WORKING CAPITAL TRENDS IN HEAVY DUTY INDUSTRY

Management consulting – the Nordic way

We’ve dived into the numbers and studied the working capital efficiency in the heavy duty industry. So, what are the main drivers of efficiency and do larger companies have better working capital? And what supplier segments have the strongest working capital performance? Here’s what we found.

The 87 companies in the study are supplying components to trucks or other heavy duty vehicles for on-road, off-road or marine industry.

In the study the working capital is built up from the accounts payable, accounts receivable and inventory, reflected by the KPIs DPO – days payables outstanding, DSO – days sales outstanding, and DIS – days in stock.

When crunching the numbers, we came up with three main conclusions.

1. Inventory turnover is the key contributor to working capital performance among companies within heavy duty industry2. Size doesn’t matter – no relationship can be found between turnover and working capital performance3. Suppliers in the on-road heavy duty segment generally show better working capital performance

NOWC – trends in heavy duty

What are the main drivers of working capital efficiency?

From the findings of the study, conclusion can be drawn that• Accounts payables and accounts receivables both play a part in driving working capital performance. But just focusing on the payment terms doesn’t cut it. • Inventory management turns out to be the most crucial in improving the working capital efficiency. • Inventory management is to a great extent a matter of optimizing internal processes, and a company can achieve a lot of improvements on its own without interacting with its suppliers and customers.

Examples of key elements connected to inventory management are: • Proper inventory control and monitoring• Assortment optimization • Sales & operations planning (S&OP)

Focusing on inventory management does not only generate less inventory, but also better delivery performance when done right.

Do larger companies have better working capital? A common hypothesis is that a company with high turnover should have better working capital efficiency. The high turnover company should be able to leverage its scale to improve working capital through for example more formalized, and therefore more effective, processes as well as better position for negotiations with both suppliers and customers. However, a comparison of working capital efficiency contradicts that hypothesis. One explanation to this could be that while larger companies have more processes in place, the increased complexity from wider assortment, larger customer and supplier base along with greater footprint, drives up working capital. This would emphasize the importance of continuous improvements in internal processes, regardless of company size.

Net Operating Working Capital / Sales

WORKING CAPITAL EFFICIENCY AND PROFITABILITY PER COMPANY

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NOWC – trends in heavy duty

Is there a difference between customer segments in the heavy duty industry?

If inventory management is the key driver of working capital efficiency – what distinguishes companies that are good in this area? Given the width of products within the heavy duty industry, a more detailed picture is given through further segmentation. In this study, companies are supplying customers within both on-road, off-road and marine industry.

On-road suppliers can be seen to perform better on inventory efficiency, with better DIS figures. This segment shows a more focused distribution of DIS which could be an effect of an industry segment with more reliable forecasting, enabling suppliers to plan their purchasing better. Suppliers are also forced to improve operations through lean and JIT delivery. Looking at companies targeting both on- and off-road customers, a larger distribution is seen. This could be the effect of companies having a more spread customer base, demanding a broader assortment.

ConclusionOur study suggests that the on-road segment has a better working capital performance, which could be explained by a more homogenous market. However, there are still variations and internal focus is important. Regardless of company size or segment, operational excellence is key to driving down working capital. Even though the prerequisites might differ, a focus on internal processes in order to make continuous improvement should be a top priority for every company. Otherwise profitability will be extinguished by large capital needs and thereby the profitability will be absent. Working capital is a major enabler for sustainable growth. An increased capital need can lead to liquidity issues with devastating effects.

DAYS IN STOCK PER HEAVY DUTY MARKET SEGMENT