Utilizing Lean Six Sigma to Reduce Accounts Receivable and Increase Cash Flow
Working Capital Management is one of the most valuable services a Shared Services operation can deliver to the company. While the focus may be on efficiently processing Order-to-Cash transactions, such as Billing and Cash Application, there is great added value in the analysis of receivables and identifying and implementing solutions to increase cash flow.
A culture of continuous improvement, and the discipline to incorporate it into the DNA of a Shared Services organization, can be applied at all levels of an organization. From the largest of transformation projects to the very simple question “Is there anything we can do to improve our customer collection time?”, all it may take to realize substantial working capital gains is someone to be willing to ask the questions and then collect and analyze the data using a disciplined approach to process improvement.
In a recent Peeriosity PeercastTM in the Accounts Receivable (OTC) research area, our feature company, which had implemented Lean Six Sigma throughout the organization, asked a very simple question, “What can we do to improve our receivables?”
As with all Peeriosity PeercastsTM, participants answered iPolling® questions that helped frame the discussion:
For those using a continuous program, Lean Six Sigma was the most predominant in use, with 36% indicating it was actively being leveraged in their OTC processes.
Our feature company outlined its approach to answering the question “What can we do to improve our receivables?”
After initial data gathering and analysis, a problem statement was formed and a narrow scope was identified:
- 1 Industry segment had significantly worse receivable collection times than the others
- 4 large customers within that segment were outliers as late payers (only 46% of outstanding balance is current)
- An improvement in those customers from 46% current to 81% would result in permanent improved cash flow of over $15 million AND could significantly improve the efficiency of OTC processes associated with collections and corrections to those accounts. The findings found that the amount of activity on those accounts post billing was significant and costly to both their company and their customers.
Once the Problem Statement, Goal, and Business Impact were documented, a team was assembled to attack this issue. Since the issue would impact across the OTC process, as well as require contact outside the organization with customers, a broad team was assigned and a RASCI chart was defined to ensure no confusion on roles, responsibilities, and authority. The RASCI acronym stands for “Responsible, Accountable, Supportive, Consulted, and Informed”. The team included the following members:
- Executive Sponsor
- Project Sponsors (heads of functional areas)
- Global OTC Process Owner
- Project Leader
- Six Sigma Black Belt
- Team Members (representatives from various functional areas)
While not a full-time effort, the team was given milestone reporting dates or “tollgates” as they called them throughout the project, with an initial improvement plan to be completed within 60 days and then a further 90 days for implementation, and iterations of improvement, and stabilization.
During the 60-day period, data analysis, as well as an investigation into root causes, took place. One of the major issues discovered was that almost 33% of billings to these four customers required additional documentation to be supplied to them and of those, almost 90% were related to only one of the four customers.
As it turned out, the root cause for each customer tended to be different, but significant in each case. A Blitz Session was held to review the findings by customers and, in turn, create suggested solutions that would meet the needs of all of their major customers and be incorporated into their standardized process. From the Blitz Session, an improvement plan was agreed upon and a project plan documented the following:
- Payment Terms Discussion/Negotiations with Customers (Sales)
- Resolve Outstanding Pricing Issues (Sales)
- Customer Portal Onboarding and Ongoing Support (EDI Specialist)
- Revise Customer Portal Reporting (EDI Specialist)
- Data Mapping Improvements (Sales, Billing)
- Sales Organization Training on Documentation and Data Requirements by Customer (EDI, Billing, Sales)
- Discrepancy/Dispute Process (All OTC)
- Documentation Attachments (Sales, EDI Specialist)
- Collection Process (Credit, Billing, Sales)
The PeercastTM included an excellent discussion on approaches being taken to improve receivables, but all agreed on a disciplined approach that “chunks down” issues into manageable pieces, such as our feature company’s approach in their example, can yield excellent and consistent results and can be incorporated in “the way shared services does business”. Lessons learned that were discussed included:
- Baseline data by customer type and portal
- The ongoing need to educate and train the sales organization and field organization as changes to the OTC processes impact them
- Within the OTC process, the need for coordinated and frequent communication
- Don’t assume anyone understands the RASCI model (or even knows what it is or that one exists)
It’s worth having a formal program to answer the question, “What can we do to improve customer collection time?” Our feature company closed the PeercastTM by informing the group of their results to date:
- DSO from the four targeted customers has improved by almost 50%
- Discrepancies are down, improving the overall efficiency of the OTC process
- Sales have more time to sell
- Customers are happier (and paying quicker)
- And most importantly:
- The goal of permanent working capital improvement of $16 million has been exceeded – it now stands at $23 million.
What is your approach to continuously improving your Accounts Receivable management?
Who are your peers and how are you collaborating with them?
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