Procurement Glossary
Capital commitment period: definition, calculation and optimization in Procurement
November 19, 2025
The capital commitment period is a key figure in Procurement that indicates how long capital is tied up in inventories and receivables. It has a significant influence on a company's liquidity and profitability. Find out below what capital commitment period means, how it is calculated and which optimization strategies are successful in procurement management.
Key Facts
- Measures the average period for which capital is tied up in inventories and receivables
- Calculated using inventory turnover rate and payment targets
- Direct impact on working capital and cash flow management
- Optimization through strategic inventory management and supplier management
- Sector-specific differences in typical capital commitment periods
Contents
Definition: Capital commitment period
The capital commitment period describes the period during which capital is tied up in various assets of a company before it is available again as cash and cash equivalents.
Basic components
The capital commitment period is made up of several sub-areas:
- Storage duration of raw materials and materials
- Production and manufacturing time
- Storage time of finished products
- Payment terms for customer receivables
Capital commitment period vs. turnover rate
While the capital commitment period indicates the time in days or months, the turnover rate describes how often the committed capital is turned over per year. Both key figures are inversely proportional to each other.
Importance in Procurement
In the purchasing process, the capital commitment period influences strategic decisions on requirements planning and warehouse optimization. An efficient procurement strategy aims to minimize capital commitment without jeopardizing security of supply.
Methods and procedures
Various approaches enable the systematic calculation and optimization of the capital commitment period in procurement management.
Calculation of the capital commitment period
The classic formula is: capital commitment period = (average stock × 365) / annual consumption. Payment targets and production times are also taken into account. A precise demand analysis forms the basis for reliable calculations.
ABC analysis for capital commitment
The categorization of material groups according to value share and turnover frequency enables differentiated optimization:
- A-items: High value, low stock levels
- B-articles: Medium value, moderate stocks
- C-articles: Low value, higher safety stocks
Just-in-time and lean principles
Modern procurement concepts reduce capital commitment through synchronized delivery. Call-off orders and flexible delivery agreements support this strategy while keeping costs under control.
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Important KPIs for the capital commitment period
Specific key figures enable the systematic measurement and management of capital commitment in the procurement area.
Stock turnover rate
This key figure indicates how often the stock is completely turned over per year. Calculation: annual consumption / average stock level. Higher values indicate more efficient capital commitment and better liquidity.
Days Sales Outstanding (DSO)
Measures the average time until payment is received for customer receivables. The formula is: (receivables × 365) / annual sales. Lower DSO values improve cash flow and reduce the overall capital commitment.
Working capital ratio
The ratio of current assets to current liabilities shows the liquidity situation. An optimal value is between 1.2 and 2.0. Return on investment analyses evaluate the efficiency of capital commitment in various business areas.
Risks, dependencies and countermeasures
Optimizing the capital commitment period entails various risks that can be minimized by taking appropriate measures.
Supply bottlenecks and stockouts
Low stock levels can lead to production downtime and loss of sales. Balanced security of supply requires safety stocks and alternative procurement sources. Regular risk analyses identify critical materials at an early stage.
Market volatility and price fluctuations
Fluctuating commodity prices can influence optimal order quantities and timing. Market observation and flexible contract design help to adapt to volatile markets:
- Price escalation clauses in supply contracts
- Diversified supplier base
- Strategic stockpiling during price lows
Technological dependencies
Digital systems for inventory optimization can fail or provide incorrect data. Redundant systems and manual control mechanisms ensure the continuity of materials management even in the event of technical faults.
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Practical example
A mechanical engineering company reduced its capital commitment period from 85 to 62 days through systematic optimization. The implementation of an ABC analysis identified high-value components with excessive stock levels. By switching to blanket orders and weekly call-offs for A-items, stock levels were reduced by 30%. At the same time, the company shortened payment terms with suppliers from 30 to 14 days by utilizing cash discounts.
- Savings of 1.2 million euros in tied-up capital
- 15% improvement in liquidity
- Reduction of storage costs by 25%
Current developments and effects
Digitalization and new technologies are fundamentally changing the approaches to optimizing the capital commitment period.
AI-supported inventory optimization
Artificial intelligence enables more precise forecasts and dynamic adjustments to stock levels. AI in Procurement analyses consumption patterns and external factors for optimized capital commitment. Machine learning algorithms continuously improve forecasting accuracy.
Supply Chain Visibility
Increased transparency in the supply chain reduces uncertainties and enables lower safety stocks. Supply chain visibility supports proactive management of capital commitment through real-time data and early warning systems.
Sustainability aspects
Environmental awareness and the circular economy influence warehousing strategies. Longer product life cycles and repairability can extend the capital commitment period, but offer sustainable value creation and risk minimization.
Conclusion
The capital commitment period is a decisive key figure for financial efficiency in Procurement. Through systematic analysis and targeted optimization measures, companies can improve their liquidity and reduce capital costs. Modern technologies and data-driven approaches open up new possibilities for more precise working capital management. A good balance between capital commitment and security of supply remains the key to sustainable success.
FAQ
What is the difference between capital commitment period and cash flow?
The capital commitment period measures the time until capital is released, while the cash flow reflects the actual cash flows. A short capital commitment period improves the operating cash flow, as capital becomes available again more quickly.
How does the capital commitment period influence the company valuation?
Lower capital commitment periods increase profitability and liquidity, which has a positive impact on company valuations. Investors rate efficient working capital management as an indicator of operational excellence and management quality.
What role does capital commitment play in supplier selection?
Suppliers with flexible delivery terms and short delivery times reduce the necessary capital commitment. Factors such as minimum order quantities, payment terms and delivery reliability have a significant impact on the overall capital commitment.
How does digitalization affect the capital commitment period?
Digital tools enable more precise demand forecasts and automated ordering processes, which optimizes capital commitment. ERP systems and IoT sensors provide real-time data for better inventory decisions and reduce excess stock.
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