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Cash on the chip: working capital in technology - Fast-evolving technology business models - EY - Global

Cash on the chip: working capital in technology

technology business models

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Technology companies have since been consciously transforming from a forecast-driven push mode to a more of a demand-driven pull system.

The recession of 2001 caught most members of the technology industry by surprise. Sales growth was assumed to be a near constant. Business models focused on R&D and production, and much less so on subtle or overt signals from customers or the economy at-large.

Consequently, the industry missed the signs that a recession had arrived, further exacerbating already bloated inventories all along the value chain. The inward focus of most companies made the technology crash of 2001 more severe than it might have been otherwise.

Driven by these experiences, technology companies have since been consciously transforming from a forecast-driven push mode to a more of a demand-driven pull system.

Within this transformation, original equipment manufacturers (OEMs) have been moving contracting to third parties as a growing part of their operations, including original design manufacturing services (ODMs) and electronics manufacturing services (EMS) providers.

Outsourced manufacturing and design are now estimated at 25% of total production.

Some of the specific actions being taken by industry members include:

  • Simplifying and consolidating manufacturing (for example, through more focused plants, increased outsourcing and by pursuing make-to-order and configure-to-order strategies)
  • Reconfiguring, relocating and consolidating supply chains according to different strategies and solutions deployed for different products or market segments
  • Leveraging, centralizing and consolidating procurement
  • Streamlining and standardizing business and IT processes
  • Expanding the use of and refining the practice of vendor managed inventories (VMI)
  • Improving billing and cash collections
  • Negotiating more favorable terms from customers and suppliers
  • Improving operational coordination between supply, planning, manufacturing and logistics functions and processes
  • Collaborating much more closely with channels of distribution and suppliers, enabling enhanced demand and supply visibility, improved forecasting accuracy, optimized production planning, lower levels of inventory and better supply chain reliability
  • Sharing leading practices within the organizations and across the various supply chain partners
  • Tracking and monitoring working capital metrics, and linking compensation to these metrics
  •  HP: shifting focus from products to customers

    HP: shifting focus from products to customers

    Optimization of production, inventory and other business practices that affect working capital can be enhanced through greater customer intimacy. In this regard, more leading technology companies are reorienting their business models.

    HP, for example, is shifting from a focus on products to a focus on customers. Once operating 35 different product based supply chains, the company is now organized into a mere five, each focusing on a distinct customer segment. These include “no touch,” “low touch,” “configure-to-order,” “high volume,” and “solutions and services.”

    Product standardization has thus been increased and customization reduced. The number of direct and indirect suppliers has been more than halved, and procurement processes have been streamlined. The company has also increased the proportion of centralized commodities from 60% to over 85%, and supply contracts have been standardized.

    Progress has also been achieved in improving operational coordination between supply, planning, manufacturing and logistics functions, and processes and business and IT processes have been simplified — all of which contribute to enhanced working capital performance.

    (Source: December 2010, HP Supply Chain conference)

    Lessons learned

    Such changes have led to manufacturing, supply and distribution chains that today are significantly leaner, more responsive and agile. The lessons of 2001 (when huge write-offs of excess and obsolete inventories, as well as much higher levels of provisions for bad debt were recorded) appear to have paid off, as evidenced by the comparatively limited impact of the global recession of 2008.

    For the industry as a whole, C2C* was down by 6% in 2008 compared with 2007, and then by 3% in 2009 compared with 2008. Each segment but one reported a decrease in C2C between 2007 and 2009 (semiconductor components saw a marginal increase).

    Had the last quarter of each year been considered rather than the full year, C2C would have declined by 12% between Q4 2007 and Q4 2009.

    Still, in a few cases, rapid changes in demand may have resulted in temporary, lagging working capital performance variations as lead times in customer orders may be less or more than the lead time required to procure components.

    When demand for technology products started to recover in Q3 2009, for example, the industry’s supply base acted to expand manufacturing capacity. This resulted in the elongation of lead times for certain components over the latter part of 2009 and throughout 2010.

    * C2C (cash-to-cash) = DSO plus DIO minus DPO (expressed as a number of days of sales, unless stated otherwise)

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