Hard-pressed companies ignoring up to $7.6 billion in cash tied up in supply chain, Hackett-REL research shows; greater liquidity pressure seen in 2006
Atlanta — April 12, 2006 — In the face of bankruptcy filings, lagging sales and rising raw-material prices, the 20 largest U.S. automotive suppliers are nevertheless ignoring up to $7.6 billion in cash opportunity, according to new research from Hackett-REL, part of business advisory firm The Hackett Group.
The opportunity comes in the form of excess working capital tied up in invoices paid late by customers, suppliers being paid too early and inventory lying unsold on warehouse shelves, Hackett reports.
Results of the Hackett-REL benchmark study and comparative analysis, "Fine-Tuning for Optimum Cash and Cost Performance," also determined that the top 17 European automotive suppliers are similarly overlooking up to $9 billion in cash, which is frozen in excess working capital.
U.S. Outperforming Europe
On average, U.S. auto suppliers significantly outperform their European counterparts, showing 37 percent lower net working capital ratios. But some of this gap, and the strong working capital performance by several U.S. auto suppliers that are already in or near bankruptcy, is likely to have been driven by special assistance programs from U.S. automakers and may disappear in 2006.
Taken as a whole, the global auto parts supply industry could have as much as $16.6 billion in cash unnecessarily tied up in working capital, Hackett believes. This significant number, however, is likely to be a conservative assessment, according to Hackett-REL, as it does not take into account the excess working capital of the many privately held European automotive parts companies.
In addition, Hackett-REL estimates that auto suppliers could see significant bottom-line benefits from reductions in administrative and operating expenses associated with working capital optimization. U.S. auto suppliers could reduce operating costs by over $700 million, while European auto suppliers could see gains of up to $480 million. These improvements could have a direct impact on improving earnings before interest and tax (EBIT).
Missing "Exceptional Opporunity"
"The cash-strapped U.S. auto suppliers are missing an exceptional opportunity here, leaving billions of cash on the table," noted Hackett-REL Global Practice Leader Stephen Payne. "Even as some of the industry's largest companies reorganize under bankruptcy rules and fight pitched battles over employee wages and pensions, they are overlooking money that is literally right there trapped on their balance sheets which could have a significant impact on their overall liquidity. It's tough to understand how companies could ignore this, since in some cases it could keep them from shutting their doors permanently."
According to Hackett-REL Senior Analyst Marc Loneux: "Working capital that is 'liberated' from balance sheets through such tested working capital methods as improved collection, better logistics, supply chain optimization and more efficient buying will always be the cheapest source of capital for corporations. This is a particularly important opportunity in light of a challenging business environment, which is being exacerbated by rising interest rates."
The research is available at www.thehackettgroup.com/insights/twc0406/
Additional Articles of Interest
— With U.S. manufacturers increasingly challenged by global rivals, American Axle & Manufacturing's Abdallah Shanti believes that the best way to compete is to collaborate. Read more in "Uniting for a Competitive Edge," in the December2003/January 2004 issue of Supply & Demand Chain Executive.
— Is your spend management program meeting its full potential? For a step-by-step process guide for the Procurement organization, read "How to Fulfill the Spend Management Promise," exclusively on SDCExec.com.
Atlanta — April 12, 2006 — In the face of bankruptcy filings, lagging sales and rising raw-material prices, the 20 largest U.S. automotive suppliers are nevertheless ignoring up to $7.6 billion in cash opportunity, according to new research from Hackett-REL, part of business advisory firm The Hackett Group.
The opportunity comes in the form of excess working capital tied up in invoices paid late by customers, suppliers being paid too early and inventory lying unsold on warehouse shelves, Hackett reports.
Results of the Hackett-REL benchmark study and comparative analysis, "Fine-Tuning for Optimum Cash and Cost Performance," also determined that the top 17 European automotive suppliers are similarly overlooking up to $9 billion in cash, which is frozen in excess working capital.
U.S. Outperforming Europe
On average, U.S. auto suppliers significantly outperform their European counterparts, showing 37 percent lower net working capital ratios. But some of this gap, and the strong working capital performance by several U.S. auto suppliers that are already in or near bankruptcy, is likely to have been driven by special assistance programs from U.S. automakers and may disappear in 2006.
Taken as a whole, the global auto parts supply industry could have as much as $16.6 billion in cash unnecessarily tied up in working capital, Hackett believes. This significant number, however, is likely to be a conservative assessment, according to Hackett-REL, as it does not take into account the excess working capital of the many privately held European automotive parts companies.
In addition, Hackett-REL estimates that auto suppliers could see significant bottom-line benefits from reductions in administrative and operating expenses associated with working capital optimization. U.S. auto suppliers could reduce operating costs by over $700 million, while European auto suppliers could see gains of up to $480 million. These improvements could have a direct impact on improving earnings before interest and tax (EBIT).
Missing "Exceptional Opporunity"
"The cash-strapped U.S. auto suppliers are missing an exceptional opportunity here, leaving billions of cash on the table," noted Hackett-REL Global Practice Leader Stephen Payne. "Even as some of the industry's largest companies reorganize under bankruptcy rules and fight pitched battles over employee wages and pensions, they are overlooking money that is literally right there trapped on their balance sheets which could have a significant impact on their overall liquidity. It's tough to understand how companies could ignore this, since in some cases it could keep them from shutting their doors permanently."
According to Hackett-REL Senior Analyst Marc Loneux: "Working capital that is 'liberated' from balance sheets through such tested working capital methods as improved collection, better logistics, supply chain optimization and more efficient buying will always be the cheapest source of capital for corporations. This is a particularly important opportunity in light of a challenging business environment, which is being exacerbated by rising interest rates."
The research is available at www.thehackettgroup.com/insights/twc0406/
Additional Articles of Interest
— With U.S. manufacturers increasingly challenged by global rivals, American Axle & Manufacturing's Abdallah Shanti believes that the best way to compete is to collaborate. Read more in "Uniting for a Competitive Edge," in the December2003/January 2004 issue of Supply & Demand Chain Executive.
— Is your spend management program meeting its full potential? For a step-by-step process guide for the Procurement organization, read "How to Fulfill the Spend Management Promise," exclusively on SDCExec.com.
- More research from The Hackett Group.
