Growing Problems: The 2007 Working Capital Survey

Focused on growth and more reliant on overseas suppliers, companies have let inventories swell.

Meanwhile, with companies searching ever farther afield for cheap goods and labor, some probably found it prudent to carry more inventory as a guard against potential supply-chain disruptions. And even if they didn’t physically hold more inventory, notes REL analyst Karlo Bustos, they might have found themselves posting higher inventory values on their books anyway — particularly where their supplier contracts required them to take ownership of goods during the long transit from Asia, Eastern Europe, or South America.

“We’re producing merchandise in places many people have never heard of, even places where there’s a pretty significant element of instability,” says the specialty retailing executive cited earlier. “Any time you start producing in places like that, you end up allowing for longer lead times and ordering and carrying more inventory. We carry a lot of items that remain popular year after year, but for a retailer that depends on having the most-updated trends in its stores at all times, that can be a challenge.”

Payne agrees. The increased lead times associated with shipping product from low-cost and faraway countries, he says, force companies to house more inventory and reduce the speed with which they can respond to changes in customer demand. Not only can that increase overall inventory levels, he warns, but, more ominously, it also can inflate the amount of “slow and obsolete,” or SLOB, inventory on corporate balance sheets. “Companies have to find the right balance between taking advantage of cheaper product and creating flexibility in their supply chains,” he says.

Pockets of Improvement

Not all companies suffered setbacks in working-capital performance this year. Of the 1,000 tracked by REL, nearly half, or 472, were able to reduce their DWC (days working capital) by an average 11 percent. By industry group, the top performers were hotels, restaurants, and leisure companies; independent power producers and energy traders; construction and engineering companies; and multiline retailers. The worst performers were gas utilities; oil, gas, and consumable-fuels companies; diversified consumer services companies; and food producers.

In some cases, dramatic changes in the way a few key players were managing their balance sheets helped entire sectors to look good. Multiline retailers were a top-performing industry group, for example, in part because some big companies in that group decided to sell their credit-card operations and the receivables associated with them, dramatically paring their days sales outstanding. When $27 billion Federated Department Stores sold its credit-card accounts and related receivables to Citibank between October 2005 and July 2006, for example, it drove its DSO figure to 0 from 33. Similarly, $15.5 billion Kohl’s Corp.’s sale of its private-label credit-card accounts and outstanding receivables to JPMorgan Chase in April 2006 helped the retailer pare its DSO figure to 0 from 45.

Going forward, opportunities for such dramatic gains in that industry group will diminish. Already, of the 16 companies in the group, only 7 show a DSO figure above 0, led by $59.5 billion Target Corp., which has a DSO of 38, and $8.6 billion Nordstrom Inc., with a DSO of 26; both still operate their own credit-card programs. While they do sell their associated receivables through a securitization program, REL’s methodology factors securitized receivables into the DSO calculation.


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