In the US and many western economies, we have operated in a world of near-zero interest rate and very low cost of capital. That is no longer true. The cost of running a business has gone up.

Cash Conversion cycle is an effective metric to track the working capital. For the Specialty Chemicals and Industrials sectors, this metric has increased by 27% since 2015.

It appears that operating in a low-cost environment for a long time has allowed some bad habits to creep back.

If this isn't addressed, it will have a negative impact on the cost and pace of long-term growth.

My name is Ranjith Kondath, and I am a partner at Oliver Wyman’s Houston Office. I focus on driving profit and cash impact for companies in energy and chemicals sectors through practical operational levers.

I’ve been fortunate to work with companies in a wide variety of contexts – healthy, stressed, in the Chapter 11 process, Mergers and acquisitions (M&A) etc.

What keeps me motivated is the diversity of problems at our clients. It keeps me and my team on our toes to ensure we crack the case and do it in a way that the results are sticky.

Today I'm going to talk about working capital, which seems to be a hot topic currently in many of the CFO offices. Typically, the businesses that we work with have good controls over CapEx, as the decision authority is contained within a small group of executives. Controls and policies usually do the job.

On the other hand, the accountability and ownership of working capital is widely distributed. Receivables’ policy is influenced by sales; payables by procurement; and inventory by supply chain.

It is harder to change since simple directives are not only ineffective but can be harmful.

It takes work and change management to set a policy that is right and tailored to business needs. Even more work to enforce it in the right manner.

The usual efforts come when immediate attention is needed and then a firefight begins and some sort of bandaid solution is put in place.

For all these reasons, there's usually a good opportunity to make a sizable impact on the cash flow, some of which can be done relatively quickly in the chemicals and industrial sectors.

The largest portion of working capital will tend to be tied up in inventory. Inventory is also the most difficult among the three to control because of the dispersed nature of ownership.

I'm going to keep things simple and talk about three things that are typically needed to build lasting capabilities on working capital.

Number one is visibility.

Most medium-to-large companies are built through a series of acquisitions and operate on multiple enterprise resource planning systems, commonly known as ERPs. End-to-end data visibility is often a problem. Getting to a single source of truth that is as close to real time as possible is important. Today's technology makes that much easier.

Second step is setting the right policies and targets.

This is an important step. Harder than it sounds because these policies must be tailored to and synchronized with the company's segment strategies. In some cases, these policies may need to be adjusted seasonally. Managing them dynamically requires the right data and tools. Most companies rely on standard transactional ERPs to do this, which I found to be quite lacking in this capability.

Third is daily execution change management. 

Next step should be to ensure there are ways to execute these on a day-to-day basis. Simple tools that are accessible and understood by distributed decision makers are a key measuring and managing two specific policies or business rules is an effective way to track change.

Automating and publishing these at the right levels of granularity aids visibility and corrective actions.

Today, there are many digital solutions that are available to help with adoption and compliance.

As an example, AI, machine learning or Robotic Process Automation – RPA – can help make the process more efficient and effective.

This is one example of how we are working with clients to make a lasting impact. I'm excited to continue to help companies succeed today while shaping tomorrow.

I’m Ranjith Kondath, and this is my take on optimizing working capital.

This transcript has been edited for clarity

In the US and many western economies, we have operated in a world of near-zero interest rate and very low cost of capital. That is no longer true. The cost of running a business has gone up.

Cash Conversion cycle is an effective metric to track the working capital. For the Specialty Chemicals and Industrials sectors, this metric has increased by 27% since 2015.

It appears that operating in a low-cost environment for a long time has allowed some bad habits to creep back.

If this isn't addressed, it will have a negative impact on the cost and pace of long-term growth.

My name is Ranjith Kondath, and I am a partner at Oliver Wyman’s Houston Office. I focus on driving profit and cash impact for companies in energy and chemicals sectors through practical operational levers.

I’ve been fortunate to work with companies in a wide variety of contexts – healthy, stressed, in the Chapter 11 process, Mergers and acquisitions (M&A) etc.

What keeps me motivated is the diversity of problems at our clients. It keeps me and my team on our toes to ensure we crack the case and do it in a way that the results are sticky.

Today I'm going to talk about working capital, which seems to be a hot topic currently in many of the CFO offices. Typically, the businesses that we work with have good controls over CapEx, as the decision authority is contained within a small group of executives. Controls and policies usually do the job.

On the other hand, the accountability and ownership of working capital is widely distributed. Receivables’ policy is influenced by sales; payables by procurement; and inventory by supply chain.

It is harder to change since simple directives are not only ineffective but can be harmful.

It takes work and change management to set a policy that is right and tailored to business needs. Even more work to enforce it in the right manner.

The usual efforts come when immediate attention is needed and then a firefight begins and some sort of bandaid solution is put in place.

For all these reasons, there's usually a good opportunity to make a sizable impact on the cash flow, some of which can be done relatively quickly in the chemicals and industrial sectors.

The largest portion of working capital will tend to be tied up in inventory. Inventory is also the most difficult among the three to control because of the dispersed nature of ownership.

I'm going to keep things simple and talk about three things that are typically needed to build lasting capabilities on working capital.

Number one is visibility.

Most medium-to-large companies are built through a series of acquisitions and operate on multiple enterprise resource planning systems, commonly known as ERPs. End-to-end data visibility is often a problem. Getting to a single source of truth that is as close to real time as possible is important. Today's technology makes that much easier.

Second step is setting the right policies and targets.

This is an important step. Harder than it sounds because these policies must be tailored to and synchronized with the company's segment strategies. In some cases, these policies may need to be adjusted seasonally. Managing them dynamically requires the right data and tools. Most companies rely on standard transactional ERPs to do this, which I found to be quite lacking in this capability.

Third is daily execution change management. 

Next step should be to ensure there are ways to execute these on a day-to-day basis. Simple tools that are accessible and understood by distributed decision makers are a key measuring and managing two specific policies or business rules is an effective way to track change.

Automating and publishing these at the right levels of granularity aids visibility and corrective actions.

Today, there are many digital solutions that are available to help with adoption and compliance.

As an example, AI, machine learning or Robotic Process Automation – RPA – can help make the process more efficient and effective.

This is one example of how we are working with clients to make a lasting impact. I'm excited to continue to help companies succeed today while shaping tomorrow.

I’m Ranjith Kondath, and this is my take on optimizing working capital.

This transcript has been edited for clarity