procedure is conducted according to the local and international accounting requirements Prepare and archive relevant documentation Analyze the average differences and the outliers (e.g. specific stock category) and determine the root causes P&L impact and working capital Consider the impact on the profit & loss account as well as on your working capital Take appropriate action accordingly Reconciliation of warehouse/inventory management and accounting Ensure that inventory differences are posted in your warehouse / inventory management as well as in accounting Resolve differences between warehouse / inventory management (quantity) and accounting (value = quantity * item price) on a regular basis (e.g. monthly) SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 105

106 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Determine the net realizable value (NRV) of your inventory goods OBJECTIVEs Evaluate inventory goods from a market perspective Manage the impact on profit & loss account and working capital KEY PERFORMANCE INDICAtoRS OR ANALYSIS Definition Net realizable value (NRV) is defined as the expected selling price in the ordinary course of business minus the cost necessary for completion and disposal kpi Comparison of the NRV with your cost of sales (COS) GooD PRActICEs Ensure not to over- or understate the value of your inventory goods Compare the NRV of your inventory goods with its COS to determine if there is a need for a write-off Align this approach with other depreciation methods such as slow moving and obsolete stock SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 106

107 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL compare actual versus target Days Inventory on-hand (DIo) objectives Optimize inventory level per inventory category Monitor the DIO trend to ensure the target will be reached key performance INDIcAtoRs OR ANALYSIS Development of inventories per inventory category vs. DIO EUR million Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Aug 11 Sep 11 Oct 11 BUD Dec 11 LE BUD days Trade goods - non group Trade goods - group Finished goods Other inventories Non aged wet goods Dry goods Inventory vs. DIO GooD practices cash Dashboard implementation Issue the Cash Dashboard for each reporting period Compare the actual versus the target DIO Analyze the average differences and the outliers (e.g. specific stock category) and determine the root causes Analyze the breakdown of stock categories Consider the impact of slow moving / obsolete stock on your profit & loss account as well as on working capital Take appropriate action accordingly SUPPLy ChAIN ALL BC MC Pernod Ricard / Cash Management / 107

108 Maintain stock master data Manage BC forecast & planning Manage MC forecast & planning Manage orders from MC to BC Manage goods in storage Manage production Manage distribution & returns Manage inventory & period end closing FORECAST TO FULFILL Calculate and monitor inventory carrying / holding costs OBJECTIVEs Optimize holdings costs of each stock category Manage safety stock level vs. its holding costs Improve cash flow and cash forecasting KEY PERFORMANCE INDICAtoRS OR ANALYSIS Inventory balance per stock category, product groups Cost of goods sold (GOGS) vs. inventory carrying costs per material (see example chart) Days Material 1 Material 2 Material 3 Material 4 Material 5 Material 6 Material 7 Material 8 Material 9 Material 10 COGS Actual inventory carrying costs Target inventory carrying costs (25% of COGS) COGS versus inventory carrying costs per material GooD PRActICEs Carrying / holding costs (excluding maturing inventories) Periodically make an inventory carrying cost analysis; make a classification of material / product groups Determine which products have relatively high inventory carrying costs Take appropriate action when needed to decrease (safety) inventory levels for specific product groups Communicate inventory carrying cost per material / product group to create internal awareness SUPPLY CHAIN ALL BC MC Pernod Ricard / Cash Management / 108

109 FORECAST TO FULFILL Notes Pernod Ricard / Cash Management / 109

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111 TREASURY operations Cash optimization and the best utilization of working capital that considers the impact of the cycles on Purchase to Pay, Order to Cash, Forecast to Fulfill, plus a strong centralized treasury process that facilitates debt minimization Martell

112 TREASURY OPERATIONS Enabling processes Order to Cash Purchase to Pay Toolkit split by Function Forecast to Fulfill Treasury Operations Finance Liquidity management Intercompany financing 4 week cash forecasting Cash-in / cash out forecasting Banking Netting Foreign Exchange Toolkit split by Cycle Toolkits by function Sales Supply Chain Purchasing Marketing Finance Treasury Operations Liquidity management Intercompany financing 4 week cash forecasting Cash-in / cash out forecasting Banking Netting Foreign Exchange Pernod Ricard / Cash Management / 112

