More than $1 Trillion Seen Unnecessarily Tied up in Working Capital

Supply chain improvements could allow companies to boost net profits by up to 11 percent, Hackett asserts

Supply chain improvements could allow companies to boost net profits by up to 11 percent, Hackett asserts

Atlanta — June 5, 2006 — The 2,000 largest companies in the United States and Europe have more than $1 trillion in cash unnecessarily tied up in working capital in the form of invoices paid late by customers, suppliers paid too early and inventory moving too slowly through the supply chain, according to new research from business advisory firm The Hackett Group.

By implementing best practices and achieving working capital levels seen by leaders in this study, companies would also reduce annual operating costs by up to $42 billion, Hackett reported in its latest Book of Numbers research findings.

Taken together, these working capital improvements could enable companies to boost net profits by up to 11 percent. Hackett's research also shows a strong correlation between companies that consistently grow shareholder value and those that excel at working capital management.

European Companies Catching Up

Hackett conducted the research for its "Book of Numbers Research Series: 2005 Performance Metrics and Best Practices in Total Working Capital" through Hackett-REL, a service formed upon Hackett's acquisition of REL Consultancy Group, a provider of services for helping companies generate cash improvement from working capital.

Working capital is the capital invested in operating processes to buy, make and sell in order to generate profit. The operating working capital comprises trade receivables and inventories less payables. Typically, a reduction in operating capital can be achieved through improved collection, dispute and credit management, inventory and supply chain optimization, supplier consolidation and more efficient buying.

The new research reveals a large distribution of performance across regions, countries and industry sectors. The research shows that European companies are now catching up to U.S. enterprises in terms of overall total working capital performance, with significantly higher levels of improvement over the past few years.

Role of Supply Chain

The research highlights a range of best practices that leading companies use to enhance their working capital performance. Companies generate significant working capital improvements by better understanding their customers and focusing proactive efforts on those that have the greatest material impact on working capital performance, according to Hackett. For example, the Hackett research identifies customer, supplier and inventory segmentation analysis as a key strategy.

Hackett also sees next-generation opportunities for companies willing to take an extended view of supply chain operations, collaborating with customers, channel partners and vendors to enable better demand visibility, inventory optimization and other operational improvements.

"Working capital optimization is inherently complex, as it touches many business processes and people within an organization," said Hackett-REL President Stephen Payne. "It's a balancing act, and companies must manage it carefully to ensure that they keep working capital low and also have the critical resources they need to do things like fund product development, produce and deliver their products, and provide high levels of customer service. But the ability to impact the bottom line through working capital optimization is tremendous."

Advisory Program Launched

In conjunction with the announcement of the latest research results, Hackett also launched a new Hackett-REL Total Working Capital Executive Advisory Program, a membership-based service for executives responsible for developing and executing working capital optimization strategies.

According to Hackett Chief Research Officer Richard T. Roth: "With this new program, we're offering a continuous, trusted source of fact-based insight to help executives determine optimum working capital levels and the strategies they can employ to deliver these levels amidst a rapidly changing business environment."

According to Katie Downs, leader of Hackett's Total Working Capital Executive Advisory Program: "In today's highly competitive business environment, it's hard to imagine a company that wouldn't be happy to improve earnings significantly without driving an increase in revenue or cutting operating costs to the bone. Poor working capital performance is often a symptom of breakdowns in broader business processes that can impact the ability to generate sales and profits. Most believe this is a finance issue. Yet the root causes of tied up capital tend to be buried within operational processes outside the view of finance."

The full version of this research is available on the Hackett Web site at

Additional Articles of Interest

— What are the skill sets that will catapult your supply management group to its peak performance? For a guide to help unlock their potential, read "Building a Better Supply Chain Professional" in the April/May 2006 issue of Supply & Demand Chain Executive.

— What do CEOs want from their supply chains, and is Supply Chain delivering? Read more in "The Supply Chain Disconnect," the Executive Memo column in the April/May 2006 issue of Supply & Demand Chain Executive.