Cash on the road. Working capital management in the automotive supply industry 2011
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5 Septembrie 2011 |
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ERNST & YOUNG S.R.L. |
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Summary
Cash on the road is the latest in a series of working capital (WC) management-focused studies based on Ernst & Young research.
For years, the automotive supply industry has been in a challenging position, resulting from continuing pricing pressures from OEMs, intense competition, evolving products due to increased complexity and advances in technology, volatile raw materials prices, as well as industry globalization.
Since the middle of 2008, the industry’s landscape has been profoundly changed by the global economic downturn and the related credit crisis. Many of the traditional forces that define the industry remain in force. But new trends have also been emerging, such as OEMs’ shifting market shares, industry consolidation, reduction in production capacity, restructuring of operations and accelerated expansion in developing countries. The crisis also highlighted the vulnerability of many participants in the automotive value chain. Given such upheaval, WC management, necessarily, became an acute focus for the industry. For many, a focus on cash and WC capital was key for survival. Yet analysis reveals a contrasting picture of the industry’s WC performance, with varying results among regions and over time.
Key findings
OVERALL
• In 2010 compared with 2009, the automotive supply industry managed to cut cash-to-cash (C2C)* by 13%, more than offsetting the deterioration in performance seen in prior seven years (resulting in C2C dropping by 7% between 2002 and 2010).
• The global downturn of 2008 had a considerable impact on the industry’s WC performance, with regions and companiesresponding differently.
• Changes in the marketplace have highlighted the need for organizations to build greater levels of responsiveness in systems and processes along the implementation of lean solutions.
• A number of factors contributed to the reported WC variations, including changing payment terms with original equipment manufacturers (OEMs), globalization of sales and supply chains, volatility in raw materials prices and currencyfluctuations.
• While there is evidence of progress in some areas of WC, we see significant opportunity for improvement across the entire WC value chain for the industry and for most of its constituents. It is worth noting that a high-level exercise (Ernst & Young analysis) indicates that a total of up to US$35 billion is still unnecessarily tied up in the WC of 40 of the largest automotive suppliers (by sales) in North America, Europe and Japan. This amount is equivalent to 7% of sales of the companies analyzed.
• The biggest problems remain the lack of mutually agreed objectives between OEMs and their suppliers, the absence of common processes and systems, and historic behaviors within the organizations and across the extended enterprise. Supply chains have also been growing complicated and vulnerable to disruptions, making businesses increasingly complex and risky to manage.
* C2C (cash-to-cash) = DSO (days sales outstanding) plus DIO (days inventory outstanding) minus DPO (days payablesoutstanding), expressed as a number of days of sales, unless stated otherwise.
REGIONS
• In 2010 compared with 2009, each region reported lower C2C.
• Latest findings mean that C2C has been falling for each region since 2002, but with large variations through the different periods under consideration.
• WC performance between companies headquartered in different regions has been converging since 2002, which can be attributed to the impact of globalization of trade and industry consolidation. Common WC leading practices have also been spreading steadily across the industry.
• While progress in WC performance has been more limited than in other regions, North American automotive suppliers still carry the lowest level of C2C, thanks to a superior performance in both inventory and payables.
• European automotive suppliers exhibit the highest level of C2C, notably due to a poor performance in inventory, while Japanese automotive suppliers sit in between.
Review of working capital performance
WC results for the automotive supply industry mask significant variations over time. WC performance was unchanged in the first five years (2003-2007) and then severely affected by the global economic downturn in the ensuing two years (2008-2009), with regions and companies responding differently. 2010 saw a significant improvement in performance.
