Study shows substantial waste in working capital in U.S. and European companies

In a survey of 2,000 of the largest companies across the U.S. and Europe, Atlanta-based advisory firm The Hackett Group found $1 trillion-plus unnecessarily tied up in working capital. The study, which comes as a result of Hackett's acquisition of REL Consultancy Group last year, shows companies are not yet fully optimizing customer-to-cash cycles.

08/01/2006


In a survey of 2,000 of the largest companies across the U.S. and Europe, Atlanta-based advisory firm The Hackett Group found $1 trillion-plus unnecessarily tied up in working capital. The study, which comes as a result of Hackett's acquisition of REL Consultancy Group last year, shows companies are not yet fully optimizing customer-to-cash cycles.

Reasons include late billings and excess inventory—problems that should sound familiar to manufacturers, says Hackett Supply Chain Practice Advisor Paul Moody.

"Inventory still offers plenty of opportunity for improvement," says Moody. While practices such as just-in-time, lean manufacturing, and collaborative forecasting are entrenched in certain sectors, he says most sectors still have lessons to learn.

"We hear of successes such as P&G and Wal-Mart, but our survey shows those companies still at the forefront," he adds.

Yet while the $1-trillion figure implies that companies are leaving lots of cash on the table, Moody says the results actually were an improvement over last year. U.S. companies bettered performance6 percent, while European companies showed a roughly 8-percent improvement. And while Europe showed more improvement, it started from a lower base. Accounts receivable (AR) in Europe average nearly 51 days, compared to nearly 41 days for the U.S.

The study, which tracked 60 verticals, shows contrasting results in manufacturing. Computer manufacturers such as Dell and Apple, which often build to order and collect payments rapidly with personal credit cards, topped the list with "negative" working capital. By contrast, consumer goods companies—in particular, cosmetics and personal care products—average 48 days of working capital, respectively, while sectors such as electronic components, machinery, and medical devices lag at 70, 86, and 111 days, respectively.

According to Moody, while inventory issues may take longer to fix, the quickest improvements come from streamlining AR processes. Although perceived as a finance issue, Moody says success in improving customer- to-cash requires a cross-functional response.

"It's an operational issue that impacts everything from product design to production, warehousing, distribution, and procurement," concludes Moody.





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