![amazon-basic-forest-iStock-1413193349.jpg Landscape of a green Amazon forest at Yasuni National Park in Ecuador.](https://www.supplychainbrain.com/ext/resources/2024/04/22/iStock-1413193349.jpg?height=100&t=1713827086&width=150)
The 2007 working capital results are in. Once again, consumer products (CP) companies have flunked. This is the fourth consecutive year that the industry has underperformed against other industry sub-segments. Each year, CFO Magazine works with REL to publish the working capital scorecard, which ranks the working capital performance of the largest public companies headquartered in the United States. The analysis, based on prior-year annual reports, is a good barometer of year-over-year performance.
Consumer products fail the working capital test: This year, 57 industry segments were evaluated on working capital performance. Most of the sub-segments improved, with 61% showing year-over-year improvements and an average 8% improvement overall. In contrast, the consumer products (CP) sub-sectors of beverages, food products, and consumer packaged goods (CPG) all performed below the average.
Why the struggle? Many of the technology investments in the industry were justified by inventory reductions. Despite the fact that over 80% of CP companies have ERP and advanced planning and scheduling (APS) systems, they continue to underperform. Does this mean that technologies do not lead to a reduction in working capital?
No. Instead, it means that working capital reductions need more than technology. What is the basis of our conclusion? There are equal numbers of winners and laggards with sophisticated ERP, APS and multi-tier inventory optimization technologies.
Rethinking the value chain: In a recession, cash flow becomes even more important. Despite the proliferation of collaborative tactics like vendor-managed inventory (VMI) and continuous planning, forecasting, and replenishment (CPFR), companies have not fundamentally improved the levels of inventory and improved working capital in the value network.
A major opportunity for CP manufacturers lies in rethinking the value chain to reduce the bullwhip effect--and the reduction of subsequent waste--for suppliers. Until CP companies roll up their sleeves and attack the value network more holistically, there will be spotty gains, with more and more power going to Wal-Mart.
In a recent research study of 190 companies on logistics, AMR Research asked CP companies to rate themselves on inventory management. On a scale of 1 to 10, with 10 being excellent as a core competency, 60% of CP companies rated themselves as having inventory management as a core competency. While we will let you draw your own conclusions, we believe that most companies overstate their competency in the areas of working capital reduction and inventory management. Despite millions of dollars of technology investments intended to solve the inventory problem, the greatest opportunity lies in recognizing the gap in traditional CP processes--mainly ownership and reward systems--and getting serious about fixing the problem.
Complexity and leadership matter: One of the industry issues in consumer products is managing the increasing complexity of the product portfolio. This product proliferation results in an increase in demand error with a subsequent increase in inventory levels. Ironically, the greatest product complexity occurs in companies with revenue of $5B to $20B.
AMR Research
RELATED CONTENT
RELATED VIDEOS
Timely, incisive articles delivered directly to your inbox.