How Low Can It Go? The 2006 Working Capital Scorecard

Keitel credits a "continuous improvement" mind-set rather than any single breakthrough for the company's success. "We focus first on quality and customer service, and second on cycle times," he says. "If people do that, we're going to have good results, low costs, and high efficiency."

That's not to say that working-capital improvements magically accrue. Keitel concedes that his team did work at improving the accuracy of invoices last year, and also the way it communicates with customers who owe money. In the latter case, that meant providing more training to collections specialists, having them communicate with customers more frequently, and making sure they were better prepared for their conversations with customers when they did contact them. The net result was a significant improvement in Qualcomm's DSO, which was down 19 percent last year to 35 days, or just over half the median for its industry.

Of the 82 industry groups examined by Hackett-REL, only 12 managed to post a double-digit decline in DWC last year. Among them were distribution firms, which notched a 12 percent improvement. Brightpoint, a $2.1 billion distributor of mobile phones and other wireless products, pared DWC by 31 percent to a sector-best 13.1 days, or less than one-third its industry median. It also reduced DSO by 18 percent. Brightpoint CFO and treasurer Anthony Boor says the improvements reflect the continuation of an effort begun in 2000, when the company faced a call on some of its bonds and wasn't certain it would have the cash to buy them back.

"We really needed to clean up our balance sheet and squeeze out as much cash as we could," says Boor. Ultimately, the company succeeded in pulling the funds it needed from its balance sheets around the world, and in doing so it recognized that it needed to dramatically pare its working-capital levels. Brightpoint focused first on bringing its U.S. operations up to snuff and is now leveraging its newfound expertise across its international operations.

That effort boils down to people and processes. In addition to hiring and training new credit and collection personnel and equipping them with state-of-the-art technology, Boor says the company fundamentally rethought its approach to collections. "In the earlier days, we focused primarily on the collection effort itself," he explains. "In the past two years, we've made a bigger investment in the credit granting and monitoring capabilities of our businesses. We've learned that even the best collection specialists can't collect on somebody in a poor credit position."

A happy byproduct of this effort: the company has been able to reduce the number of credit collectors it employs. It also decided to outsource past-due accounts to third-party collectors earlier than it used to. "We found that by outsourcing more quickly on those accounts we knew would be hard to collect, we ended up with more money in our pocket," says Boor.

Brightpoint also reduced its days payables outstanding (DPO) by 5 percent, to 39.6 days, about the industry median. While the converse approach — stretching out your payables rather than shrinking them — is a "tool in your toolkit," Boor says it is not one he likes to use. "It's not going to help your relationship with your vendors, or make them more comfortable granting you more credit down the road, or in providing references to other potential vendors," he says. "We're focused on streamlining our supply chain instead of stretching payables. We have a saying here that inventory is like a melting ice cube; the longer you hold on to it, the less it's worth."

To keep its ice from melting, Brightpoint began using supply-chain-management software two years ago to improve internal forecasting and better manage its inventory. More recently, it has been working with customers to pull their sales data into that system. Eventually, the company hopes to extend the system to its manufacturers as well, so that they have real-time access to Brightpoint's inventory data. Beyond reducing inventory and speeding operations, Boor hopes these efforts will help to solidify Brightpoint's relationships with its customers by making the company integral to their own supply chains.

Bonus Time
Nucor, a $12.7 billion steel company that has managed to thrive in an industry that has laid low many of its former competitors, drives its working-capital improvements the old-fashioned way — by affixing a juicy carrot to them. Last year, Nucor trimmed its DSO 7 percent and reduced DIO 32 percent en route to a 25 percent improvement in DWC, which now stands at about two-thirds its sector median. Corporate controller Jim Frias attributes the short-term improvement largely to a global spike in demand in 2004, when steel manufacturers and their customers worried that there would not be enough steel to go around. "The price of scrap steel, which is our main feedstock, was rising by leaps and bounds starting in late 2003, so in 2004 we intentionally built inventories while we rode out this volatile period," says Frias. "By 2005, we were used to this new environment and became more comfortable with our ability to get material, so our divisions, without corporate direction, skinnied themselves down."

But that brief spike doesn't explain Nucor's consistently good working-capital performance. For that, look to the company's incentive-based pay system. "Our production employees are paid a bonus based on what they produce," Frias says, "but all the folks not directly tied to the production process are paid based on the return on assets for their business unit." Each plant, he explains, has its own controller, credit manager, sales manager, production manager, and general manager, all working together to "maximize working-capital efficiency, because that's the thing they have the most control over that improves their bonus. Everything they do, from making credit decisions to collecting cash, is done knowing that if they maximize profits and minimize assets, they'll have a better bonus."

• « previous
• 1
• 2
• 3
• next »