Capital Ideas: The 2005 Working Capital Survey

Despite cheap credit and surplus cash, companies still find plenty of reasons to improve operational efficiency.

While companies may be managing supplier relationships more effectively, the widespread rise in days payables outstanding (DPO) suggests more companies are simply squeezing their suppliers through delayed payments or tougher terms. That can hurt a company in the long run, as suppliers raise prices to cover the cost of financing the goods.

Improving working capital on the backs of suppliers is usually counterproductive, argues Martin Jarvis, head of global sales and operations for consumer-products giant Unilever. Extending DPO, he says, could mean “trying to extract credit from olive growers in Spain who produce olive oil.” That’s absurd for a company with Unilever’s access to capital. Even worse, he says, “one of the more obvious things that happens if you push on working capital blindly is that sister companies stop paying each other. That improves their numbers, but does nothing for the overall working capital of the company.”

Forcing suppliers to hold inventory can also be self-defeating, even though it is cheaper to have more raw goods than finished products in the supply chain. “A supplier’s cost of capital is actually going to be greater that Unilever’s,” explains Jarvis. “So by putting inventory back in its hands, you’re probably costing yourself money.” Not only are suppliers likely to raise prices, but the supply chain as a whole will still be carrying excess working capital.

At Unilever, a shipment of tea bought at auction in Kenya, Sri Lanka, or Indonesia might change hands three or four times before finding its way into Lipton tea bags or the iced-tea formula brewed in Ireland by UK-based Lipton Ltd. Along the way, it passes through both independent suppliers and Unilever companies. Historically, each supplier was urged to reduce working capital. “At each stage,” recalls Jarvis, “companies would try to get the unit upstream or downstream from them to carry their working capital.”

Today, says Jarvis, Unilever focuses on reducing working capital for the entire supply chain. “In the total chain of stock, ownership becomes secondary,” he says. That means sharing information and resources. For example, Unilever works with its Kenyan bankers to make sure its independent tea suppliers have access to credit at Unilever rates. The result? According to Unilever’s calculations, working capital fell 40 percent, or about $2 billion, from 2001 to 2004. “It’s in everybody’s interest to lower the total amount of working capital,” says Jarvis, “but you need a fairly mature relationship to do that.”

Tim Reason is a senior editor at CFO.

Top Performers
Companies with substantial year-on-year reductions in DWC (%)
2004 2003
3M -7 -12
Boeing -13 -5
Dell -1 +7
Gillette -12 -15
Heinz -16 -19
HP -16 -20
Motorola -28 -13
Wal-Mart -1 -25
Source: REL Consultancy Group
Best and Worst
Changes in DWC (% by industry)
Most Improved
Aerospace and Defense -8
Broadline Retailers -4
Computers -13
Containers and Packaging -12
Cosmetics/Personal Care -7
Food Retailers and Wholesalers -15
Major Oil Companies -10
Worst Deterioration
Air-freight Couriers +13
Construction +12
Pharmaceuticals +1
Soft Drinks +4
Telecommunications +6
Source: REL Consultancy Group
Slowing Down
U.S. and European companies demonstrated similar, slowing levels of working capital improvements.
COMPANY DSO
2004 Change 2004-2003 Change 2003-2002
Total U.S. (excluding automotive) 40.9 -1.0% -3.7%
Total U.S. 50.8 -2.5% -3.5%
Total Europe (excluding automotive) 50.9 -1.7% -1.9%
Total Europe 61.1 -1.1% -0.2%
COMPANY DIO
2004 Change 2004-2003 Change 2003-2002
Total U.S. (excluding automotive) 30.7 -1.5% -2.9%
Total U.S. 30.5 -1.2% -2.7%
Total Europe (excluding automotive) 33.7 -1.4% -3.2%
Total Europe 34.7 -1.3% -2.3%
COMPANY DPO
2004 Change 2004-2003 Change 2003-2002
Total U.S. (excluding automotive) 28.1 0.8% -2.0%
Total U.S. 28.8 0.9% -1.4%
Total Europe (excluding automotive) 40.7 0.4% 0.6%
Total Europe 41.2 0.2% 0.9%
COMPANY DWC
2004 Change 2004-2003 Change 2003-2002
Total U.S. (excluding automotive) 43.5 -2.5% -4.2%
Total U.S. 52.5 -3.6% -4.1%
Total Europe (excluding automotive) 43.9 -3.3% -5.1%
Total Europe 54.6 -2.2% -2.3%
Source: REL Consultancy Group

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