Case study – Working capital problems as business strategy

Working Capital

Shifting the business model in order to overcome the problem of locked in working capital and killing the price war in infrastructure trading business.. Corporate recipes offered a very unique strategic solution which virtually changed the positions, solved the working capital problem and also created alternative marketing dealer network

Client

It is a company based out of south india involved in trading of infrastructure and building materials. The company’s network is spread over all the states of south india with more than 30 warehouses and branches.

The challenge

Being a trading company they have a long working capital cycle since their primary suppliers are major building material manufacturer whereas their clients are dealers across south india. The working capital cycle was very long due to following reasons

  • Suppliers give very less credit or ask for advance payment at times
  • Because the products were not unique and multiple dealers were appointed by suppliers, the price cutting was rampant negotiated mainly on credit period.
  • Dealers were asking very long credit period and due to which large amounts were stuck in outstanding debtors. Working capital was under stress.
  • Substantial amounts were stuck in cheque bouncing cases and which were absorbing large amounts of money.
  • The nature of the products were such that in case of large infrastructure projects customers used to buy directly from suppliers.

The solution

As you would see the company had few specific issues emerging out of the challenges and which were as follows

  • No unique product available for trading
  • No own product available for sales
  • No exclusivity on territory given by supplier.
  • Supply and options were far too many which compelled constant price war.
  • Considering the above a unique strategic shift was envisaged and that opportunity was grabbed to change the position dramatically.

A supplier had come out in the market with a unique product called colour coated roofing sheet but which had following features

  • It colour from both the sides.
  • Supplier had offered multiple colours and customers could do mix and match with their walls or furniture.
  • Supplier had given a 10 year warranty with free replacement for colour.
  • Pricing was kept same through out the country.
  • Supplier was looking to appoint only one distributor per state and only he would appoint dealers in that state and who in turn will only sell to final customers and not to retailers.
  • The pricing and profit margin was completely transparent

Company applied for the distributorship in one state and was offered by the supplier. However while implementing the same company was advised to

  • create a separate dealer network which did not have a legacy,
  • company was also advised to get a new team since the focus had shifted from b2b to b2b2c model
  • Since this was a unique product and nearest competitor had only 70% of the features and profit and price being absolutely transparent company was advised to go for 100% cash advance model which was never tried in the history of the company.

The results

The model became extremely successful and more and more dealers signed up since their profitability was very high and assured. The product required some amount of direct marketing to final consumers and company developed such team. New dealer network got developed. The biggest advantage was due to 100% cash advance the long working cycle and huge outstanding debtors were completely eradicated from the system and cash flow improved dramatically.

Looking at the success, supplier offered 4 more states for the distributorship and which were immediately picked up.

 

 

 

 

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