The document summarizes the findings of a study on working capital management challenges and best practices for manufacturing and distribution companies. It finds that while most executives recognize the importance of optimizing working capital, over half of companies have not implemented a working capital strategy. Common challenges include long supply chain lead times, inaccurate sales and operations planning, and delinquent receivables. The document also outlines best practices for inventory management, accounts receivable/payable management, and capital expenditure management that could help companies optimize their working capital.

1. Audit / Tax / Advisory / Risk / Performance Smart decisions. Lasting value.™
June 2016
A research report by Bart Kelly
Shedding light on working
capital management challenges
and best practices
A study of the manufacturing
and distribution industry

2. Working capital management: A study of the
manufacturing and distribution industry
2 June 2016 Crowe Horwath LLP
Every senior executive faces the working
capital challenge: managing cash for today’s
obligations while also investing in tomorrow’s
growth. Crowe Horwath LLP conducted the
Working Capital Study to help manufacturing
and distribution leaders make informed decisions
when addressing this challenge.
Working capital is a critical gauge of
business health, measuring current assets
against current liabilities. While negative
working capital can create a cash-flow
crisis, too much working capital means that
a firm’s cash isn’t working hard enough.
The Working Capital Study explores
the challenges and opportunities U.S.
manufacturers and distributors face as they
work to maintain optimum liquidity while
planning for the future.
This report highlights best practices and
benchmark performances for working
capital management. For example,
successful working capital management
often is built around lean-thinking operation
and financial improvement practices.
The lean objective that drives profitability
through operational and financial
improvement also directs the management
of the business at optimum levels of
working capital.
The findings from the Working Capital
Study provide insights that will help
executives minimize working capital
while maintaining or improving quality
and service to customers. This delicate
balance requires cross-functional
collaboration, with the following functions
proving particularly important:
• Operations: Minimizing process wastes,
lowering inventories
• Supply management: Improving
forecasting and fulfillment with customers
and suppliers
• Finance and legal: Securing favorable
procurement and sales terms
• Senior executives: Analyzing and
communicating the importance of
working capital management

3. 3Numbers may not total 100% due to rounding.
Working capital strategies and effectiveness
The Working Capital Study confirms
that most executives realize the
importance of optimizing working
capital – 32 percent rate it “extremely
important” to their company’s success
over the next two years, and another 50
percent rate it as “very important.”
The vast majority of executives surveyed
(88 percent) also believe that improved
working capital management would boost
their company’s profit margin.
Despite the importance and potential
outcomes from working capital
management, more than half of companies
have not implemented a working capital
strategy (Exhibit 1).
“Working capital management requires
ongoing awareness and consistent,
standardized practices throughout an
organization,” says Bart Kelly, principal
at Crowe. “That can only happen if
senior leaders identify working capital
management as a core objective.
Developing and implementing a strategic
plan to optimize working capital is the first
step in demonstrating that.”
Exhibit 1: Strategic plans to optimize working capital
54% of companies
have not implemented
a working
capital strategy
9%
24%
7%
46%
14%
Strategic plan
implemented
Strategic plan
developed but not
yet implemented
Strategic plan
in development
No strategic plan
but considering
development
No intent to develop
strategic plan

4. Working capital management: A study of the
manufacturing and distribution industry
4 June 2016 Crowe Horwath LLP
About two-thirds of executives agree
that the approach to managing certain
activities (including accounts payable,
accounts receivable, capital expenditures,
raw materials inventory, and finished
goods inventory) meaningfully affects
their working capital management. For
example, 68 percent report that raw
materials inventory management has
a measured impact on working capital
management in their organizations.
The problem is that a high percentage of
manufacturing and distribution executives
don’t recognize the impact of these
activities; in fact, some stated they see
“no impact.” And still other executives
don’t see the connection between daily
activities in their companies and working
capital. Executives may understand the
general relationship between operations
and finance, but don’t have access to
specific metrics to track the impact of
production decisions on the bottom line.
For example, a fear of being out-of-stock
may spur managers to order “just-in-case”
inventory – wasting working capital.
This situation is driven in part by the
fact that many companies lack effective
management of raw materials inventory.
For example, only 60 percent of survey
respondents effectively manage their raw
materials inventory.
This lack of effective management is
unfortunate, because improved processes
and policies could reduce working capital
by an average 28 percent without negatively
affecting business performance.
Addressing working capital challenges
Issues beyond a company’s control can
increase the need for working capital:
Executives cite economic factors,
unreliable customer-demand forecasts,
and industry-related factors as their top
difficulties (Exhibit 2). But other challenges
are directly or indirectly within executive
control and provide opportunities to
optimize working capital, including:
• Supply-chain lead times. Vendors can
deliver supplies on a just-in-time (JIT)
basis or assume ownership in strategic
areas (and the working capital burden of
inventory) until production begins.
• Inaccurate sales, inventory, and
operations planning (SIOP). Shorter
product life cycles and increased demand
volatility challenge manufacturers
everywhere. Yet SIOP at many firms
remains a largely static process that is not
updated frequently – meaning that sales
plans, production schedules, inventory
volumes, research and development project
pipelines, and customer lead times often
are out of date. Straightforward approaches
to implement a better SIOP can deliver
more efficient operations, supply chains,
and product development.
• Delinquent receivables. Lax invoicing
and receivables policies create cash
flow problems. Improved management
reduces the strain on working capital.
Frequent use of any of these methods
can improve management of working
capital. Frequent use of all four can
result in world-class working capital
management — but only 5 percent of
companies have achieved that status.

