The dynamics between working capital management and total productivity management

The theory of Total Productivity Management (TPMgmt) predicts that the breakeven, and thereby the profitability, of an organization is determined by the working capital (WC) consumption over a period. One of its inferences is that higher the ratio of consumed WC to the total tangible input utilized by an organization, the sooner the organization breaks even. Extrapolating this logic, the highest possible ratio of 1, which indicates all capital consumed being only WC, would lead to immediate profits the instance the first output is produced. This, of course, is only a theoretical possibility. In reality, firms try to manage their working capital levels actively, either conservatively or aggressively, and try to find the optimum level determined by the opposing forces that are embodied by the cash conversion cycle. This paper looks at the dynamics between working capital management (WCM) and TPMgmt and how the different factors that influence WCM also end up impacting organizational productivity as determined by TPMgmt. Importantly, a theoretical evaluation to reconcile the conceptual inferences of TPMgmt, such as the WC ratio of 1, that are seemingly inconsistent with the tenets of WCM is presented.