Days Conversion Cycle (CCC) is a measure that tells

Days
Payable Outstanding

Procter & Gamble (P&G), the world’s
largest consumer packaged goods (CPG) company, announced in April 2013, that it
would extend its payment terms to suppliers by 30 days and on July 1, 2013, it implemented a new standard
payment terms policy to harmonize their terms to a global standard of minimum
net 75 days for all their External Business Partners (EBP) where
legally allowed.  By this increase in the time it takes to pay its suppliers from 45 days
to 75 days can free up to $2 billion in cash as reported by the Wall Street
Journal which will gave it a competitive advantage and helped improve its
performance compared to its competitors. Below table shows the days payable of
its competitors.

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Comparing the Days payable outstanding of Procter and Gamble with its competitor
in the above table, we can observe that the DPO of Procter and Gamble is good
compared to its competitor Colgate Palmolive which is 69.83. It is better
compared to most of its competitor except its competitor Coty Inc which has
186.65 days payable outstanding which indicates that Procter and Gamble is in a
good position compared to its competitors but still has the room for
improvement.

After increasing of the DPO by P,
it could use that cash to fund investments in new factories overseas or to help
pay for stock buybacks which will give it competitive advantage compared to its
competitors.

Cash Conversion Cycle (CCC) is a measure that tells how fast
a company can convert cash on hand into even more cash on hand. This metric takes
into consideration the amount of time needed to sell inventory, the amount of
time needed to collect receivables and the length of time the company is
afforded to pay its bills without incurring penalties. The lower the number is,
the better it is for the company. The company with the lowest CCC is often the
one with better management. Decreasing or steady CCCs are good. The following
table compares the cash conversion cycle of Procter and Gamble with its competitors.

Metrics considering the three months ended in
Sept. 2017

Procter and Gamble Co.

Colgate-Palmolive Co.

Days Sales
Outstanding

27.08

35.13

Inventory
days of supply

53.49

68.94

Days
Payable outstanding

104.88

66.76

Cash
Conversion Cycle

– 24.31

37.31

Procter and Gamble Co.
has the cash conversion cycle of -24.31
whereas its competitor Colgate Palmolive Co.’s has 37.31 which indicates that
the management and health of Procter and Gamble Co. supply chain is better than
Colgate-Palmolive Co. 

Also the cash conversion cycle of Procter and Gamble was
12.6, positive in 2013 which became -3.5 in 2015 and still reduced to -24.31 in
2017 which is a good improvement in just 2 years.

Its negative shows that the DPO (Days Payable Outstanding) is
higher than the total DOS (Inventory days of supply) and DSO (Days Sales
Outstanding). The more negative cash conversion cycle, the better. The higher
DPO indicates that Procter and Gamble Co. 
does not makes payments to its suppliers immediately after receiving the
material and the negative cash conversion cycle indicates that this available
cash is utilized in production operations generating more revenue before paying
it to the suppliers. 

The shorter cycle compared to Colgate-Palmolive tells that
Procter and Gamble Co.  holds cash for a
longer period of time than Colgate-Palmolive which gives more opportunities to
Procter and Gamble Co. to invest in production operations giving competitive
advantage over Colgate-Palmolive. 

Inventory
turnover is a measure of the
company’s ability to flip its products for cash. A low turnover means weak sales and
hence excess inventory
whereas a high ratio implies
strong sales.

 

Inventory turnover versus peers

We can say from the above graph that the inventory turnover metric for
P for fiscal 2015 came in at 6.4x, which was the highest among peers, due
to increases in sales for all product segments except the beauty segment. Its
competitors Estée Lauder (EL) and
Colgate-Palmolive (CL) reported inventory turnover metrics
of 1.7x and 5.1x, respectively, in fiscal 2015 which is significantly lower
compared to Procter & Gamble.

 

Revenue Growth
Rate

The revenue
growth of 5.5% in 2012 to 13.7%  in 2015 which
is a significant increase of 8.2% increase in just 3 years which might be -7.97%
decrease in 3 years starting from 2012 to 2015 which shows that procter and
Gamble is at a much better position compared to its competetors in terms of
revenue growth rate.

COGS (Landed cost)

 

COGS
(Landed cost)

 

2013

2014

2015

2016

2017

Procter and
Gamble Co.

41.04B

40.61B

36.44B

32.19B

31.94B

Colgate-Palmolive
Co.

7.17B

7.2B

7.17B

6.66B

6.06B

 

The following table shows that there is 22.17% reduction in COGS (Landed cost) within 5 years for Procter
and Gamble and is also continuously decreasing whereas of its biggest competitor
it is 15.48 % in five years which means that Procter is able to manage its
supply chain better than its competitors which is a good sign. This decrease in
COGS may be because of its supply chain finance program which helped in
building good relationship with its suppliers and hence reduce the overall
cost.

Gross Profit Margin

Also the gross profit margin has increased from 15.2% in 2012
to 31% in 2015. The current net profit margin
for Procter & Gamble as of 2017 is 50.59%.whereas Colgate-Palmolive has gross profit
margin of 59.96%. But we can see from the past data that it’s in increasing
trend so it will easily go ahead of its competitors in terms of gross margins.  

Reference:

Lecture videos

https://www.gurufocus.com/term/CCC/PG/Cash-Conversion-Cycle/Procter–Gamble-Co

https://www.marketwatch.com/investing/stock/cl/financials
 

https://www.reuters.com/article/us-procter-suppliers/pg-taking-longer-to-pay-suppliers-offers-financing-idUSBRE93G14Z20130417
 

https://www.gurufocus.com/term/CCC/CL/Cash-Conversion-Cycle/Colgate-Palmolive-Co

http://www.hbs.edu/faculty/Pages/item.aspx?num=51013

http://marketrealist.com/2015/09/pgs-fabric-care-businessa-global-leader/