The working capital suffers from a high supply chain complexity
A comparison of working capital performance indicators throughout the value chain (figure 1 above) indicate low performance for AR, AP and inventory for the manufacturing companies.
On average, manufacturing companies have higher number of components per product than processing companies. This leads to a long tail of low volume items being sourced and held in inventory. In product companies with manufacturing, this problem is further exacerbated by a swelling of product portfolios from long product life cycles as well as differentiation of products per customers and segments.
Except driving up inventory, the wide variety of components being sourced weakens the company’s relative buyer power, leading to worse payment terms towards suppliers. Finally, many of the medium sized manufacturing companies in our study sample are suppliers to a few large OEMs with a lot of buyer power, which likely contributes to the high Days sales outstanding found in this category.