5. 5Numbers may not total 100% due to rounding.
11%38%33%1% 17%Economic factors
31%5% 17% 18%30%
Unreliable
customer-demand
forecasts
12%34%38%4% 12%Industry-related factors
29%16% 22% 12%20%Seasonality of business
Inability to transfer
transaction data to
business analytics
9%16%31%14% 29%
Challenges within executive control
12%19%46%7% 17%
Long supply-chain
lead times
10%16%31%12% 31%Delinquent receivables
7%20%8% 20% 45%Inaccurate SIOP
10%13%28%21% 29%Access to financing
7%15%30%14% 33%
Unfavorable
supplier contracts
8%14%32%16% 30%
Aging or obsolete
inventory
7%14%41%13% 26%
Expeditious
payables
7%14%31%13% 35%
Unfavorable
customer contracts
7%14%35%14% 31%
Lack of visibility/
transparency to working-
capital performance
9%11%39%12% 29%
Poor ERP system
drivers or adherence
8%8%21%60% 4%Other
7%13%28%29%24%
Poor credit
management/diligence
Issues beyond company control
= 1 Not difficult = 2 = 3 = 4 = 5 Extremely difficult
Exhibit 2: Difficulties affecting working capital management
Numbers may not total 100% due to rounding.

6. Working capital management: A study of the
manufacturing and distribution industry
6 June 2016 Crowe Horwath LLP
Exhibit 3: Annual inventory turn rate
14%
28%
27%
11%
5%
13%
3%
3 turns or fewer
4-6 turns
7-12 turns
13-18 turns
19-24 turns
More than 24 turns
Don’t know
69% of executives report
they turn inventory
monthly at best
Improve inventory levels, improve sales
The faster a company can turn over its
inventory, the faster it frees up cash for
other purposes. But two-thirds of
companies turn their inventory monthly at
best, and 14 percent have three turns or
fewer (Exhibit 3).
Companies frequently fail to implement the following four best practices for working capital
although doing so could vastly improve an organization’s working capital management:
1. Formalizing collaboration with
suppliers: 15 percent “frequent”
vs. 23 percent “infrequent”
2. Building timely and detailed
dashboards of working capital
performance: 12 percent “frequent”
vs. 28 percent “infrequent”
3. Creating business analytics of
working-capital factors: 12 percent
“frequent” vs. 23 percent “infrequent”
4. Formally collaborating with
customers: 10 percent “frequent”
vs. 29 percent “infrequent”

7. 7Numbers may not total 100% due to rounding.
Exhibit 4: Factors responsible for obsolete inventory
17%Poor economy
27%
Poor scheduling
processes
15%
Poor production
processes
14%
Poor supplier-
management
processes
28%Volatile market factors
14%
Lack of visibility into
work-in-process
inventory levels
11%
Lack of
production visibility
8%
Lack of visibility
into finished-goods
inventory levels
7%Other
11%
No problem with obsolete
inventory or inventory
write-offs
12%
Poor logistics
processes
12%
Lack of visibility into
material and components
inventory levels
What’s more, 25.5 percent of a typical
company’s total inventory is more than
180 days old. This poses a major risk: The
longer inventory sits, the more likely those
goods are to become obsolete.
Not surprisingly, almost two-thirds of
companies hold obsolete inventory or
inventory write-offs worth 1 percent
or more of annual sales. And one in 10
companies holds obsolete inventory
worth 4 percent or more of annual sales.
Much of this obsolete inventory and
write-off damage is self-inflicted — it’s
the result of unsolved problems such
as poor scheduling, production, and
supplier management (Exhibit 4).
Much of obsolete
inventory and write-
off damage is the
result of unsolved
planning and
production problems.

