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Cash on the road: Regional performance shows wide working capital variations - EY - Global

Cash on the road

Regional performance shows wide working capital variations

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Companies in the US operate simpler supply chains, owing to the absence of national borders and a unified currency and language.

Automotive supply industry working capital performance varies widely across regions. This reflects variations in country sales and local payment practices, customer base, as well as in manufacturing, logistics and distribution strategies.

North American automotive suppliers exhibit by far the lowest levels of C2C (35 days), due to superior performance in each working capital area. European automotive suppliers exhibit the highest level of C2C (61 days), notably due to a poor performance in inventory, while Japanese automotive suppliers sit in between (51 days).

Turning the focus to receivables (DSO), the levels do not vary across regions. This likely reflects the global and concentrated customer base nature of the industry, with most suppliers realizing a significant part of their sales outside their headquarter region.

However, in terms of inventory and payables (DIO/DPO), industry averages differ significantly. North American automotive suppliers carry a much lower level of inventory (DIO of 31 days) than their peers in Japan (36 days) and Europe (45 days). Companies in the US operate simpler supply chains, owing to the absence of national borders and a unified currency and language. Vendor-managed inventory arrangements are also less widespread outside North America.

Suppliers in the North American also exhibit higher levels of payables than in Europe and Japan. While trade terms are longer in the latter two regions, globalization in sales and procurement may be dampening the effect of regional payment practices.

Certain companies also choose to pursue extended payment terms rather than to pay faster in return for cash discounts. Differences also exist among suppliers in the levels of cash and cost savings that each one has been able to drive out of its supply chain in response to pressure from customers.

WC metrics by region, 2010

  US Europe Japan Total
DSO 57 59 55 57
DIO 31 45 36 38
DPO 54 44 39 46
C2C 34 61 51 49

Source: EY analysis, based on 2010 publicly available financial statements

Within each region, analysis also shows wide variations in performance among companies for C2C and for each working capital metric. This is due to differences in country and customer sales mix, production, logistics and distribution infrastructure, vertical integration and supply contracts.

The spread of C2C performance among companies is larger in Europe than in North America and Japan, with the former region exhibiting the highest figure for each working capital metric.

There are several reasons that may explain these results for Europe:

  • Differences in business models, with companies operating at various points of the value chain
  • Wide variations in trade terms across countries, notably between the North and the South
  • Dispersion of production, logistics and distribution facilities
  • Absence of a unique currency

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