113 Table of contents TREASURY OPERATIONS Liquidity management Concentrate cash with Corporate Treasury as soon as possible Calculate a global cash position on a daily basis Leverage the cash forecasting to determine cash shortage or surplus Intercompany financing No external borrowing facilities are to be established without approval from Corporate Treasury Entities should investigate how to integrate the group financing process (cash pool, treasury convention, etc.) 4 week cash forecasting Improving short-term cash forecasting accuracy 4 week cash forecasting development Cash-in / cash-out forecasting Perform Cash-in / cash-out forecasting according to the model Banking Bank only with the core financing banks for cash management purposes Minimize the number of bank accounts and banking relationships (Contact Corporate Treasury whenever considering a new banking relationship) Utilize Zero Balance Accounts for all collection and disbursement accounts Segregate cash management activities from accounting Netting Entities not using the netting system should research if they can legally participate Utilize the netting system to offset all intercompany agreed balances every month FX risk management of external and intercompany exposures No FX hedges are to be performed by an entity without specific authorization from Corporate Treasury Non-functional currency invoices above 350k (outside of netting system) should be communicated to Corporate Treasury on an immediate basis via e-treasury Compare budget vs. actual at budgeted FX rates using Prisma to understand the full impact of FX fluctuations Brand Companies should invoice within the group in distributor s currency, where possible Distributors should invoice in their local currency, where possible Pernod Ricard / Cash Management / 113

114 Liquidity management Intercompany fi nancing 4 week cash forecasting Cash-in / cash-out forecasting Banking Netting Foreign Exchange TREASURY OPERATIONS liquidity management objectives PR liquidity objectives are to: Maintain sufficient liquidity and available funds to meet ongoing daily cash needs Minimize financial costs by pooling the cash, controlling float time and limiting payment costs Minimize the expense on borrowed funds Ensure availability of funds and minimize risk on short term investments, where applicable key performance indicators OR ANALYSIS Frequency of overdraft for local subsidiaries (Brand and Market Companies) Quarterly average local overdraft / cash balances Average balance of overnight investments sweeps, interest earned 2,500,000 2,000,000 1,500,000 1,000,000 Excess Cash Balance Cash Balance Target Balance 500, Jan 13 Jan 17 Jan 24 Jan 31 Jan Excess Cash Balance good practices Daily liquidity management Calculate a global cash position on a daily basis Leverage the cash forecasting to determine cash shortage or surplus and borrow / invest from Corporate Treasury accordingly Establish Zero Balance Account (ZBA) feature on all collection and payment accounts, where possible Establish target balances for accounts where ZBA is not possible Analyze historical cash flows annually to determine minimum monthly balance requirements for each account. If a balance never drops below a certain amount that amount is likely to be excess cash and should be moved to the cash pool or upstreamed Cash concentration Borrow and invest funds with Corporate Treasury wherever possible as that will result in maximum interest savings on debt for the group overall Enroll in the automated or non-automated treasury convention If automatic cash pooling is not possible, participate manually in cash concentration (treasury convention if possible) See next page. Review liquidity position at least weekly to identify excess funds to send to PR Finance If cash convention is not available, contact Corporate Treasury for guidance and other relevant departments if needed Identify appropriate investment funds for cash sweeps and establish an overnight sweep on all concentration accounts where automatic cash pooling is not possible. Contact Corporate Treasury on advice regarding cash investment options Pernod Ricard / Cash Management / 114

115 Liquidity management Intercompany fi nancing 4 week cash forecasting Cash-in / cash-out forecasting Banking Netting Foreign Exchange TREASURY OPERATIONS intercompany financing objectives Corporate Treasury provides affiliates with intercompany funding and to help affiliates: Simplify the process around receiving financing and reducing borrowing costs Avoid FX and interest rate exposure key performance indicators OR ANALYSIS Frequency of overdraft positions in local subsidiaries (Brand and Market Companies) Quarterly average local overdraft / cash balances good practices Funding rules Affiliates participating in the cash pool will automatically be funded for any cash shortage Companies not in the cash pool or part of the treasury convention should request all funding from Corporate Treasury in the form of intercompany loans No external borrowing facilities are to be established without approval from Corporate Treasury. Corporate Treasury will oversee issuance of all external debt and manage interest rate risk on a corporate level Enroll in intercompany funding Entities that are not part of the cash pool or treasury convention should research if they can participate in the intercompany loan process Contact Corporate Treasury directly to establish intercompany loan agreements request funding Utilize e-treasury as a mean to request funds (72 hours before) Funds should be requested three days in advance to ensure availability Pernod Ricard / Cash Management / 115

