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The Flaw in Your Working Capital Management Strategy

Each year that passes in the world of manufacturing seems to operate around a particular theme. In 2018, this theme appears to be working Capital management, with supply chain executives making it a priority to squeeze the cash flow cycle as much as possible as the predictions regarding interest rates and inflation continue to look bleak. Many analysts have long pegged US industries as particularly lacking in this area compared to other comparable regions, and several top-level CEOs and CFOs have recently gone on record to place working capital as a top priority during their tenure.

“In terms of priorities for 2018, I’d say out of the two or three for the year that number one is working capital,” said Honeywell CEO Darius Adamcyk. “We want to drive free cash flow. We want to drive free cash flow conversion.”

Richard Palmer, CFO of Fiat Chrysler Automobiles, expressed a similar sentiment. “You saw that in 2017, we had a negative impact on working capital where the volumes are flat and also had a lot of launches at the end of the year,” he said. “So we’re expecting working capital to improve to a positive number [on] the volume growth and also some optimization in terms of inventories as we get through the launch process.”

The most common solution to this issue, so far, has been successfully lengthening payment terms with suppliers. According to a study conducted by The Hackett Group, days payable outstanding (DPO) increased by an average of 6 percent across all industries, with terms in some cases stretching well beyond 90 days. In fact, overall DPO performance is now at its highest point than at any time in the past 10 years.

Pushing the working capital burden to the supplier side, however, comes with consequences. Suppliers are not immune to the cash crunch cycle either, and to counter they are going to prioritize not OEM customer relations, but inventory turnover. Between a customer who is willing to pay upfront and one who requires financing options, the choice is obvious who is going to acquire the inventory.

The business initiatives that provide OEMs additional leverage regarding cash flows are, unfortunately, the same initiatives that restrict their suppliers. Should such a trend continue, it has the potential to damage long-standing business relationships and, in the longer term, deplete the working capital reserves OEMs have prioritized creating.

The current industry model cannot be sustained. Emphasis on working Capital Management is a positive step toward industry growth, but it’s incomplete without a solution in place to guarantee relationships on the supplier side remain positive. Otherwise, those very working capital reserves are destined to end up just as compromised as years past.

As the demand for passive components and semiconductors continue to increase along with their cost, the point of no return is coming soon. Suppliers continue to ramp up production to match market demand, but the current market shortage is expected to last well into 2019. A working capital strategy that provides leverage and flexibility, while providing prompt payment to suppliers, will help OEMs survive.



This post first appeared on Xilinx EOL Notices, please read the originial post: here

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The Flaw in Your Working Capital Management Strategy

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