DBS for Huhtamaki
Best Working Capital Solution
Towards the beginning of 2014, Huhtamaki had finished the process of integrating the business operations of Hong Kong-based Josco companies, acquired nearly two years before. The management's focus turned to merging cash and liquidity management processes across the company’s various legacy systems.
This was far from straight-forward. Not only did Josco and Huhtamaki’s existing Asia arm have separate IT systems, the company had also inherited numerous bank accounts spread across several banks. This had resulted in significant receivables inefficiencies and large amounts of trapped cash that could be used by the firm in investments toward future growth.
Huhtamaki's centralised treasury operation, run by the Group Treasury department at Group headquarters in Finland, looks to work with the same core group of banks across the 35 countries where it has a presence.
As a result, Huhtamaki issued a Request for Information, followed by a Request for Proposal to find a partner with whom it could significantly improve cash management in Hong Kong and build a platform for growth throughout Asia.
The winning proposal came from DBS, which was awarded the mandate in December 2014. Within a year, its optimised cash management solution was bearing fruit for Huhtamaki across the Group’s Foodservice business in North Asia and particularly in Hong Kong where the trapped cash level was reduced by 30% compared to previous years. Efficiency from customised collection and receivables management systems enabled the Hong Kong team to reduce overdue payments from its Hong Kong based customers by over 65% in 2015 compared to the previous year’s average overdue level.
After several discussions with the company, DBS was able to pinpoint three key areas to work on. The first was the need to devise an alternative cash collection method from Huhtamaki's small-sized customers that would increase the firm’s control over cash flow. The second was to streamline bank accounts needed for daily operations and optimise liquidity through cash concentration. The third was automating transaction workflows and multidimensional reconciliations as much as possible within Huhtamaki’s internal enterprise resource planning system.
"DBS has been one of Huhtamaki’s relationship banks for over ten years," said Lifei Li, Treasury Manager at Huhtamaki Group Treasury "Throughout the whole RFI and RFP process, DBS clearly demonstrated its commitment to understanding our needs, and made the extra effort to find the optimal solution for us."
Special cash attention
The bank set up a team dedicated to implementing the cash management optimisation plan with Huhtamaki. The team worked with Huhtamaki closely through both the systems technology solutioning, and in the capacity of a strategic advisor providing expert guidance through the processes.
DBS used bespoke analytics to help Huhtamaki compare its working capital performance against industry peers and uncover opportunities to improve efficiencies in both physical and financial supply chains. Ultimately, the bank was able to ascertain for Huhtamaki how and where it could improve its cash conversion cycle times and how it could free up that trapped cash.
Rationalise accounts for operational efficiency
With over a thousand customers in Hong Kong, a central aspect to improving efficiency was in minimising the number of the company's bank accounts and increasing automation in reconciliations. DBS helped to achieve the former through its multi-currency saving account offering.
For the latter, the bank offered Huhtamaki the virtual account solution. This gives each customer a unique reference number and funds received in that virtual account number are swept automatically to the company's nominated master account. This allows the firm to keep track of its receivables easily and identify all of its customers and their respective payments.
"Rather than spending many manhours in the back office, maintaining reels of paper for reconciliations, virtual accounts enabled us to handle collection recognition almost 50% faster than time spent in the past," said Ravi Chidambaram, Finance Director, Huhtamaki Foodservice North Asia.
The time saved by the company on this area allows staff to focus their efforts on collecting outstanding payments, according to Chidambaram.
"While overall market risk profile has gone up in the last year, over-dues in many of our key accounts came down significantly, and we had a significantly positive outcome on the receivables management in the Hong Kong local sales," said Chidambaram. "Compared to the average in the previous years, we witnessed over 65% improvement as a percentage of our receivables from our Hong Kong based customers. This was a feather in the cap for the team."
Two-way sweep for consolidation of funds
To help automate cash flow further, DBS implemented a two-way daily target balance sweep for Huhtamaki's Hong Kong entities. This system automatically moves funds between different corporate accounts depending on where payments need to go.
As a result, the structure optimises working capital while facilitating payments to company subsidiaries which have cash concentration structures, meaning that the firm's aggregated balances can obtain the higher interest yields and minimised facility costs.
It wasn't just DBS's solutions that had impressed managers at Huhtamaki. The bank's team showed a willingness to adapt their working processes to best suit the Finnish firm’s requirements.
"DBS and Huhtamaki implemented this transition using a 'project management approach' with clearly defined tasks and timelines. During implementation, DBS worked closely with Erica Chan, Finance Manager, Foodservice Hong Kong who was the project manager. DBS was quite patient when it came to waiting for us to gain confirmation with customers, or during validation of documentation," said Chidambaram. "They were very proactive when it came to talking with our IT experts, and customising their back office systems to be able to align with ours. That was the first time I’d seen that because large multi-national banks I have dealt with are ordinarily reluctant to alter their back office systems for us."
Looking to build on this success, Huhtamaki is already in discussions with DBS to implement technological solutions that would improve supply chain processes with both small-scale customers and vendors.
"Hong Kong has one advantage - it has the capabilities to adopt new technologies faster. China is one area for me where rapid change is taking place and it is critical to keep up," said Chidambaram. "We will work closely with banks such as DBS to tackle these challenges."
(This article was first published in Corporate Treasurer, Feb/Mar 2016.)
Subscribe to DBS BusinessClass
Stay updated with the latest market trends and industry insights, connect with a network of entrepreneurs, and gain access to exclusive event invitations. Join Asia's fastest growing business community – get your complimentary membership here.