U.S. companies are doing a surprisingly good job of working around the problem of rising energy prices, but for Cabot Corp., a $2.6-billion specialty chemicals company, the issue is especially challenging. Its key business is carbon black, a material made from oil feedstock, and like most manufacturers, Cabot has no control over the global price for crude oil that is essential to operating its carbon black business, which represents two-thirds of the company's revenues.

Vice President and Treasurer Irene Sudac and her team faced the issue by developing a plan to reduce inventories of raw materials and finished product to lower working capital days and boost cash flow. Sudac was new to Cabot–she had been at the U.S. operations of Philips Electronics.With support of the carbon black general manager, Sudac established a global team (Cabot's revenues are three-quarters non-U.S.) to set global metrics and made each regional production unit accountable for reducing inventories. "We were able to lower absolute working capital days from 80, to 58 days," she says. Additionally, company-wide raw material inventories were reduced by 36%, a major savings when the raw material is oil, and finished product inventories were reduced by 17%. Combined, these initiatives freed up $61 million in cash flow, well above the target of $55 million originally set by Sudac and her team.

"The process we initiated is now a standard procedure for all Cabot businesses," says Sudac. Monthly global conference calls routinely include working capital issues on the agenda, and working capital data for each business unit is reported at monthly board meetings. "These changes helped to more clearly identify the cost of money associated with inventory," she says. "I know this initiative is sustainable as we continue to see additional decrease in average days of working capital. And, as the price of oil continues to climb, this can have a huge impact on the bottom line."

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