Off the Shelf: The 2004 Working Capital Survey

Low inventories drove down working capital last year. But will that continue as the economy improves?

For those who rejoiced when the New York Yankees faltered at the start of this season or thought 2003 surely had to be Lance Armstrong’s last Tour de France win, here’s some exciting news: Dell Computer’s working capital performance has slipped.

Well, sort of. The undisputed champion saw its overall working capital grow by 2 days — putting it at a still mind-blowing negative 30 days in CFO’s annual survey, conducted by Purchase, New York-based REL Consultancy Group. Which, of course, leaves even Dell’s best competitors trailing behind like the Boston Red Sox or a German cyclist.

Indeed, despite a deterioration in receivables collection, Dell once again shaved its days inventory outstanding (DIO) — by 9 percent — to three days (four days by Dell’s slightly different reckoning). That’s so low that chief accounting officer Robert W. Davis says the company now thinks of inventory in terms of dollars rather than days.

But those rooting for the underdogs still have plenty to cheer about. In last year’s survey, it looked as though Corporate America had all but abandoned its working capital efforts in the face of the Sarbanes-Oxley Act and other distractions. While European firms showed impressive reductions in the amount of cash tied up in daily operations (see “Transatlantic Tie,” at the end of this article), U.S. companies barely managed to squeeze more than 2 percent out of their days working capital (DWC).

American companies have fought back since then, reducing their overall DWC in 2003 by almost 4 percent. And, like Dell, their greatest strides were in inventory, which continued to fall despite an improving economy. Overall, U.S. companies saw a 2.5 percent reduction in DIO — 3.1 percent if the auto industry is excluded. Stephen Payne, REL’s CEO, speculates that corporate caution in the face of a faster-than-expected recovery kept the cupboards relatively bare at many companies. The trend is similar for the first six months of 2004, he says.

Dave Harrison, CFO of diversified manufacturer Pentair, sees evidence of an even more lasting change in that post-recession performance. “The productivity we’ve been able to develop during the downtime has an impact on Pentair’s cost structure,” he says. In other words, he explains, the same productivity gains that have kept the job market lagging the economic recovery are also keeping inventories lower. “Eventually, you’ll see the dollars we put into inventory go back up, but turns will continue to go down.”

Pentair’s water-treatment products, enclosures for electrical and electronic equipment, and high-end power tools brought in revenues of $2.7 billion last year. When Harrison joined the Golden Valley, Minnesota-based company in 2000, its tools division was struggling, thanks in part to the troubled start-up of a new distribution facility that was holding up deliveries to customers. With DIO soaring “out of sight” at nearly 80 days, he set an ambitious target of 45 days, or roughly eight inventory turns a year. (Like many companies, Pentair calculates DIO using cost of goods sold, an alternative formula to the one used in CFO’s survey.) “We look at any inventory as being waste,” says Harrison. Today, inventory is down to 60 days, thanks in part to a kaizen (continuous improvement) system that helped reduce both inventory and travel times inside both the factory and warehouse.


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