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Perspective:
Dairy Logistics

Dairy manufacturers! Stop chasing cash and mitigate your risk

Tyler Lenz

Tyler Lenz is the director of finance at WOW Logistics Co. He has more than 12 years of experience in finance and contributes this column exclusively for Cheese Market News®.

Picture this — you are a dairy manufacturer artfully crafting the perfect blend of top-quality ingredients to create delectable cheese, butter or dairy powder. You’ve received your shipment of milk and other ingredients for your next product run. Shortly thereafter, the invoices arrive. Your accounts payable terms allow 10 days to make payments to the suppliers. On the other side of the cash flow equation, your newly produced product sits in your finished goods warehouse awaiting quality assurance testing, and then follows a variety of different paths. Some is shipped fresh directly to customers, some is shipped to outside warehousing for aging (like cheese), and some is shipped to a conversion facility to be cut and wrapped, shredded, dried or blended. While most of your accounts receivable (cash) flows back to your company after 60 days, some of your customers are unable to pay until your product is aged. As the manufacturer, this leaves your receivables out of balance with your payables creating a cash crunch! This scenario often results in chasing payments from customers in order to keep cash flowing.

Managing late receivables is time-consuming and stressful with the ever-looming risk of non-payment. Dairy manufacturers may purchase insurance on their receivables to mitigate risk, but this does nothing to cover the gap between payables and receivables. With credit insurance, the insurance company will pay the manufacturer and go after the manufacturer’s customer for payment. This option is extremely expensive and often provides limited coverage. Another alternative is for manufacturers to factor their receivables, which is when a manufacturer sells its receivables to the bank; however, the manufacturer will often only get around 95 cents on the dollar when using this method. While this solution may result in quick payment, manufacturers are missing out on potential profit. Neither of these options create an ideal solution for the manufacturer.

So how do you solve this problem? One viable option is to use a commodity purchase program. A commodity purchase program utilizes a third-party “middle man” to purchase your inventory on behalf of your customers.

Your customers then pay the third party when they are ready to take delivery of the product. There are three primary benefits that manufacturers experience by utilizing a commodity purchase program:

1. They get paid on time consistently.

2. They avoid establishing credit facilities with dozens of different companies, but extend credit to one trusted commodity purchase program provider.

3. They eliminate the risk of bad debt.

Your customers also benefit by using a commodity purchase program. They are able to leverage the financial strength of a third party to purchase your product, transport it, store it for aging and pay for it when they need it. This is a win-win for both the manufacturer and its customer.

Bill Mullins, vice president of Mullins Cheese says his company has used commodity purchase programs for many years.

“Getting consistently paid on time saves us a tremendous amount of work and allows us to focus on strategic business initiatives instead of chasing payments,” Mullins says. “Our customers benefit from it as well because they are able to pull product when they need it, not just when their cash flow allows.”

In a nutshell, a commodity purchase program provider balances the timing of payment between a manufacturer and its customer.

By utilizing a commodity purchase program, a manufacturer’s accounting workflow is drastically simplified.

Credit authorization, accounts receivable, collections, reserves and general cash flow management are streamlined. This also has a dramatic effect on debt management. In a perfect world, if all of your customers consistently paid you within 10 days, your need for short-term financing would be dramatically reduced. Many companies are forced to establish short-term debt facilities in order to bridge the gap between their payable and receivable cash flow cycles. Positioning a commodity purchase program between manufacturers and their customer’s is a simple, effective cash flow bridge.

Andrew Rice, account manager at Fonterra notes New Zealand’s seasonal production curve creates challenges in financing and storage of products until the end-customer needs them.

“This type of program allows us to make the sale more in line with our cash conversion requirements, whilst allowing the customer to purchase the product when they need to use it,” he says.

In the dairy industry there are a variety of commodity purchase providers. So how do you pick the right partner? This is a critical decision. Not only is your company depending on the choice for payment of receivables, but so are your customers for their product. Here are some factors to take into consideration before doing business with a third-party commodity purchaser:

1. Is it their core competency or a side business to make a quick buck? Are they a trusted provider in the industry that has a reputation for delivering quality service? Have they invested in people, processes, systems and tools to purchase and sell commodities with financial accuracy?

2. Have they invested in the technology to calculate fees and provide accurate billing? If they are providing services based on calculations in a spreadsheet, there is a high probability that financial accuracy is going to be a problem in the long-term. The systems required to support these types of complex transactions have to be dynamic and redundant. Transportation, storage, handling and a variety of accessorial services need to be accurately accounted for in a commodity purchase system or your customers are going to be very disappointed. Additionally, your customers need visibility to their inventory through reporting to analyze data and get the most out of a commodity purchase service.

3. Do they have the financial strength to be able to survive commodity price fluctuations and your customer’s future growth needs?

In conclusion, there are viable options for improving your cash flow, mitigating your receivables risks and providing your customers with greater access to your products. By selecting the right commodity purchase program provider, dairy manufacturers will balance cash flow and provide more flexibility to their customers.

CMN

The views expressed by CMN’s guest columnists are their own opinions and do not necessarily reflect those of Cheese Market News®.

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