Balancing Financial Settlement and Inventory Levels Remain Key Concerns For Supply Chain Managers

U.S. companies made only marginal improvements in their ability to collect from customers and pay suppliers in 2013, while showing no improvement in how well they managed inventory, according to the 16th annual working capital survey from REL a division of the Hackett Group, Inc.

“For inventory, the global marketplace has made issues like demand planning more important than ever before,” says Analisa DeHaro, Associate Principal for REL. “Companies need to factor in lead times that may not have been an issue when manufacturing was done closer to home. The best companies are becoming more savvy about this, and are more effectively balancing the various elements of inventory management.”

The amount tied up in excess working capital at nearly 1000 of the largest public companies in the U.S. is over a trillion dollars, according to the REL research.

The U.S. economy was slow but stable, with gross domestic product increasing by 3.2 percent in 2013. But at the same time, the REL research found that gross margins decreased by 0.3 percent, indicating that companies are spending more internally to generate revenue.

The researchers also found that companies are continuing to borrow, using low interest rates to improve their cash position, with cash on hand increasing by 12 percent, or $110 billion. At the same time, companies continued to ramp up capital expenditures, which have risen by 43 percent over the past three years.

The value of total net working capital rose by 3.2 percent in 2013, and days working capital improved by less than 1 percent. While days sales outstanding and days payable outstanding improved only slightly, days inventory on hand showed no change at all.

“We’re clearly not seeing a big push on improving inventory performance right now,” says Craig Bailey, director of The Hackett Group. “That’s being driven by a few things. With low interest rates, it doesn’t cost as much to hold inventory, so service and availability become the drivers. In some industries, there’s also an expectation of an upturn in the market, which is leading companies to stockpile inventory.”

According to Bailey, some offshoring trends are also working against inventory improvements.

“As the cost of manufacturing in China continues to increase, companies are moving West within China, or relocating to Vietnam or other countries to find markets where infrastructure and labor costs are lower,” he says. “To facilitate moves like these, companies will commonly build inventory, to allow production to ramp up, and as a fallback in case of startup issues, which are common.”

Follow the money
Meanwhile, off-shoring poses ongoing challenges for supply chain financial management, too. Analysts with the Boston Consulting Group note that the payments and transaction businesses continue to represent vital elements of the banking industry and the global financial-services landscape.

In its recent “Global Payments” report, BCG observes that the importance of these sectors – both as critical sources of stable revenues and as the foundation of customer relationships and loyalty – has grown steadily in recent years and shows no signs of slowing down.

The growth in payments and transaction banking, moreover, is driving stiff competition among not only traditional players but new entrants. Consequently, financial institutions must differentiate themselves, refine their strategies, and raise their execution skills if they want to remain competitive in the supply chain arena.

BCG expects the next ten years to continue to bring substantial growth in the payments and transaction-banking businesses. But these years will also bring “disruptions,” as economic models shift owing to digital technologies, regulation, intensifying competition, and new market entrants challenging incumbents. The many faces (and interfaces) of payments will change as successful innovators gain market share.

By contrast, developed regions are projected to achieve a much lower annual growth rate of 4 percent. These regions continue to be challenged by narrow margins, the maturation of payments products, and modest economic growth. Compounding the systemic trends, various regulatory measures have been or will be implemented that significantly reduce revenues.

For example, a “regulatory tidal wave” has already hit the United States, one that was fully reflected in 2013 revenues. In Europe, two waves are in force: first, the Single Euro Payments Area (SEPA) has resulted in gradually declining prices for certain payments products; and second, limits on interchange are expected to take a significant toll, resulting in €8 billion in lost revenues annually beginning in 2015. Payments stakeholders in developed European markets must therefore weather the regulatory storm and forge new business models to fill the revenue gap.

On the wholesale side, transaction-related revenues have tended to track economic and trade growth, whereas account revenues have faced a tug of war—pulled up by rising bank balances and pulled down by shrinking spreads. Account revenues are expected to recover, however, contributing roughly 56 percent of total wholesale revenue growth from 2013 through 2023.

Good News/Bad News
Cash conversion efficiency – or the time companies take to convert sales into cash –improved somewhat in 2013, after two years of declines. In addition, free cash flow- which is a key indicator of the health of corporate cash flows and represents the cash companies are able to generate after laying out money to maintain or expand their asset base – improved dramatically, rising by 23 percent over the previous year. This, say analysts, indicates an upswing in cash flow management.

“The good news is that U.S. companies aren’t getting any worse at managing their working capital,” says REL’s Analisa DeHaro, “In fact, the number of companies that improved working capital performance for three years in a row increased significantly in 2013.

For most companies, however, working capital remains a low priority. With easy access to low-interest cash there’s little motivation for companies to deal with complex issues like how to collect from customers faster without alienating them, what can be done to optimize payments to suppliers, or how to maintain just the right inventory levels given today’s complex supply chains.

But there are tremendous opportunities here, and with slow growth and shrinking margins, plus interest rates that are certain to rise, companies that focus in these three areas can drive real bottom-line benefit, today and in the future.

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