The connection between supply chain management and working capital is the subject of two recent research reports. The 10th Annual Working Capital Survey conducted jointly by REL and CFO Magazine shows that after nearly a decade of annual reductions in working capital, the 1000 largest U.S. companies (excluding automakers and financial institutions) overall showed no improvement in 2006, due in large part to increased inventory. Inventory build-ups were a result of both slowing sales and increased use of overseas manufacturing facilities, according to REL senior director Daniel Windaus. REL, an Answerthink company, is a consulting firm dedicated to delivering sustainable cash flow improvement across business operations.
"We see two primary factors in this year's poor working capital performance by U.S. companies," says Windaus. "First, while sales continued to grow in 2006, the growth rate was down by nearly 25 percent over last year. As a result, companies housed more inventory due to the lag in supply matching the slow down in demand.
"Secondly, we believe this year's poor U.S. performance is tied to a hidden downside of offshore manufacturing. As companies source materials or manufacture goods in low cost countries the increase in lead times associated with shipping parts of finished products to the U.S. contributes to rising inventory levels. This also hinders the speed with which companies can respond to demand changes, causing levels of obsolete inventory to rise. To address this problem, companies will have to find the right balance of taking advantage of cheaper product while creating flexibility in their supply chains to respond better to demand changes, both up and down," he says.
The U.S. survey found that the top 1000 largest publicly-traded U.S. companies (by sales) are carrying as much as $764 billion in excess working capital because of inefficiencies in the way in they manage inventory, collect bills from customers and pay suppliers. Typical companies in the survey would need to reduce their overall working capital by 48 percent to achieve the levels seen by top performers. Those leaders actually reduced working capital by an average of 11 percent, but the vast majority of CFOs saw their company's performance either stall or degrade.
A parallel survey of total working capital performance at Europe's 1000 largest publicly-traded companies (excluding automakers and financial institutions) found a 6.6 percent improvement over last year, liberating 46bn ($62n USD). But overall total working capital performance by the European companies was still 18 percent worse than that of their U.S. peers.
"It's difficult to understand why companies are not taking advantage of the opportunity to drive improvements in working capital, as this results in increased levels of cash flow which should be of significant strategic importance. This is the cheapest source of cash which can be used to enhance shareholder returns or be dedicated to funding strategic initiatives such as paying down debt, building new or additional capacity in low cost regions or repurchasing shares," says REL President Stephen Payne.
Findings from the REL/CFO survey are featured in the July issue of CFO Magazine and the July/August issue of CFO Europe. A more detailed REL analysis of the findings is also available online.
Given these results, it is not surprising that another recent survey from Aberdeen Group shows that working capital is an issue high on the agenda of supply chain and finance professionals. Sixty-five percent of 400 such professionals surveyed for an Aberdeen benchmarking report indicated that working capital optimization was a high priority for their company. Best in class performers in this survey, which represented 20 percent of the total, showed significant differentiation in their use of innovative supply chain, inventory and finance strategies as well as new-generation technologies. Best in class companies were almost twice as likely as laggards to be using an inventory optimization tool, 2.4 times as likely to be using inventory collaboration technology, 1.6 times as likely to be using supply chain/inventory visibility technology, more than twice as likely to be using working capital/cash management tools and twice as likely to have access to receivables/payables/inventory financing at various stages in their supply chains.
The study, "Working Capital Optimization," is available from Aberdeen.
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