8. Working capital management: A study of the
manufacturing and distribution industry
8 June 2016 Crowe Horwath LLP
“Manufacturers and distributors invest
significant cash into their inventories
— raw material and components,
work-in-process inventory, finished
goods — but often hold too much
inventory due to fears of unexpected
customer demand (buffer inventory)
or inefficient production and supplier
processes (overstock), or they hold the
wrong inventories,” says Kelly. “Improved
inventory management can reduce the
need for working capital, minimize obsolete
inventories, and even boost revenues.”
Indeed, three-quarters of executives
say that annual sales would increase if
they had the right inventories (Exhibit 5).
There’s a toolbox full of best practices
available to better manage inventories, but
no single technique is used by a majority
of companies, and 4 percent of firms
don’t use any of them (Exhibit 6). This is
surprising. Even techniques once embraced
only by companies using lean thinking for
improvement – pull systems, kanbans,
quick changeovers – are increasingly
common today. Other practices such as
lead-time indicators, reorder inventory
levels, supplier penalties, and rewards
are just manufacturing common sense.
Exhibit 5: Effect of right inventories on annual sales
75% of executives say that
annual sales would increase if
they had the right inventories.
No changeMore than
10% increase
Don’t know
1-5% increase
6-10% increase
44%
19%
7%
5%
26%

9. 9Numbers may not total 100% due to rounding.
Surprisingly, no single technique is used by a majority of companies, and 4 percent report
they don’t use any of them.
Exhibit 6: Inventory management practices
44%
Detailed inventory
analysis (plan for
every part)
41%
Segmented stock and
reorder inventory levels
35%
Vendor-managed or
-owned inventories
34%Lead-time indicators
45%
Lean material-
management techniques
(pull, flow, kanbans)
32%
Radio frequency identi-
fication (RFID) and comp-
uterized inventory tracking
31%
Production smoothing
and level loading
29%
Just-in-time or milk-run
supplier deliveries
20%
Periodic stock-keeping
unit (SKU) rationalization
and portfolio management
17%
Supplier penalties or
rewards for on-time
performance
31%
Quick changeover
of equipment
4%
No practices to
manage inventories
1%Other

10. Working capital management: A study of the
manufacturing and distribution industry
10 June 2016 Crowe Horwath LLP
Managing the cash-to-cash cycle
Companies generally balance their
incoming cash flow from customers with
cash going out to suppliers at about the
same rate (Exhibit 7).
This cycle accentuates the need to
optimize fluctuations and increases in
inventory requirements.
Accounts
receivable
Accounts
payable
30 days or less 14% 16%
31-60 days 52% 51%
61-90 days 25% 25%
91-120 days 6% 5%
121-150 days 1% 0%
151-180 days 1% 1%
181-365 days 0% 0%
More than 365 days 1% 1%
Exhibit 7: Average age of accounts
Accounts receivable
terms with customers
Accounts payable
terms with suppliers
Very advantageous for company 12% Very advantageous for company 11%
Advantageous for company 35% Advantageous for company 41%
No advantage for company
or customers
33%
No advantage for company
or suppliers
37%
Advantageous for customers 18% Advantageous for suppliers 9%
Very advantageous for customers 1% Very advantageous for suppliers 3%
Exhibit 8: Description of account terms
Many executives report that they hold
advantages in contract terms with both
customers (accounts receivables) and
suppliers (accounts payable) (Exhibit 8).
But companies could still do more to
improve their terms and cash positions,
evidenced by the 16.1 percent of accounts
receivable more than 180 days old.