116 Liquidity management Intercompany fi nancing 4 week cash forecasting Cash-in / cash-out forecasting Banking Netting Foreign Exchange TREASURY OPERATIONS 4 week cash forecasting objectives PR forecasting objectives are to establish and maintain accurate cash forecasting processes in order to: Provide information for business decision making on capital and operational expenses Minimize the level of excess cash while maintaining liquidity Maximize the pay down of external debt and reduce interest expense (the best use of PR group cash) key performance indicators OR ANALYSIS % large receipts / disbursements missed in the forecasting process Cash forecasted vs. actual for each reporting unit: number of months within 20% variance range and improving Timeliness of forecasting completion with a target of 90% on time for a given business unit per year, and 100% at month and year end good practices improve short-term cash forecasting accuracy Roll out a cash culture management initiative which would include policies and principles surrounding timeliness and accuracy of business unit forecasts Where there are exceptions to principles and policies (e.g. a last minute funding need or need to hold excess cash), mandate notification of the CFO Perform monthly variance analysis of actual vs. forecast and research causes to fine tune the forecasting process, focusing first on big items Compile historical cash flow result in a single spreadsheet or database and analyze these results to identify cash flow patterns such as monthly seasonality, weekly customer payment trends, daily customer payment trends, etc. short-term cash forecasting development Develop a detailed and rolling operational 4 week cash forecasting model in order to provide guidance in short-term investing and borrowing decisions Utilize a Cash In Cash Out methodology for cash forecasting and report the forecasts to Corporate Treasury based on implemented Treasury guidelines e.g. LE2, LE4 Provide Corporate Treasury with the amount of excess cash that will be sent for investment or any foreseen cash shortage Inform Corporate Treasury of any significant changes to your cash forecast as soon as they become known Pernod Ricard / Cash Management / 116

117 Liquidity management Intercompany fi nancing 4 week cash forecasting Cash-in / cash-out forecasting Banking Netting Foreign Exchange TREASURY OPERATIONS Cash-in / cash-out (Ci-Co) forecasting objectives Improve accuracy of net debt forecast at group and entity level at closing dates (30th June and 31 st December) Complement the existing forecast using the Free Cash Flow model key performance indicators OR ANALYSIS Variance between net debt level as forecasted by the CI-CO model and actual net debt at closing dates (see example report) TESTING ENTITY; 2M direct CF forecast GBP m Jul-10 Aug-10 Total Operating Operating cash receipts Other operating cash receipts Total operating cash receipts Goods, raw materials & other operating purchases Payroll Other taxes (net balance) Corporate taxes (net balance) Other operating cash payments Total operating cash payments Total operating Investing Investing cash receipts Dividends & other receipts from investments Total investing cash receipts Investing cash payments Dividends paid & other payments from investments Total investing cash payments Total investing Financing Interest received Total cash receipts Interest paid Total cash payments Total Opening net indebtness balance Net CF Closing net indebtness balance good practices Define and approve Ci-Co model assumptions Define the model assumptions and ensure that relevant stakeholders agree to those assumptions Approve and document the final model assumptions Ensure reliability of input data Analyze your input data on a regular basis for e.g. completeness, accuracy Conduct primary data improvement projects if the analysis has shown a need to take action automate Ci-Co forecasting Minimize the level of manual input or adjustments Calculate / derive material items of the CI-CO forecast directly in your Enterprise Resource Planning (ERP) system (requires a high level of system integration) Forecasting frequency Consider increasing the forecasting frequency to stimulate positive effects according to the learning curve Pernod Ricard / Cash Management / 117

118 Liquidity management Intercompany fi nancing 4 week cash forecasting Cash-in / cash-out forecasting Banking Netting Foreign Exchange TREASURY OPERATIONS banking objectives PR banking objectives are to support affiliates payment and liquidity needs through: Sourcing appropriate banking services Maintaining strong controls and security of cash movements Minimizing banking fees key performance indicators OR ANALYSIS Balances in each bank account Unit price for each banking service as compared to third party benchmarks Variance between actual fees in bank statements vs. banking agreement Total banking fees by service type Value Société Générale Crédit Lyonnais HSBC Actual Banking fees Bank Fees and Industry Average Banking fees compared to industry average good practices Establishing a bank account structure Utilize only the core financing banks for cash management purposes where possible Minimize the number of bank accounts and reduce banking relationships to preferred banks where possible Collect third party receipts through the use of the best local available channels and automated wherever applicable Utilize Zero Balance Accounts (ZBA) for all accounts where possible (automatic transfer to a concentration account) bank monitoring Perform quarterly review of banking fees for accuracy and appropriateness of services and discontinue unnecessary services Negotiate favorable banking fees and other conditions on a regular basis Close any dormant bank accounts Establish controls over cash Follow Corporate Treasury guidelines for opening, closing, and modifying bank accounts Segregate cash management activities from accounting Track compliance with the cash bible, assess performance and inform appropriate personnel of cash management activity Pernod Ricard / Cash Management / 118

