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Cash on the chip: working capital in technology - Essential steps to excel in working capital - EY - Global

Cash on the chip: working capital in technology

Essential steps to excel
in working capital

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Amid a strengthening economy and in the presence of holding so much cash on the balance sheet, companies who will excel in working capital management will be those that continue to apply lean manufacturing and supply chain practices, constantly adapting structures to a rapidly evolving market.

Technology companies need to take a look at their operations to determine the value being lost to inefficient working capital management. Leaders, especially those in the upper quartiles, need to remain vigilant to prevent performance entropy. Others, especially those in the lower quartiles, should begin a systematic program to recover lost ground.

Size in the way

Certain segments of the technology industry feature a few dominant players, all serviced by numerous far smaller and somewhat obsequious suppliers. While this is common in many industries, it is important that companies both large and small are aware of how this relationship can get in the way of effective working capital strategies.

Consider forecasting. Today, when a large company says it needs X delivered by Y, suppliers scramble — no questions asked. Because the large company always gets what it wants whenever it wants, it often fails to notice any flaws in the system.

But in reality, the larger entity is paying for its failure to provide clearer insight into demand. Smaller suppliers, feeling the need to be ready at all times, will carry larger than necessary inventories. And, when orders suddenly spike, suppliers are forced to produce, often in less-than-optimized production runs. The result is higher costs within the system.

Similarly, look at commercial terms. When the downturn of 2008 arrived, the most dominant companies in the value chain began extending their own payment terms, in many cases significantly. In the short term, working capital, at least for the dominant companies, is preserved.

However, for others in the supply chain, such pain can quickly translate into financial distress. The resulting cost cutting and loss of focus can lead to lapses in quality or even failure to deliver.

This is not to point fingers. Rather, the goal is to remind all that closer collaboration across a value chain can lead to greater optimization, lower costs and less working capital tied up unnecessarily in safety stocks or inefficient production runs.

Smaller, less dominant companies, needing clearer windows into downstream demand, should speak up. Larger, more dominant companies should listen and where possible, respond. And all should seek opportunities for eliminating systemic inefficiencies and other drains on working capital.

The battle over working capital is fought daily

Companies tend to focus more closely on working capital in the lean times. But, when matters improve, focus is diffused and inefficiency returns. Given the quick turnaround for the technology industries, that risk is particularly strong today.

Today, technology executives’ focus is on ramping up production and replenishing inventories to serve growing sales. In addition, cash is plenty, accounting for about 30% of the total assets and sales of our industry sample.

There is now a danger that corporate attention will once again move away from balance sheet and working management in particular, shifting instead toward driving revenues and the bottom line, pursuing acquisitions and returning cash to shareholders.

However, companies that allow their focus to shift in this way not only risk damaging their business performance, but they could also undermine the close business relationships and trust that they have spent many years building with customers and suppliers.

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