11. 11Numbers may not total 100% due to rounding.
“Financial executives need to go beyond
the first layer of the reports they receive on
their receivables and payables to confirm
that balances and activity meet contract
terms and corporate expectations,” says
Doug Schrock, managing principal of
manufacturing and distribution services
at Crowe. “For example, we often see
companies exceeding their commitments to
suppliers, creating an unnecessary draw on
working capital.”
Manage and monitor capital expenditures
Most manufacturers and distributors
invested more than 2 percent of sales
in capital equipment over the past 12
months, and plan to do so again in the next
12 months. About a third of companies
invested 6 percent or more of sales in
capital equipment.
Capital expenditures represent a sizeable
component of working capital for industrial
organizations. Yet a majority of companies
earn a 20 percent or less return on invested
capital (ROIC) (Exhibit 9).
Exhibit 9: Return on invested capital
More than 30%
10-20%
21-30%
58%
18%
7%
16%
Less than 10%
76% of companies earn a
20 percent or less return on
invested capital.
The most common practices to manage accounts receivable are:
• Early detection and alerts of late payments: 56 percent
• Front-end credit review: 54 percent
• Responsive escalation process: 41 percent
• Accounts receivable segmentation analysis: 37 percent
• Stratified terms by customer type: 18 percent
• Use of outside collections-service providers: 16 percent
• Incremental penalties: 16 percent
• Enhanced post-mortem review: 16 percent

12. Working capital management: A study of the
manufacturing and distribution industry
12 June 2016 Crowe Horwath LLP
During the Great Recession, many
companies shelved their capital expenditure
plans. Even as the economy rebounded,
capital expenditure hesitation remained.
Younger manufacturing executives now may
be purchasing long-term assets for the first
times in their careers, and even seasoned
executives may be rusty in evaluating
capital expenditures. This is reflected in
the limited effort expended by most firms
in managing (Exhibit 10) and monitoring
(Exhibit 11) capital expenditures.
Exhibit 10: Practices to manage capital expenditures
33%
Project portfolio
segregation (such as
by risk or by need)
36%
Tracking all proposals and
capital expenditure projects
in a single portfolio
33%
Standardized capital
expenditure proposal
input data
48%
Standardized capital
project proposal process
46%
Capital-management team
or committee
24%
Capital expenditure
project-stage-gate
reviews
31%
Standardized capital
expenditure project
tracking measures
1%Other
22%
Standardized capital expend-
iture post-project tracking
metrics (such as ROIC)
No practices to manage
capital expenditures
3%

13. 13Numbers may not total 100% due to rounding.
Exhibit 11: Metrics to gauge effectiveness of capital expenditures
42%
34%
43%
53%
20%
33%
34%
4%
Return on assets (ROA)
Net present value (NPV)
ROIC
Payback period
Hurdle rates
Benefit-to-cost value
Internal rate of return (IRR)
No metrics to gauge
capital expenditure
effectiveness
Other 0%

14. Working capital management: A study of the
manufacturing and distribution industry
14 June 2016 Crowe Horwath LLP
Collaborate with supply-chain partners
to minimize working capital
Manufacturers typically work with a large
number of customers and suppliers and
have an opportunity to optimize working
capital by focusing on their core supply-
chain relationships:
• 37 percent of suppliers provide 80
percent of purchased materials
and components.
• 45 percent of customers account for 80
percent of product sales.
Yet only a small percentage of companies
takes full advantage of these opportunities
to better manage incoming and outgoing
inventories (Exhibit 12). Collaboration with
supply-chain partners via shared forecasts
(customers) and production schedules
(suppliers) improves inventory management.
Enhanced collaboration also can generate
other benefits, such as improved
capabilities (including knowledge, best
practices, and intellectual-property sharing),
and capacity (facility and resource sharing).
Exhibit 12: Level of inventory collaboration and coordination
= 1 Never = 2 = 3 = 4 = 5 Continuously
With suppliers 6% 11% 36% 35% 13%
With customers 10% 13% 41% 22% 14%

15. 15Numbers may not total 100% due to rounding.
A critical success factor in satisfying
customers is delivery performance,
and half of companies deliver to
their customers in two weeks or less
(from receipt of order to delivery).
“In the era of e-commerce, speed
is expected,” says Kelly. “This puts
tremendous pressure on the business,
often resulting in ill-advised downstream
practices, such as excessive inventories
and overproduction. An upstream
perspective — better demand forecasting
and collaboration with customers — can
reduce the pressure and minimize working
capital tied up in inventories. It also
helps to evaluate and understand which
customer sales drive the most business
success.” Although a dynamic, ongoing
assessment of market segmentation
in terms of products, lead times,
pricing, margin, and terms is critical,
even for basic measures, this type of
assessment rarely occurs (Exhibit 13).
Executives also must extend best practices
and analysis upstream through the supply
chain. Improved supplier performance
— speed, cost, and delivery — has a
direct impact on working capital. Only
by monitoring and evaluating suppliers
vs. performance criteria can vendors be
expected to improve (Exhibit 14).
Exhibit 13: Frequency of formal sales segmentation and analysis
= 1 Never = 2 = 3 = 4 = 5 Continuously
Product margin 3%3% 25% 41% 29%
Product sales 3% 6% 27% 36% 28%
Customer 3% 6% 29% 35% 27%
SKU 20% 15% 23% 20% 22%
Customer location 11% 17% 35% 24% 13%

