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Reducing Working Capital through Purchasing

Linderoth, Mattias LU (2012) MTT820 20121
Engineering Logistics
Abstract
Problem background:
In the beginning of 2011 the working capital levels rose drastically for companies operating in the polymer industry, as a result of macroeconomic factors and changes of supply market conditions. Suppliers were allocating capacity and uncertainty spread among buyers, which resulted in that large volumes were purchased in order to secure supply. Moreover, the suppliers were dictating the conditions, leading to non-favorable payment terms. For companies pursuing corporate strategies involving acquisitions, a large amount of capital is needed. Thus, initiatives for reducing working capital are likely to be prioritized. Working capital initiatives might be focused at purchasing activities, since these heavily impacts the... (More)
Problem background:
In the beginning of 2011 the working capital levels rose drastically for companies operating in the polymer industry, as a result of macroeconomic factors and changes of supply market conditions. Suppliers were allocating capacity and uncertainty spread among buyers, which resulted in that large volumes were purchased in order to secure supply. Moreover, the suppliers were dictating the conditions, leading to non-favorable payment terms. For companies pursuing corporate strategies involving acquisitions, a large amount of capital is needed. Thus, initiatives for reducing working capital are likely to be prioritized. Working capital initiatives might be focused at purchasing activities, since these heavily impacts the working capital performance.

Purpose:
The purpose of this study is to analyze how working capital can be reduced through purchasing initiatives.

Methodology:
The research started with a literature review in order to gain understanding of how purchasing was related to working capital. Then a case study was conducted, in which empirical data and theory resulted in that an analysis model was developed. The model was applied at the case company in order to analyze the impact of implementing possible purchasing initiatives.

Conclusions:
Working capital can be reduced by optimizing safety stock levels, ordering sizes of economic order quantity, benchmarking prices internally between two production sites and place orders jointly. Moreover, depending on the bargaining power over suppliers, additional working capital reductions can be obtained through extended credit days and reduced lead times. Finally, it is likely that working capital can be reduced from entering into logistical partnerships with suppliers. (Less)
Please use this url to cite or link to this publication:
author
Linderoth, Mattias LU
supervisor
organization
course
MTT820 20121
year
type
M1 - University Diploma
subject
other publication id
5737
language
English
id
3469707
date added to LUP
2013-02-15 14:49:58
date last changed
2013-02-15 14:49:58
@misc{3469707,
  abstract     = {Problem background:
In the beginning of 2011 the working capital levels rose drastically for companies operating in the polymer industry, as a result of macroeconomic factors and changes of supply market conditions. Suppliers were allocating capacity and uncertainty spread among buyers, which resulted in that large volumes were purchased in order to secure supply. Moreover, the suppliers were dictating the conditions, leading to non-favorable payment terms. For companies pursuing corporate strategies involving acquisitions, a large amount of capital is needed. Thus, initiatives for reducing working capital are likely to be prioritized. Working capital initiatives might be focused at purchasing activities, since these heavily impacts the working capital performance.

Purpose:
The purpose of this study is to analyze how working capital can be reduced through purchasing initiatives.

Methodology:
The research started with a literature review in order to gain understanding of how purchasing was related to working capital. Then a case study was conducted, in which empirical data and theory resulted in that an analysis model was developed. The model was applied at the case company in order to analyze the impact of implementing possible purchasing initiatives.

Conclusions:
Working capital can be reduced by optimizing safety stock levels, ordering sizes of economic order quantity, benchmarking prices internally between two production sites and place orders jointly. Moreover, depending on the bargaining power over suppliers, additional working capital reductions can be obtained through extended credit days and reduced lead times. Finally, it is likely that working capital can be reduced from entering into logistical partnerships with suppliers.},
  author       = {Linderoth, Mattias},
  language     = {eng},
  note         = {Student Paper},
  title        = {Reducing Working Capital through Purchasing},
  year         = {2012},
}