Why Working Capital Should Matter to You

This is an excerpt of the original article. It was written for the November 2012 edition of Supply Chain Management Review. The full article is available to current subscribers.

November 2012

We’ve all heard about the advantage of being a preferred customer to your buyers. Now we learn that it’s just as important to become a good customer to your key suppliers. This article explains the benefits of becoming a preferred customer and lays out the actions needed to become one.

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Over the past few years, a global recession and tight credit markets have created a challenging environment for businesses in a variety of industries. Most recently, the uncertainties regarding the timing and the type of economic recovery have only added to the pressure. It is during such times that working capital management captures the attention of top management as the corporate goals shift from maximizing profits to securing liquidity. A 2010 Grant Thornton /World Trade survey confirms that optimizing working capital has been a top priority. Fully 90 percent of the survey respondents, who were in top management positions, reported taking some action to reduce their working capital.

The Grant Thornton study also found that the most common approaches to reducing working capital were obtaining price concessions from suppliers and extending their payment terms rather than investing in supply chain infrastructure improvements in such areas as warehousing, transportation, inventory management, and technology upgrades. Thus, it is evident that many companies that have successfully reduced their working capital may have done so at the expense of their supply chain partners.

It is widely acknowledged that effective supply chain management practices can reduce operating costs and logistics expenses, significantly impacting a company’s working capital. The leading companies recognize this, but more importantly realize that sound supply chain practices can also achieve profitable growth. In striving to lower working capital, they pursue initiatives that will not only reduce their operating costs and improve profitability, but also benefit their supply chain partners. This article will explain why working capital should matter to supply chain professionals. We begin by underscoring the impact that working capital has on financial performance and then discuss companies’ overall progress to date in creating supply chain initiatives that positively impact working capital.

The article then describes some of the limiting factors in working capital management and how supply chain managers can identify and overcome them. Finally, we offer some ideas on how supply chain managers can meet the working capital challenge going forward.

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