A review of the WC performance of the largest companies in the US and Europe for the full year 2010 reveals a year-on-year improvement compared with 2009, with C2C dropping by 2% in the US and 4% in Europe.
Change in WC metrics by region, 2009–10
Source: EY analysis, based on publicly available financial statements
Note: DSO (days sales outstanding), DIO (days inventory outstanding), DPO (days payableoutstanding) and C2C (cash-to-cash), with metrics calculated on a sales-weighted basis
These results are in contrast with those reported a year before, when C2C increased by 6% in the US and 3% in Europe in 2009 compared with 2008. They have occurred in the context of a solid recovery in global economies.
The level of improvement, however, remained limited. The US regained only a fraction of the ground lost in the prior year, while Europe returned to a level of performance that was marginally better than in 2008.
Last year's better performance in the US was due entirely to higher levels of payables (days payable outstanding, or DPO, up 3%). Inventory performance deteriorated slightly (days inventory outstanding, or DIO, up 1%), while receivables performance remained unchanged. In Europe, each WC component had a positive contribution, with days sales outstanding (DSO) and DIO down 1% and 2%, respectively, while DPO was up 1%.
Working capital variations
Several factors may explain the reported year-on-year WC variations, each with varying impacts on different regions, countries and companies.
- For most companies, sales in 2010 appear to have returned to their normal seasonal patterns. In 2008 and 2009, quarterly sales patterns were particularly unusual, making year-on-year performance comparisons difficult. There was a large drop in business sales in the final quarter of 2008 compared with the full year 2008, while the final quarter of 2009 showed a significant rebound in business sales compared with the full year 2009.
- In 2010 compared with 2009, strong sales growth throughout the year (+11% in both the US and Europe) and anticipation of solid demand in the first months of 2011 led to a significant increase in the absolute levels of receivables and inventories (+11% each in the US, and +10% and +9%, respectively, in Europe), which was more than offset by much higher levels of payables (+14% in the US and +12% in Europe) associated with increased purchasing activity.
- While balances of receivable were much higher on a year-to-year basis due to the sharp increase in sales, DSO remained unchanged in the US and was down slightly in Europe when comparing 2010 with 2009.
Pressure on payment terms still persists, but this was mitigated by the positive impact of ongoing initiatives on billing and collection. Credit problems remained limited, except in certain Southern European countries facing financial difficulties (such as Greece), which resulted in some cases in higher levels of receivables and bad debt provisions.
- Inventory performance varied across regions, with the US reporting a slight deterioration while Europe managed to reduce DIO.
- Payables performance improved in both regions. Progress in payables continued to be supported by a stronger focus on procurement and sourcing, as well as by success in extending payment terms (with tangible results coming from food and general retailers and technology companies in the US, and brewers and telecom operators in Europe).
- Another factor that influenced WC performance was the rising contribution of sales coming from emerging countries, accounting now for 10% to 20% of total sales of our sample of companies.
This impact, however, is difficult to assess, as each emerging market exhibits different characteristics and dynamics that drive WC, such as the level of demand and supply concentration, varying manufacturing and supply chain models, and local payment practices.
- The effect of currency movements on WC performance was more limited than in the previous year. For the companies reporting in US dollar, euro or British pound, this impact was negligible in 2010, as the US dollar differential against those currencies between the exchange rates at year-average and at year-end was not material.
These latest results for 2010 bring the total reduction in C2C achieved since 2002 to as much as 13% in the US and 16% in Europe. Each WC component contributed to this improved performance. In the US, receivables and inventories fell by 8% and 3%, respectively, while payables rose 5%. In Europe, receivables dropped by 9% and inventories were down 4%, while payables were up 8%.
WC performance for the US and Europe, 2002–10
Movements in commodity prices had a significant impact on WC performance
Change in food, metals and oil prices, 2009–10
Food, metals and oil price indexes rose by as much as 17%, 48% and 28%, respectively, in 2010 compared with 2009, and by 24%, 32% and 20% in December 2010 compared with the same period of 2009.
In 2009, the average for the year was still significantly below that of the previous year, as the rebound in prices was following a sharp decline in the second half of 2008.
For each individual company, the impact of changing commodity prices was partially determined by the degree and speed with which variations in input costs were passed on to customers, compounded by the ability to deliver increased cost efficiencies across the supply chain. In some cases, it was also smoothed by the use of hedging policies.
Increased volatility in prices, compounded by the need to conclude more short term supply agreements, had also made production planning and inventory management more difficult.
The lag effect of higher commodity prices on business operations suggests a much greater impact on WC performance in 2011 than in 2010.
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