We Can Work It Out: The 2002 Working Capital Survey

Some companies have learned how to reduce working capital without punishing customers or suppliers. But the alternatives aren't totally pain-free.

Taking care of suppliers is just as important to Tom Sabol, CFO and COO of Plexus, which makes electronic components that rely on the shortage-prone chip industry. “If you treat suppliers well with regard to payments, you have a better chance of getting components in times of [shortage-driven] allocations,” he says. “They do remember who treated them well.” Plexus saw its DPO drop precipitously last year from 52 to 18 days, but inventory turns more than doubled from three to seven. Because Plexus pays its suppliers and distributors promptly, they are willing in some cases to hold the inventory bag, even maintaining stores inside the company’s plants that allow Plexus to buy an item the moment it is needed.

Of course, such techniques shift the burden of inventory to suppliers, says Payne, and just-in-time techniques can simply be a way to pass the buck to the supplier. But in cases like Plexus’s, carrying inventory is sometimes a trade-off the suppliers are happy to make. “Not only are the suppliers paid promptly,” says Payne, “but they also have more visibility into the true demand of the supply chain. So they can manufacture and supply more efficiently, rather than just respond to lumpy supply orders.”

Securitization Blanket

Such solicitousness toward suppliers does not necessarily imply a tougher line with customers, however. To be sure, average days sales outstanding (DSO) dropped last year from 53 days to 47 days, as companies like Siebel, Palm, Lear, and Plexus all reported beefed-up collections. But much of the improvement in the manufacturing sector appears to have come not from dunning customers, but from a surge in alternative financing techniques. As capital markets dried up, companies looking for cash turned, often for the first time, to techniques such as securitization of receivables. That can cause the DSO number in the survey to plummet even if a company’s collection activity has not improved at all.

“For manufacturers, a majority of [recent] DSO improvement is due to alternative financing,” declares John Peak, CFO of Transamerica Distribution Finance, which provides inventory financing, factoring, and other receivables-based financing techniques (although not securitization) to manufacturers.

Lear, which reduced its DSO from 44 days in 2000 to 37 days in 2001, securitized $270 million last year — the first time it has used such a technique. Add that amount back into accounts receivables, and Lear’s DSO actually goes back up to 45 days.

“[Securitization] had nothing to do with working capital management, other than that it’s a receivables facility. The ABS [asset-based securitization] facility was put in place because it is less expensive to borrow on an ABS than against our revolver,” says Wajsgras, who estimates that the lower interest costs saved about $2 million.

“Securitization had a lower average interest rate than our line of credit,” adds Sabol, who securitized $23 million for Plexus in 2001 and drew down an additional $17 million in first-quarter 2002.

Of course, companies that opt to securitize usually remain responsible for collecting the receivables, and the technique can be addictive if a company’s business doesn’t improve, simply because it represents a one-time income gain. “Once you get into the securitization world, it’s hard to get out of it,” warns Peak. “Once you get on that treadmill and start recording gains on your income statement, it’s hard to jump off.” That’s made all the more likely by the upfront costs of securitizations. They must be amortized, so any event that forces a company to unwind a securitization before its time carries a high price. Finally, there are growing questions about how companies report securitization activity.

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