Procurement’s influence on the Income Statement is well-recognized, yet we frequently observe Operating Partners errantly overlook Procurement’s impact on the Balance Sheet. Operating Partners can look to Procurement to unlock cash to fund growth, acquisitions, and debt paydown. How? Through optimizing inventory (DIO) alongside payment terms (DPO) – 2/3 of the working capital equation. To avoid this mistake, I’ve outlined recommendations below.

1. Tackle Inventory. Ensure Supply Chain understands customer requirements, has a SIOP process and purchasing policies, and employs solid statistical theory when setting stock levels. Inventory optimization can hit the Balance Sheet within 100 days post-closing and will increase service levels.
2. Optimize Pay Terms. Ensure Sourcing negotiates for extended pay terms and early pay discounts (not mutually exclusive), and price/inventory tradeoffs are visible to the CFO before contracting. Pay terms can impact both the P&L and Balance Sheet within the first 100 days as well.
3. Negotiate Wholistically. Procurement teams should conduct interests-based negotiations for both Working Capital levers (consignment, extended pay terms, inventory buy-backs, etc.) and EBITDA levers (pricing, rebates, VA/VE savings, early pay discounts, etc.) when negotiating with suppliers.