Cash on the chip. US technology companies and working capital management 2011
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7 Septembrie 2011 |
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ERNST & YOUNG S.R.L. |
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Cash on the chip is the latest in a series of working capital (WC) management-focused studies based on Ernst & Young research.
The US-based technology industry has changed a great deal since 2002. Substantial strides have been made in improving working capital management. Progress, however, has been uneven. Many WC issues remain, suggesting significant WC benefits are still available for most companies.
Key findings
Technology companies have made significant progress in reducing WC levels in recent years, with specific actions to transform and drive greater efficiencies out of manufacturing, supply chain and procurement operations. Changes in product mix have also contributed.
Lessons appear to have been learned from the recession of 2001, as seen by the comparatively reduced impact of the global downturn of 2008 on the industry’s WC performance.
2010 compared with 2009 saw a limited improvement in WC performance, which can be attributed to higher levels of WC associated with increased sales growth.
Further analysis, however, shows that WC results over time have been varied among and within segments of the US technology industry.
Evidence also suggests that many WC issues persist. Supply chains have been growing complicated and vulnerable to business disruptions. It is also getting harder to balance operational excellence with agility. There is a lack of trust between manufacturers and their suppliers. Visibility to the final demand remains poor. There is still some heavy resistance to change at many levels within organizations.
For each company, we believe that significant opportunity for WC improvement still exists. A high-level comparative exercise (Ernst & Young analysis) indicates that up to US$50 billion is unnecessarily tied up in the WC of the leading 70 US-based technology companies, an amount equivalent to close to 6% of their sales and 3% of their market capitalization.
Introduction
The technology industry has one of the most complex supply chain structures of any industry.
All industries evolve. However, few experience change at the scope, scale and pace of the US technology industry. The nearly incessant evolution of high-tech products and services, so essential to the industry, tends to be mirrored through continuous reconfigurations of associated financial, operating and geographic footprints.
Organizations are now more global, portfolios of offerings have been expanded, operating models are more efficient and financial positions remain strong. A critical element of this transformation has been a stronger focus on return on capital invested, as well as on cash and WC management.
Progress has been achieved, for example, by driving greater cash and cost efficiencies out of manufacturing, supply chains and procurement operations. Collaboration has been increased across the extended enterprise. Terms have been renegotiated. Yet many issues remain. Supply chains are increasingly complex — balancing cash, cost and service levels is a constant challenge, and visibility of final demand remains poor.
In this context, we continue to see further opportunity for improvement in many areas of WC.
Fast-evolving business models
The recession of 2001 caught most members of the technology industry by surprise. Sales growth was assumed to be a near constant. Business models focused on R&D and production, and much less so on subtle or overt signals from customers or the economy at-large. Consequently, the industry missed the signs that a recession had arrived, further exacerbating already bloated inventories all along the value chain. The inward focus of most companies made the technology crash of 2001 more severe than it might have been otherwise.
Driven by these experiences, technology companies have since been consciously transforming from a forecast-drivenpush mode to a more of a demand-driven pull system. Within this transformation, original equipment manufacturers(OEMs) have been moving contracting to third parties as a growing part of their operations, including original design manufacturing services (ODMs) and electronics manufacturing services (EMS) providers. Outsourced manufacturing and design are now estimated at 25% of total production.
Some of the specific actions being taken by industry members include:
- Simplifying and consolidating manufacturing (for example, through more focused plants, increased outsourcing and by pursuing make-to-order and configure-to-order strategies)
- Reconfiguring, relocating and consolidating supply chains according to different strategies and solutions deployed for different products or market segments
- Leveraging, centralizing and consolidating procurement
- Streamlining and standardizing business and IT processes
- Expanding the use of and refining the practice of vendormanaged inventories (VMI)
- Improving billing and cash collections
- Negotiating more favorable terms from customers and suppliers
- Improving operational coordination between supply, planning, manufacturing and logistics functions and processes
- Collaborating much more closely with channels of distribution and suppliers, enabling enhanced demand and supply visibility, improved forecasting accuracy, optimized production planning, lower levels of inventory and better supply chain reliability
- Sharing leading practices within the organizations and across the various supply chain partners
- Tracking and monitoring working capital metrics, and linking compensation to these metrics
HP: SHIFTING FOCUS FROM PRODUCTS TO CUSTOMERS
Optimization of production, inventory and other business practices that affect WC can be enhanced through greater customer intimacy. In this regard, a growing number of leading technology companies are reorienting their business models.
HP, for example, is shifting from a focus on products to a focus on customers. Once operating 35 different productbased supply chains, the company is now organized into a mere five, each focusing on a distinct customer segment. These include “no touch,” “low touch,” “configure-to-order,” “high volume,” and “solutions and services.”
Product standardization has thus been increased and customization reduced. The number of direct and indirect suppliers has been more than halved, and procurement processes have been streamlined. The company has also increased the proportion of centralized commodities from 60% to over 85%, and supply contracts have been standardized. Progress has also been achieved in improving operational coordination between supply, planning, manufacturing and logistics functions, and processes and business and IT processes have been simplified — all of which contribute to enhanced WC performance.