16. Working capital management: A study of the
manufacturing and distribution industry
16 June 2016 Crowe Horwath LLP
Exhibit 14: Frequency of formal supplier evaluations
Never Annually or less frequently Semi-annually Quarterly Monthly or more frequently
Quality and reliability 2% 24% 28% 25% 22%
Delivery to schedule 3% 22% 26% 29% 20%
Total cost 3% 25% 26% 26% 20%
Service 3% 26% 24% 26% 20%
Specification
compliance
3% 29% 29% 20% 19%
Delivery lead time 3% 28% 24% 29% 16%
Regulatory compliance 9% 37% 24% 18% 12%
Upside and
downside flexibility
15% 34% 29% 14% 8%
Environmental
performance
21% 34% 22% 16% 7%
Ethics and governance 20% 37% 21% 16% 6%
Labor practices 25% 38% 16% 16% 5%

17. 17Numbers may not total 100% due to rounding.
Approximate title
Operations or manufacturing director or comparable 22%
Other senior-level executive or VP 18%
VP operations or comparable 14%
President or CEO 11%
Plant-level manager/leader 7%
CFO 7%
Chief Information Officer (CIO) 6%
VP finance or comparable 5%
Chief Operating Officer (COO) 4%
VP information technology or comparable 3%
Chief Marketing Officer (CMO) 2%
VP supply chain or comparable 1%
Chairman 1%
Other 0%
Improving
working capital
Improved working capital management
requires executive time and attention,
creation of a detailed strategy, and vigorous
implementation of best practices in
operations and across the supply chain.
The data and ability to optimize working
capital are available in every company,
and only require senior leadership’s
commitment to begin a journey toward
improved financial health.
Working capital study
methodology and
participants
The Working Capital Study was
conducted in February and March 2016
with participants including a panel of
manufacturing and distribution executives.
The study received 153 valid submissions.
Responses to the Working Capital Study
were received from a variety of executive
positions (titles), entities (public, private),
company sizes (revenues and employees),
and industries.

18. Working capital management: A study of the
manufacturing and distribution industry
18 June 2016 Crowe Horwath LLP
$51 million
to $100 million
$101 million
to $250 million
58%
$10 million
to $50 million
$251 million
to $500 million
$501 million
to $1 billion
$1 billion
to $5 billion
More than
$5 billion
26%
16%
15%
14%
14%
8%
7%
Approximate annual revenue
Approximate employees
50,001 to 100,000
Less than 100
501 to 1,000
10,001 to 50,000
More than
100,000
58%
101 to 500
5,001 to 10,000
1,001 to 5,000
29%
16%
14%
12%
8%
7%
5%
9%
Corporate structure
Private company
Public company
Private-equity-owned
company
5%
44%
51%

19. 19Numbers may not total 100% due to rounding.
Industries in which company participates
Machinery and industrial equipment 15%
Electrical and high tech 14%
Fabricated metal products 14%
Automotive 12%
Consumer packaged goods (except food, beverage, and tobacco) 11%
Construction materials 10%
Chemicals 9%
Food, beverage, and tobacco products 9%
Plastics and rubber 5%
Wholesale and distribution 5%
Life sciences 4%
Primary metals 3%
Textiles and apparel 3%
Wood and paper products 2%
Other 16%

20. crowehorwath.com/mfg
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This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance specific to your organization from qualified advisers in your jurisdiction.
© 2016 Crowe Horwath LLP, an independent member of Crowe Horwath International crowehorwath.com/disclosure MD-17000-002B
Learn more
Bart Kelly is a principal with
Crowe Horwath LLP and can be
reached at +1 404 442 1627 or
bart.kelly@crowehorwath.com.
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Manufacturing
and Distribution
Services Group
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