Working Capital's "Alpha": How to unlock value through the Supply Chain

Article originally published on Investing.com, written by Camila Affonso and her team of consultants at Leggio Group, in partnership with columnist Carlos Heitor Campani.

In this article, developed in partnership with Camila Affonso, Partner at Leggio Group, and her team of specialized consultants, we'll explore how operational improvements in inventory, payment terms, and physical flows can free up cash, reduce the need for additional capital, and generate meaningful financial impact for companies. Let's dive in.

There's an important source of value creation present in nearly every company, yet it rarely takes center stage in strategic discussions: the efficiency with which capital moves through the supply chain, in other words, operating working capital.

Operating working capital refers to the resources needed to fund a company's operating cycle, that is, the period between the cash outlay to produce or acquire a good and the actual receipt of payment from its sale. During that interval, part of the company's resources sits tied up in inventory, goods in transit, and accounts receivable, while another part is financed through the payment terms obtained from suppliers.

In simplified terms, operating working capital can be expressed as:

Operating Working Capital = Inventory + Accounts Receivable – Accounts Payable

Each of these components has its own impact on cash. Inventory, for example, ties up capital until the products are sold. For accounts receivable, the longer the collection period, the greater the working capital requirement. The same concept applies to accounts payable, but in the opposite direction: the shorter the payment period to suppliers, the greater the working capital requirement.

As a result, inventory levels, agreed payment terms, cash efficiency, and demand predictability are among the factors that determine how much capital stays tied up throughout operations, meaning typical Supply Chain decisions have a direct impact on a company's cash generation.

In financial markets, one important concept is a given investment's alpha: the additional return generated relative to a market risk benchmark, adjusted for the risk of the investment being evaluated. A positive alpha means a strategy beat the market, even after accounting for its risk level. A negative alpha, in turn, indicates below-average performance. Alpha is traditionally associated with a manager's ability to generate value above the market.

In an operational context, we can apply this concept in an analogous way. Working capital's "alpha" represents the ability to create value not by increasing sales, but by using the capital deployed in operations more efficiently — improving financial performance as a result.

While many value-creation initiatives require new investment, capacity expansion, or acquisitions, optimizing working capital can increase cash generation using the exact same assets, simply deployed more efficiently, meaning the company produces more value with the same amount of capital invested. That makes working capital a potential lever for value creation.

From the same people who brought you "there's no such thing as a free lunch": there's also no such thing as a free resource tied up in operations. All capital tied up, whether in inventory, goods in transit, or accounts receivable, carries a cost. That cost can show up, for example, as an opportunity cost or as a financial cost (via interest paid). Whenever a company becomes more efficient in managing these areas without compromising service levels, cash is freed up immediately, and those resources can be redirected toward paying down debt, new investments, dividend distributions, or simply strengthening the cash position. In every case, this creates value for the business.

Consider, for example, a company with annual revenue of R$10 billion and an operating working capital requirement of R$2 billion. If supply chain management improvements reduce that requirement by 4%, approximately R$80 million is immediately freed up for the company's cash position. In practice, it's as if the company "received" R$80 million without raising debt, issuing shares, or selling assets, simply by becoming more efficient.

On top of that, this gain has a direct impact on Free Cash Flow (FCF), one of the main drivers of company value. That's precisely why working capital improvements tend to have an almost immediate effect on cash generation and, in turn, on company valuation.

But where, in practice, is this value actually created? The answer lies in the many decisions that make up supply chain management. This alpha is spread across nearly the entire supply chain. Contrary to what one might expect, it doesn't come from a single major initiative, but from the combination of numerous operational improvements that, together, reduce inventory, shorten the cash conversion cycle, and lower the amount of capital tied up in operations.

Each initiative delivers its own specific gain, from more accurate demand planning to better supplier integration and process optimization, but they all converge on the same outcome: freeing up cash and increasing the efficiency of invested capital.

At the same time, shortening the average collection period and negotiating more favorable terms with suppliers also help reduce the amount of capital required. While these initiatives involve areas like Sales and Finance, their effectiveness depends directly on the reliability and predictability the supply chain provides.

For many years, logistics was treated mainly as an operational function focused on cost control and service levels. Today, it's also increasingly recognized as an important lever for cash optimization and value creation. Investors and executives are paying closer attention to metrics like the Cash Conversion Cycle (CCC), Free Cash Flow (FCF), Return on Invested Capital (ROIC), and working capital requirements, with the same level of attention traditionally reserved for more common metrics like revenue growth, EBITDA, or net income.

Given all of this, companies with similar revenue can show very different levels of cash generation. The difference doesn't always lie in operating margin, it can lie in how quickly capital moves through the supply chain. The true "alpha" of working capital comes precisely from the connection between operations and finance. Every day shaved off the logistics cycle means less capital tied up, lower cost of capital, and greater capacity to invest, grow, and return value to shareholders.

In a high-interest-rate environment, capital allocation demands extra attention and there's growing pressure for cash generation, as capital becomes an increasingly scarce and costly resource. As a result, operational efficiency stops being just a competitive advantage and becomes a core value-creation strategy. Companies are increasingly recognizing that creating value doesn't necessarily depend only on selling or investing more, often, it depends on using the resources already deployed in operations more efficiently.

*Carlos Heitor Campani holds a PhD in Finance and serves as Academic Director of iluminus – Academia de Finanças, Partner at CHC Treinamento e Consultoria, and Researcher at the Cátedra Brasilprev em Previdência and at ENS – Escola de Negócios e Seguros (School of Business and Insurance).

*Camila Affonso is a Partner at Leggio Group, Director of the Infrastructure Department at FIESP, holds a Master's in Corporate Finance from the Université de Bordeaux, a Specialization in Finance from COPPEAD/UFRJ, and degrees in Production Engineering and Mathematics from UFRJ.

Link to the article published on Investing.com: https://br.investing.com/analysis/o-alpha-do-capital-de-giro-como-destravar-valor-com-a-cadeia-logistica-200478985