October 25, 2018

The chorus of warnings that another recession is imminent seems to be getting louder by the day in the business community. The many possible triggers of another downturn include America’s trade dispute with China and rising corporate debt. Can companies draw lessons from the Great Recession of 2008 that will help them weather the next financial storm?

Research carried out by Lima Zhao, Associate Professor of Supply Chain Management, Ningbo Supply Chain Innovation Institute China (NSCIIC) in collaboration with Arnd Huchzermeier, Chaired Professor of Production Management, WHU-Otto Beisheim School of Management, Germany, offers some useful insights.

The analysis focuses on the auto industry’s response to the 2008 financial meltdown, and the impact on working capital management and hence supply chain performance.

Analytical Approach

The 2008 economic downturn pitched many automotive suppliers into financial distress owing to poorly performing working capital.

In 2006, the consulting firm AlixPartners LLC reported at least 38 percent of automotive suppliers in North America face “fiscal danger”, thus should “improve financials, ranging from maximizing cash flow to improving working capital”.[i]

Zhao and Huchzermeier analyzed working capital management in the automotive supply chain in terms of the cash conversion cycle (CCC, how fast a company can convert cash on hand into inventory and accounts payable through sales and accounts receivable, and back into cash). The research compares CCC performance during the periods 2012-2014 and 2006-2008 to explain how the metric changed since the 2008 global financial crisis. A secondary data analysis retrieved data from the annual reports of 121 automotive companies.

For the purposes of the project, the automotive supply chain was segmented into six stages: raw material supplier, material specialist, component standardizer, system integrator, automotive OEM, and car dealer.

CCC across these six stages was calculated for the 2012-2014 time period. The researchers looked at the relationship between supply chain and working capital performance in the auto industry during these years, and then compared the CCC metrics in 2012-2014 with those in 2006-2008[ii] to show how the financial crisis impacted the working capital management strategy.

Anatomy of a Downturn

The main findings show how recessionary forces can restructure auto supply chains. For example:

  • The average CCC across the value chain stages reviewed during 2012-2014 is 53 days, compared to 67 days in the 2006-2008 period. A drop by more than 20%.
  • The average CCC for automotive OEMs in 2006-2008 and 2012-2014 is 106 days and 35 days respectively; a significant improvement of 71 days (or by approximately two thirds). During 2006-2008, automotive OEMs had the longest CCC across the supply chain stages, while they demonstrate the second-best CCC in 2012-2014.
  • The upstream stages of production from raw material supplier, material specialist, component standardizer to system integrator, also exhibited a significant improvement in performance of 5% to 24%.
  • OEMs have enhanced their working capital metrics by shortening inventory conversion period by 21%, accelerating payment from car dealers by 39%, and extending payment to suppliers by 55%. As a result, the upstream stages from raw material supplier to system integrator have all extended payments to their suppliers by 24% to 30%, while the car dealers have speeded up payment from end customers by 33%. In addition, the component standardizers have managed to reduce their inventory conversion period by 20%.

The results show that OEMs have largely enhanced their working capital performance based on the lessons learned during the Great Recession years. Moreover, they have used their market power to improve the working capital performance of the upstream supply chain (especially for component standardizers and system integrators).

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