EY - Cash on the road 2014

Cash on the road 2014

Working capital management in the automotive supply industry

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Cash on the road is the latest in a series of working capital management reports based on EY research.

The results from our analysis of the top automotive suppliers in 2013 show an improvement in working capital (WC) performance from the previous year. Cash-to-cash (C2C) dropped by a further 2% from its 2012 levels, after a fall of 3% the year before.

However, our 2013 research also reveals wide regional variations in the degree of change in C2C, exacerbated by contrasting production growth trends. In general, companies in North America and Europe reported better WC results, while those in Japan saw their performance deteriorate.

These findings for 2013 mean that the automotive supply industry as a whole has managed to reduce its C2C by 6% since 2007, in marked contrast to the flat performance reported in the previous five years (2002–07). However, these overall results also mask significant variations between regions and countries.

Today, WC performance varies widely between automotive supply companies in different regions. While the wide performance gaps between automotive supply companies in different regions may partly be as result of variations in business models and customers served, they also highlight fundamental differences in the relative sharpness of management focus on cash and the effectiveness of WC management processes.

Our research indicates that the leading 50 automotive suppliers have up to US$51b of cash unnecessarily tied up in WC. This figure is equivalent to 10% of their combined sales.

To realize these WC benefits, automotive suppliers will need to drive continuous operational and structural improvements, addressing “root and branch” aspects of WC policies, processes and metrics.

Key initiatives should include:

  • Managing WC as a strategic initiative, including aligning executive compensation with appropriate performance measures
  • Further streamlining of manufacturing and supply chains
  • Closer collaboration and process alignment with original equipment manufacturers (OEMs) and suppliers
  • Better coordination between supply, planning, manufacturing, procurement and logistics functions and processes
  • Improvements in billing and cash collections and in dispute management and more effective management of payment terms; intensification of spend consolidation and standardization
  • Implementation of more robust supply chain risk management policies
  • Active management of the trade-offs between cash, cost, service levels and risks

Addressing this opportunity would boost the automotive supply industry’s return on capital, while also offering the potential for higher cash returns to shareholders. In addition, those companies that constantly manage their business with a view to achieving improved or top-tier WC performance will send a positive signal to capital markets, and are likely to be rewarded with a higher valuation in comparison with their peers.

More key findings

Improvement in WC performance in 2013
The results from our analysis of the top automotive suppliers in 2013 show an improvement in WC performance from the previous year. C2C dropped by a further 2% from 2012 levels, after a fall of 3% the year before.

Reductions in C2C since 2007, but with variations between regions and countries
The findings for 2013 show that the automotive supply industry as a whole has managed to reduce its C2C by 6% since 2007. However, the overall improvement masks significant variations between regions and countries.

Wide variations in current WC performance across regions
WC performance in the automotive supply industry varies widely across and within regions. These performance gaps are partly down to variations between different countries’ customer bases and payment practices, and partly to the differences in the commercial, manufacturing and logistics strategies deployed by the companies analyzed within each region.

Size matters in WC performance
Our analysis also reveals that large automotive suppliers not only carry much lower WC requirements than their smaller peers, but that the WC performance gap between the two sub-groups has been widening since 2007.

Opportunities going forward
The wide variations that our research reveals in WC performance between different automotive suppliers in each region point to significant potential for improvement — amounting to an aggregate US$51b of cash for the top 50 automotive suppliers.