Make your own free website on

Working Capital Management


Working Capital Management
Financial Ratio Analysis Heading
Specific Strategies
Exciting Examinations
Multiple Choice
True or False
Essay Questions
Virtual Calculator

Eli Lilly’s Working Capital Project

By Joseph Neu

The pharmaceutical MNC shows the team work involved in improving global working capital management.

Contrary to what global cash management bankers may lead you to believe, working capital management projects are more than selecting the right global transaction bank.

A presentation at last October’s TMA Annual event by Eli Lilly’s global treasury director, Tom Yamamoto, and Global Cash Management Ltd.’s Susan Griffiths, makes clear: To make real progress with cash and liquidity management, treasury must be prepared to work within the company to understand working capital processes in total. In fact, the most crucial partnerships are not with banks, but those forged internally between treasury and business.

A process of accountability

Perhaps a unique aspect of the Lilly project is that local business affiliates—and three of the more significant ones in Spain, Mexico and Japan—had requested treasury’s working capital assistance. Their request can be attributed to the high level of working capital awareness Lilly possesses throughout the enterprise.

Indeed, working capital management was a cornerstone of retired CEO Randy Tobias’ EVA-based Strategic Capital Management Plan initiated in 1994. Under this plan, each line manager must plan and be held accountable for accounts receivable, inventory and accounts payable targets. As a result, the local operations that had requested global treasury’s assistance had real incentives to improve their working capital usage.

Eli Lilly also had a history of treasury working closely with global business operations at the local level.

The combination of real incentives and a culture of positive treasury assistance (as opposed to a treasury image of audit and control) were key to the project’s success.

Notable too was that the very same affiliates requesting a working capital review, were those seeking credit for good working
capital management.

Treasury’s first thought, acknowledged Mr. Yamamoto, was that affiliates with poor working capital would be the ones asking for help, since they were reliant on global treasury for funding. Since the reverse was true, Lilly sees the project leading to EVA benchmarks with the added benefit of setting tangible standards within the firm—standards that other business operations can work to improve.

The approach

The general approach employed with each of the three affiliates was as follows:

(1) Assemble a “study team” consisting of members from global treasury, affiliate staff and consultants. At least half the team consisted of non-treasury staff, including representation from marketing and supply chain;

(2) Lay out the timing and requirements of the specific country-level project (this was done six- to eight weeks prior to the anticipated start date);

(3) Request data from local affiliates (two to four weeks beforehand);

(4) Conduct on-site work (typically completed over 10-12 calendar days or the equivalent of 30-48 man days).

During the on-site phase of the project, the study team merged extensive interviews with marketing, manufacturing, purchasing, accounting and finance, with detailed quantitative analysis of historical data covering a period from six months to a year.

The basic calculation Lilly’s team used to determine opportunity areas was:
Amount x Time (e.g., Days, Days in Stock, Days Sales or Days Payable) x Rate.

The rate used was EVA, unless a local borrowing or investment was being assessed, and in that case, the local interest rate was applied.


For each area of working capital and cash management, certain assumptions were made and analysis performed. In most locations, it became apparent that there was a disconnect between sales, manufacturing and finance.

Inventory analysis. This disconnect was most visible in inventory management. Inventory numbers are processed only for balance sheet purposes. Thus, the project had to segregate inventory by presentation/packaging as well as product. For example, manufacturing recorded stock figures in SKUs (stock keeping units) and then converted the numbers to “cost numbers” by applying the local cost of product sold (COPS). Trying to reconcile these numbers was virtually impossible.

Moreover, finance discovered that it dealt with summarized inventory numbers which did not allow much insight into the underlying processes. Sales objectives were a key driver. Plus, there were also product application, delivery and regulatory considerations.

In the end, a metric was constructed that quantified the Days of Stock (DOS) by using the local cost of product sold (COPS). This was multiplied by the local EVA rate to determine the total carrying cost. Eli Lilly also put in place a comparative process to monitor variances in plan from actual DOS.

Receivables. Business considerations were also important to receivables management. During the on-site phase, the study team sought to build a complete understanding of the local affiliates’ commercial/market position—and not just measure DSO by customer and evaluate credit terms.

Taking these considerations into account, along with distribution channels, collection methods, cultural issues, local banking infrastructure, and financial and operational risk considerations, the team came up with an improvement plan. Either credit terms were reset to accelerate cash or alternatives such as factoring or securitization were considered.

Payables. As with receivables, certain assessments need to be made to understand the internal payment process.

For instance, there are differences between production (manufacturing related) and non-production (services, office and marketing supplies, etc.) suppliers.

The team also had to consider the location of vendors (either within the country or offshore), standard commercial practices and cultural considerations, as well as existing banking and payment technologies in the country.

Looking at payables vs. receivables, the team was able to quantify cash conversion efficiency—e.g., days sales outstanding (DSOs), less days payment (DP). Ideally, the resulting figure should be “0” or negative because the company shouldn’t be paying faster than it is receiving funds.

Liquidity. More akin to a traditional cash management project, the study team also looked at liquidity, including daily cash levels (by bank); positions in the investment/borrowing portfolio; bank relationships (e.g., services, direct and indirect costs); daily cash procedures, and related exposure considerations.

On a higher level, the team also considered capitalization requirements, tax drivers and risk management/hedging considerations associated with overseas liquidity.

While Lilly is spreading the lessons of this project via an internal web site, it is quick to point out that findings varied by country and affiliate (see below).

For example, in Spain, Lilly discovered that vendors were offering 60-day terms and discounting the receivables for immediate payment. Lilly was able to do the same.

In Mexico, inventories were the most interesting aspect, as high levels of inventory were found to be maintained in non-strategic items. In Japan, the largest opportunity was presented by better coordination of data between manufacturing and wholesalers.

Ultimately, a metric that accounted for business realities in each country would not have been possible without on-site study and cross-functional communication. The Lilly experience indicates that although the metrics used and the objectives can be universal, any suggestions for change and improvement have to be put in the context of the affiliates’ environment. Hence, while global treasury can help provide global tools, these must be applied in the hands of those with local expertise.


Key country findings

 Country: Spain

Background: Manufacturing site with mostly domestic sales primarily to government with a complex regulatory environment.


• Retrospective analysis required to improve inventory management controls.

• Market-driven opportunities allowed discounting of selected receivables.

• Payment procedures were very efficient.

• Liquidity management and forecasting process required streamlining.

EVA benefits = $1.1MM


Country: Mexico

Background: Mature market for pharmaceutical and animal health business; manufacturing site for domestic/intercompany export consumption; two distinct markets (private and government).


• Actual inventory days higher than targets (with highest deviation for non-strategic products.

• Payments made too soon, opportunities for controlling and use of EFT.

• Cash management techniques not formalized.

EVA benefits = $1.2MM

Country: Japan

Background: Manufacturer for domestic market with primarily wholesale sales; significant competition.


• Inventories higher than plan.

• Coordinated data management required.

• Securitization more expensive than interco borrowing.

• DP too low.

EVA benefits = $2MM



If you have same comments and suggestion e-mail us at: