Answer to Question #6992 in Economics of Enterprise for LaMarcus Streeter

Using the Internet sources we have found that Aberdeen Group report shows that many companies using advanced technology go back to basics and determine how to optimize working capital. Indeed, two-thirds of survey participants place a "high priority" on working capital optimization.

We have found some technologies that go beyond traditional solutions. For example, technology providers such as SmartOps, Optiant, i2, and Logic Tools have developed multi-echelon inventory optimization solutions that offer the ability to calculate safety stock inventory to ensure companies have the right amount of inventory at the right place. Adopting these types of capabilities is often a first step on the road to working capital optimization.

Speaking about cash management I would like to mention that highly successful firms in sectors like software and services, entertainment and media don't have the same levels of spending required by capital-intensive companies. So their cash builds up. By contrast, companies with a lot of capital expenditure, like steel makers, must invest in equipment and inventory that must be regularly replaced. Capital-intensive firms have a much harder time maintaining cash reserves. Investors should recognize, moreover, that companies in cyclical industries, like manufacturing, have to keep cash reserves to ride out cyclical downturns. These companies need to stockpile cash well in excess of what they need in the short term.

Our opinion based on the research made is that the companies seeking to use technology to improve working capital should carefully examine and incrementally improve upon three areas:

1. Inventory optimization: Best practices include using inventory optimization tools, inventory visibility and collaboration technology, and multi-echelon inventory optimization.

2. Supply chain finance: Third-party inventory financing, working capital/cash management tools, supply chain network design tools, and platform upgrades are all helpful.

3. Cross-functional metrics and management: Take a cue from best-in-class companies, and measure and manage working capital via a cross-functional approach.