High Tech's Inventory Woes

Inefficiencies in managing working capital cost tech industry $10 billion in 2001, study finds

Tempe, AZ  June 25, 2002  High-tech companies in the United States let $10 billion slip through the cracks last year due to inefficiencies in managing working capital, according to a new study by an industry consultancy.

The study, by REL Consultancy Group, found that in 2001, U.S. tech companies (excluding software) took an average of 69 days to convert sales into cash, nine days longer than in 2000, representing a $10 billion cash flow loss.

REL said its analysis of 90 U.S. public technology companies with annual revenues of at least $450 million revealed a surprising level of inefficiency in managing working capital over the last two years. The consultancy predicted that this poor performance could impair the industry's ability to recapture investor confidence, as Wall Street focuses increasingly on cash management as one of the most important elements of company analysis.

"In the last year, the high-tech industry allowed cash to get tied up in excess inventory, extended receivables and premature payments," said Stephan Thomas of REL. "As a result, cash is not readily available for strategic initiatives such as paying down debt, buying back stock, or [mergers and acquisitions]."

The REL research, released this week, used days of working capital ((receivables + inventory - payables)/days of sales) to identify which U.S. tech companies have done the best job managing their working capital during the last two years, comparing individual companies as well as seven technology industry sub-sectors.

Among the key findings was the discovery of significant variations between the companies that were the best and worst in managing their working capital. The three best performers took an average of 30 days to turn sales into cash, while the three worst performers required an average of 90 days. If the entire U.S. high-technology sector were to perform at the level of the three best performers, Thomas said, it would generate an extra $42 billion in cash every year.

REL also found that companies positioned near the beginning of the supply chain suffered the most since they were unable to slow down their processes as quickly as customers slowed down orders. Semiconductor equipment manufacturers were hardest hit. Compared to a year ago, this sub-sector took 21 percent longer (116 days versus 96 days) to convert sales into cash, representing a cash flow loss of $1.4 billion.

In addition, the study found that inventory spent 10 percent more time in warehouses last year, costing $8 billion to finance.

On the bright side, a few tech companies were able to buck the trend, including Broadcom, Flextronics, Cisco, Tektronics and 3Com, according to REL. In addition, Dell and Apple both achieved negative cash cycles, -12 and -19 days respectively, reflecting their business model advantages of building-to-order, outsourcing and selling direct.

"Working capital performance is a key element for evaluating company health because it incorporates all of the processes related to clients, products and suppliers," said Thomas. "Companies with low days of working capital are nimblest, able to react quickly to market changes such as price cuts, drops in demand or a new product launch. On the other hand, an increase in days of working capital is a clear sign that a company is in trouble. High inventories show that products aren't selling, while high receivables indicate that dissatisfied customers aren't paying their bills."

REL consults with tech companies on managing working capital and cash flow.