The cash conversion cycle: an empirical analysis of its impact on supply chain performance.
Past event — 8 January 2020
Kühne Logistics University
Grosser Grasbrook 17, 20457 Hamburg, Room EE Lecture 2
Prof. Maximiliano Udenio
Assistant Professor at the Research Centre for Operations Management
KU Leuven (Belgium)
The Cash Conversion Cycle (CCC) is a measure of the working capital of a firm. It's defined as the time in days taken by a firm to convert its investments in raw materials and inventory into revenue from sales. A lower CCC implies that a firm has a fast turnover, which implies profitability; it has been shown that CCC is negatively associated with profitability measures. Thus, firms typically attempt to keep CCC down by, for example, lowering inventory days and payment terms from customers, or extending payment terms to suppliers. However rational these strategies are, they ignore second order effects that can affect supply chain performance; indeed, a large CCC can help firms improve service levels, give greater flexibility to customers, and help strengthen supply chain relationships.
In this presentation, we investigate how the working capital management practice of a firm impacts its upstream and downstream supply chain partners. We use secondary empirical data from Factset and Compustat to construct a supply network comprised of over 25000 unique customer/supplier pairs for the period 2003-2019. We distinguish unique layers in the network based upon the distance of a firm to the customer; the majority of firms are concentrated within the first 4 layers, but we distinguish up to 14 distinct layers in the network. To measure the working capital management practice, we propose a Cash Conversion Distance (CCD) metric that identifies the degree with which a firm practices aggressive (or lax) working capital management. We show how a firm's profitability as well as that of its partners varies as a function of this measure and its `importance' in the network.
Maximiliano Udenio is an assistant professor at the research centre for operations management of the KU Leuven (Belgium). He obtained his PhD from the Eindhoven University of Technology. His current research interests are in using empirical data for measuring different aspects of inventory dynamics, and in several aspects of sustainability in supply chain management.
Further information about Prof. M. Udenio