Yes, it is possible to improve asset productivity without deteriorating business profitability, but this requires fine strategic trade-off, particularly through “Make-or-Buy” decisions and Working Capital Requirement (WCR) management.

Here are the mechanisms and nuances identified in the sources:

1. The relationship between asset productivity and profitability

Financial performance, measured by return on capital employed (ROCE), is the product of two ratios:

• Asset productivity (or Assets Turnover – ATO): Revenues / Capital Employed.
• Commercial profitability: (ROS): EBIT / Revenues.

Mathematically, to improve ROCE, a company may seek to increase its assets turnover (producing more revenue with less capital).

2. The lever of outsourcing (Make-or-Buy)

Outsourcing is the most direct method to improve asset productivity.

• Reduction of capital employed: By entrusting production to a subcontractor, the company avoids investments in machinery (Capex) and reduces its working capital (accounts payable is mechanically up, which reduces the capital employed).
• Impact on the commercial margin:
  • Ideal scenario: If the supplier is more efficient and sells the service at a price below the company’s internal cost, commercial profitability is preserved or even improved.
  • Risk of deterioration: If the supplier sells at a price higher than the internal cost, the company improves the productivity of its assets (less capital) but deteriorates its commercial margin (EBIT/Revenue). It is then necessary to calculate whether the capital saving compensates for the loss of margin.

3. Examples of Asset Optimization Strategies

The case of Coca-Cola (The “49 Solution”) Coca-Cola illustrated this strategy in the 1980s by outsourcing its capital-intensive bottling activity (factories, trucks).

• By selling its factories to separate entities (such as Coca-Cola Enterprises) in which it only held a minority stake (49%), Coca-Cola took these heavy assets off its balance sheet.
• This has mechanically improved the parent company’s asset turnover and ROCE, while maintaining a high commercial profitability thanks to the sale of the concentrate (syrup). However, this strategy ended up distancing the brand from its customers, leading to the takeover of bottlers in 2010 to regain operational control.

The risk of “forced outsourcing” (Boeing) An excessive search for asset productivity can hurt long-term value. The case of Boeing and its subcontractor Spirit Aerosystems shows the dangers of a purely financial logic.

• By outsourcing to optimize ROCE and reduce capital investment, the company can lose control over quality and safety.
• Coordination costs and operational risks (such as quality defects) can ultimately destroy business and reputational value, negating asset productivity gains.

4. Optimization of WCR

Another way to improve asset productivity without affecting the margin is to reduce the Working Capital Requirement (inventories, trade receivables).

• Reducing inventory (e.g. by half) frees up invested capital without reducing the selling price or increasing direct operating costs. This generates an immediate economic value equivalent to a significant increase in operating profit. Walmart, by reducing its inventory from 2.5 months to 1.5 months of purchases, freed up the funds to finance its international growth.

On the other hand, it is important to ensure that the risk of exploitation is controlled in order to avoid, for example, stock-outs that would destroy the advantage thus created.

In summary, improving asset productivity without deteriorating margin is possible if the company manages to reduce its capital employed (via outsourcing or working capital management) while keeping its procurement costs competitive. However, taking this logic to the extreme carries major operational risks.