Cash on the road
6 contributing factors to working
Procurement and sourcing have remained an area of focus for the industry, with companies seeking to consolidate spend, change payment terms, standardize processes and work closely with their suppliers.
For the automotive supply industry, a number of factors have influenced the reported working capital variations since 2002.
- Evolution of payment terms
The evolution of payment terms with Original Equipment Manufacturers (OEMs) played a big role behind the changes in receivables performance. For both GM and Ford, payment terms policy appear to have changed significantly over different periods and between them.
GM's DPO rose significantly between 2002 and 2007, with the company terminating supplier fast-pay account programs in 2004 and 2005. DPO then fell back in 2010 to reach a level that was still 20% above that of 2002. GM explains the late drop in DPO by the completion of a change to weekly payment terms to its suppliers.
For Ford, DPO fell by 13% between 2002 and 2007, and then recovered by 8% by 2010. In total, DPO for US OEMs (on a weighted basis) was up 13% between 2002 and 2010.
By contrast, DPO of the four largest (by sales) European OEMs has been falling since 2002 (down 14%) to reach a low in 2010 (if we were to exclude the "abnormal" year 2008).
There was also a drop of 15% in DPO for the three largest (by sales) Japanese OEMs during the same period.
- Supply chain responsibilities
OEMs have been looking to their suppliers to assume greater supply chain responsibilities, such as providing complete systems and combinations of components.
In addition, market globalization and the desire of OEMs to adapt their products to satisfy regional demands have driven suppliers to establish capabilities within major regions as they follow their customers.
- Consolidation of procurement and sourcing
Procurement and sourcing have remained an area of focus for the industry, with companies seeking to consolidate spend, change payment terms, standardize processes and work closely with their suppliers. Consolidation has also created larger Tier 1 suppliers with increased buying power, capable of extracting better cash terms from Tier 2, Tier 3 and other suppliers.
- Uncertainty in raw material prices
Another feature has been the volatility in certain raw materials prices, such as steel, aluminum, rubber, resins and fuel. While price adjustment provisions exist, the sharing of costs remains the subject of negotiations with customers. Increases in raw materials prices in the second half of 2010 boosted reported levels of inventory and payables at year-end.
- Regional and country sales variations
Changes in the region and country sales mix and the associated rebalancing of OEM exposure also had an impact. This was notable for US automotive suppliers, with sales outside North America accounting for as much as 47% of total sales compared with only 36% in 2002.
For suppliers in Europe, the proportion of sales outside the domestic market was only slightly up, with a relative stability of sales exposure to European OEMs and a higher share of sales to Asian OEMs replacing falling sales with Big Three. For suppliers in Japan, the rebalancing of OEM exposure since 2002 has been moderate.
- Internal company changes
Individual companies may also have caused working capital variations by choosing to change the balance among cash, cost and service levels in response to varying internal, customer or supply and demand requirements.
Actions taken by automotive suppliers
To address working capital, automotive suppliers have been focusing on several actions, including:
- Applying lean manufacturing, with just-in-time (JIT) manufacturing and just-in-sequence (JIS) processes being normal
- Reconfiguring, relocating and consolidating supply chains
- Leveraging, centralizing and consolidating procurement
- Managing payment terms more effectively with customers and suppliers
- Improving billing and cash collection
- More efficient billing of costs incurred under engineering, tooling and R&D costs contracts
- Optimizing service and products-parts planning and aftermarket distribution practices
- Collaborating more closely with each partner of the extended enterprise
- Linking up with downstream OEM processes to gain improved visibility into demand
- Monitoring financial viability of key suppliers and implementing dual sourcing to reduce dependence on single supplier
- Adopting common technologies up and down the value chain to share real-time and accurate information about supply and demand
- Tracking and monitoring WC metrics and linking compensation to these metrics
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