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Consumer & Industrial giants grow inventory, extend payments as supply problems worsen


As the Russia-Ukraine war exacerbates supply issues, corporates including 3M, GE, PepsiCo, Kraft Heinz struggle to reduce working capital and accelerate cash conversion

by Anmol Karwal

Published: May 3rd 2022

Two months ago, treasurers boasted about how their technology initiatives were driving working capital efficiencies amidst supply disruptions. Now, Russia’s invasion of Ukraine is reversing those gains as it piles new troubles onto consumer and industrial multinationals. According to a EuroFinance analysis of 18 US-based companies, outstanding inventory increased by $5.71 billion to an all-time-high of $166.3 billion, in the first quarter of 2022, stretching the time it takes to convert investments in working capital into cash flows from sales. 

To alleviate these pressures, corporates have been extending payments to suppliers as average Days Payable Outstanding (DPO), a measure of the number of days that it takes for a company to make payment after a purchase has been made, increased to 77 days, highest in the last six years.

Inventories Dilemma

Consider the manufacturing giant, 3M which produces goods for a wide range of industries increased inventory to a record high of $5.29 billion in the first quarter, resulting in its Days Inventory Outstanding  (DIO), a measure of the average number of days that a company holds inventory for before turning it to sales, increased to an all-time-high of 96 days. 

This comes at a time when the supply chain disruptions which the industry was already experiencing have magnified after Russia’s war with Ukraine, resulting in corporates to operate on higher levels of inventory now to ensure smoother production in the coming quarters. 

“We continue to navigate global supply chain disruptions, which have been amplified by recent geopolitical unrest. We are doing whatever is necessary to take care of customers, while managing extended lead times and elevated inventory levels.” said Mike Roman, CEO at 3M.  

This has further delayed 3M’s Cash Conversion Cycle (CCC), which expresses how many days it takes a company to convert inventory into cash after a sale to a customer, by 6 days to 90 days at the end of the first quarter. Despite that, management expects the benefits of its ongoing data analytics and operational strategies to play out as supply chains normalise. 

The manufacturing conglomerate, General Electric (GE) also grappled with the same situation as it held an additional $723 million of inventory in the first quarter, taking the balance to $16.57 billion, highest since 2019. GE’s DIO increased to 117 days in Q1 as compared to 106 days at the start of the year. 

GE had previously discontinued its receivables factoring programmes and placed focus on automation & collections based capabilities to drive efficiencies within working capital. However, after taking longer to receive payments from clients in the first quarter, it further deteriorated the operating cycle as the company took an additional 16 days to convert cash as CCC stood at 77 days, highest in the last six years. 

“We still see opportunities to improve both inventory turns and receivable DSOs. In this challenging environment, it is much harder to implement though, but we are still seeing pockets of improvement.” said Carolina Happe, CFO at GE 

Meanwhile, the manufacturer of construction machinery and equipment, Caterpillar and the consumer electronics company, TE Connectivity also followed suit as DIO increased to record levels of 137 days and 98 days in the first quarter, respectively. Further pushing CCC by nine and twelve days higher to 125 days and 102 days during the same time period. 

On the other hand, multinational consumer companies which are also dependent upon global supply chains for raw materials faced similar challenges. 

The producer of beer, wine, and spirits, Constellation Brands which had previously struggled with low inventory levels amidst supply bottlenecks, ramped up its inventory holdings by 3.57% to $1.57 billion in the first quarter of 2022. 

However, this led to its DIO to increase by 16 days to 143 days, further pushing its CCC by 7 days to 98 days during the same time period. 

“During the coming year, we expect to rightsize inventory levels in the business” said Garth Hankinson, CFO at Constellation Brands. 

The food & beverage giant, Kraft Heinz also increased inventory by 13.3% or $364 million to $3.09 billion in the first quarter leading to its DIO to expand by 9 days to 64 days in the first quarter. The company expects to subsequently increase its inventory levels in the coming quarters to support production as volumes increase 

PepsiCo also followed suit as its inventory stood at $4.76 billion, 9.5% or $415 million higher than the previous quarter, thereby expanding its DIO by 14 days to 55 days in Q1. 

Extending Payments 

As higher inventory balance took a toll on cash conversion, corporates pushed their payments to suppliers further in the first quarter in order to relieve the increased pressure on working capital. 

For instance; whilst DIO expanded at PepsiCo, the company also received payment from customers ten days later during the quarter, further delaying the operating cycle. However, as the company delayed payments to suppliers, its DPO increased by 20 days to 111 days in Q1, helping the cash conversion cycle to impede by only 4 days.  

Meanwhile, Constellation Brands, General Mills, Procter & Gamble, GE amongst other companies also followed suit as DPO increased to 81, 102, 119 and 111 days respectively. 

The extension of payment terms was only possible as supply chain financing, a facility offered to suppliers by third party financial institutions, to sell their receivables to these institutions in order to generate liquidity, remained at elevated levels in the first quarter. 

At GE, $1.9 billion was paid to suppliers via SCF, $300 million higher than the previous quarter, while, $1.38 billion million was payable to suppliers who utilised SCF at General Mills. 

Meanwhile, suppliers received $882 million from SCF at Coca Cola, 9% or $73 million higher than the average SCF payments in 2021. Despite that, the company’s DPO fell by 5 days during the same time period.