Billions of dollars are being left on the table every year by automotive suppliers, who apparently are so preoccupied with bankruptcy filings, lagging sales and the rising cost of raw material that they’re failing to take advantage of these cash opportunities. the 20, According to new research from Hackett-REL, the top 20 largest U.S. automotive suppliers are ignoring up to $7.6 billion in cash opportunity in the form of excess working capital tied up in invoices paid late by customers, suppliers being paid too early, and inventory lying unsold on warehouse shelves.
The Hackett-REL benchmark study and comparative analysis also determined that the top 17 European automotive suppliers are similarly overlooking up to $9 billion in cash, which is frozen in excess working capital. On average, U.S. auto suppliers significantly outperform their European counterparts, showing 37% lower net working capital ratios. But some of this gap, and the strong working capital performance by several U.S. auto suppliers that are already in or near bankruptcy, is likely to have been driven by special assistance programs from U.S. automakers, and may disappear in 2006.
Taken as a whole, the global auto parts supply industry could have as much as $16.6 billion in cash unnecessarily tied up in working capital. This significant number, however, is likely to be a conservative assessment, according to Hackett-REL, as it does not take into account the excess working capital of the many privately held European automotive parts companies.
In addition, Hackett-REL estimates that auto suppliers could see significant bottom-line benefits from reductions in administrative and operating expenses associated with working capital optimization. U.S. auto suppliers could reduce operating costs by over $700 million, while European auto suppliers could see gains of up to $480 million.
“The cash-strapped U.S. auto suppliers are missing an exceptional opportunity here, leaving billions of cash on the table,” notes Stephen Payne, global practice leader with Hackett-REL. “Even as some of the industry’s largest companies reorganize under bankruptcy rules and fight pitched battles over employee wages and pensions, they are overlooking money that is literally right there trapped on their balance sheets which could have a significant impact on their overall liquidity. It’s tough to understand how companies could ignore this, since in some cases it could keep them from shutting their doors permanently.”
According to Marc Loneux, senior analyst with Hackett-REL, “Working capital that is ‘liberated’ from balance sheets through such tested working capital methods as improved collection, better logistics, supply chain optimization and more efficient buying will always be the cheapest source of capital for corporations. This is a particularly important opportunity in light of a challenging business environment, which is being exacerbated by rising interest rates.”
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