119 Liquidity management Intercompany fi nancing 4 week cash forecasting Cash-in / cash-out forecasting Banking Netting Foreign Exchange TREASURY OPERATIONS netting objectives Corporate Treasury provides affiliates with netting of intercompany payments to help affiliates: Simplify the settlement of intercompany trade between Brand Companies (BC) and Market Companies (MC) and reduce payment fees Hedge intercompany FX exposure to reduce risk key performance indicators OR ANALYSIS % of intercompany invoices settled through netting vs. direct payments Number of adjustments between initial and final netting amounts 150 EUR million Directly settled I/C invoices I/C invoices settled via netting 71% settled via netting June 2010 Usage of Netting System good practices Enroll in netting Entities not using the netting system should research if they are legally allowed to participate Entities enrolled in the netting should utilize the netting process to hedge FX exposure on intercompany receipts and payables Monthly netting practices Utilize the netting system to offset all intercompany agreed balances every month At the beginning of every month, run a report to determine all the invoices to be included in the netting this month, enter the total by entity into the netting system and provide the report to Market Companies Ensure netting is accurate Market Companies should reconcile the detailed report provided at the beginning of the netting period against their purchases if an entity cannot use the netting system Entities not using the netting system should nevertheless ensure that intercompany payments are made on terms that are consistent with the terms that would have been applied if the entity was participating in the netting system Pernod Ricard / Cash Management / 119

120 Liquidity management Intercompany financing 4 week cash forecasting Cash-in / cash-out forecasting Banking Netting Foreign Exchange TREASURY OPERATIONS FX risk management of external and intercompany exposures OBJECTIVEs Manage identified currency exposures and risks to minimize the effects of foreign currency fluctuations on the company s financial results Centralize foreign currency exposures at Brand Company level through invoicing in distributor local currency Ensure derivative execution is managed centrally in a well controlled and cost efficient manner KEY PERFORManCE INDICATors OR ANALYSIS FX results on current operations (see example chart) Summary of hedging results - FX transaction exposure by type against outstanding FX hedges by currency EUR million Q1/09 Q2/09 Q3/09 Q4/09 FY09 20% 15% 10% 5% 0% FX result Net income % FX result on current operations GOOD PRACTICEs Governance / risk centralization / invoice currency Ensure the entity manages FX risk in the framework of the group Foreign Currency Policy Ensure the entity has a process in place to report and reconcile FX gains and losses every period Brand Companies should invoice within the group in distributor s currency, except when this is not possible Distributors should invoice in their local currency, except when this is not possible Corporate Treasury should be consulted on any currency invoicing decision that may result in billing in a non-functional currency Trade management / FX risk management practices The treasury management system is used to track, report and value all derivative transactions Non-functional currency invoices above 350k that are outside of the netting system should be communicated to Corporate Treasury on an immediate basis via e-treasury All requests via e-treasury require affiliate management approval; all requested fields should be completed including notional amount, currency and value date All FX hedge transactions will be executed by Corporate Treasury (any exceptions must be approved by Corporate Treasury) FX accounting and reporting A monthly report is prepared by Corporate Treasury and circulated that includes details on underlying exposure data by currency and exposure type, net exposure position, outstanding derivatives and policy compliance Pernod Ricard / Cash Management / 120

121 TREASURY OPERATIONS Notes Pernod Ricard / Cash Management / 121

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123 OTHERS Perrier Jouët

124 OTHERS Consider other elements such as taxes or other assets OBJECTIVES Periodically review asset base to identify cash improvement opportunities Periodically monitor cash improvement opportunities in tax KEY PERFORMANCE INDICATORS OR ANALYSIS Periodic analysis and estimation of cash tax (CIT) through the tax reporting process GOOD PRACTICES Assets Review purchase / lease / hire decisions Identify non-core assets for disposal Review authorization controls Tax Affiliate: Review direct and indirect tax payments to identify refunds and cash deferral opportunities (e.g. management of CIT advance payment, etc.) Reduce timing to processing Value Added Tax (VAT) inputs In conjunction with the region / holding, review and optimize the tax basis considering the legal and tax requirements (e.g. tax amortization, etc.) In the event of a tax reassessment, analyze (in conjunction with the region / holding) the timing benefit of making an appeal compared to the interest / penalties of doing so To the extent it is possible and entails no additional risk, negotiate with authorities to optimize duties and rates Region / Holding: In projects (and/or restructuring opportunities), the cash tax impact and timing should be part of the memo for approval Pernod Ricard / Cash Management / 124

125 OTHERS Notes Pernod Ricard / Cash Management / 125

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127 APPENDIX Procedures & recommended methods Treasury Operations Jacob's Creek