EuroFinance

The supply chain disruptions that have marked the recovery from the pandemic have upended working capital calculations at large multinationals. But for every firm that has suffered under the impact, there are some corresponding winners, EuroFinance analysis shows.

Consider how in the third quarter of 2021, US consumer goods producers benefited from a slump in digital sales at their largest retail customers. This meant that they were able to faster convert inventory to sales on the account of their customers’ forward stocking and orders for larger quantities to stave off supply chain disruptions.

Zero-Sum Game

Working capital efficiency of US consumer goods giants like Coca Cola and Procter & Gamble reached new highs as Days Inventory Outstanding (DIO), a measure of the average number of days that a company holds inventory before turning it to sales, fell significantly in the third quarter of 2021 helping them to more quickly convert the capital into cash.

This comes after their key customers, the big-box retailers including Walmart, Amazon, Costco and Target reported a delayed cash conversion as they held record levels of inventory on their books to fulfil demand as they moved into the final quarter of the year, as earlier reported by EuroFinance

The household products multinational Procter & Gamble (P&G) took 53 days to convert outstanding inventory into sales in Q3, fastest in the last six years. Despite holding $6.3 billion of inventory at the end of Q3, 5.4% higher than the previous quarter, inventory conversion quicker as the company recorded its highest ever quarterly sale since 2014, of $20.3 billion.

Faster inventory turnover along with extended payment terms with suppliers further helped P&G shorten its operating cycle by 10 days since the start of the year as the company was able to collect cash from sale 41 days before paying to suppliers in Q3 as compared to 31 days in 2020.

Management gave credit to digital investment which helped the company drive efficiency through its supply chain. “The digitization we've been investing in our supply chain over the past years, better synchronized demand from suppliers all the way to retail partners” said Andre Schulten, CFO at P&G during a third quarter earnings call.

Walmart, Sally Beauty and Dollar General are amongst the key distribution/retail partners of P&G in the US.

The US beverage giant, Coca Cola’s DIO stood at 73 days in Q3, 6 days or 7% lower than the previous quarter. This further helped the cash conversion cycle to contract by one-third or 8 days to 17 days in the third quarter.

The beverage giant mainly sells its beverage concentrates to its bottling partner in the US, Coca-Cola Bottling, which then distributes the branded beverage to retailers like Walmart and Kroger.

The packaged and refrigerated foods producer, Hormel Foods, took 44 days to convert inventory into sales, the fastest in the last six years. While its CCC also stood at 44 days, 9 days or 18% lower than the previous quarter. The company’s finished goods inventory stood at $725 million at the end of the quarter, 5% or $41 million lower than the previous quarter.

The company launched its One Supply Chain initiative in Q1 2021 under which it has placed focus on automation to be implemented in its facilities to maximise output and generate efficiency to turnaround its inventory.

Kimberly Clark, manufacturer of paper-based consumer products also followed suit as it recorded a 5% or 2 day decline in DIO to 54 days from 56 days in the last quarter. Subsequently, CCC declined by 40% or 6 days to only 8 days in the third quarter.

The company has a distribution partnership with Walmart, Dollar General and Interline Brands or Home Depot in the US.

On the contrary, the energy drinks manufacturer, Monster Beverage registered a 23% or $89 million increase in its inventory level leading to a 14% or 8 day jump in DIO to 62 days in the third quarter.

Despite common distributors including Walmart, Amazon, Costco and Coca Cola Consolidated, the rise in DIO was mainly attributable to changes in the company’s bottling partner’s production schedule which delayed invoicing and the lower inventory levels maintained by distributors.

Shorter inventory turnover along with a faster payment schedule further exacerbated the problem as CCC increased to 21% or 12 days to 70 days at the end of the third quarter.

Meanwhile, facing a similar problem, PepsiCo reacted quickly and adjusted its inventory levels lower by $642 million to $4.36 billion at the end of the quarter. This helped DIO decline by 7% or 3 days to 45 days during the same time period. CCC stood at -11 days in Q3 as compared to 3 days in the previous quarter.

“Because we've had some supply chain constraints in some of our product, we've pulled back on some of the inventory on the perimeter during the summer voluntarily, just to make sure that we were able to service the customers at the right level” said Ramon Laguarta, CEO at PepsiCo during the Q3 earnings call.