‘Cash is king’ is an oft-spoken business adage; with the economic impact of the Coronavirus causing many businesses to scramble for cash, it has perhaps never been more apt. With a renewed focus on capital employed, how the supply chain is managed is critical for all businesses that want to survive and grow. How does your business source and use capital? How does the design and management of the supply chain impact on capital requirements? Answers to these questions are imperative and even apparently small operational improvements can make a significant impact, as a simple illustration demonstrates:
Inventory and Accounts Receivable improvements from ‘period 1’ to ‘period 2’ act as a source of capital to be re-deployed to increase the cash reserve and reduce debt.
Managing inventories is probably one of the least glamourous roles in your business; any stock-outs and everyone knows about it, any excess or obsolete stock and something of a ‘blame game’ may ensue. Before assessing how well inventory is managed, it is worth understanding what role inventory should play in your business and who is making decisions about its level.
Inventory is essentially a buffer between demand and supply; it allows orders to be fulfilled on the timescales required by customers if that timescale is shorter than it takes your business to source and/or make the final products sold. It can be, fundamentally, a bet on what your customers will order and when. The odds of this paying off are improved by any information that may be available about possible demand and a rigorous planning process that aligns forecasts and expectations across the business.
That said, inventory can be held in several forms: finished product ready for sale, sub-assemblies requiring final configuration or components requiring processing to end state and assembly. The concept of ‘postponement’ has been applied in several ways in many sectors; that is, gearing the supply chain to prepare finished items when true demands (customer orders) are known and thus reducing or eliminating the need to estimate or forecast demand for finished products. Forecasts by their nature are wrong and safety stocks must be held to account for this and to maintain service to customers; any steps that reduce reliance on forecasts provides a route to reducing inventories, particularly when a reasonable proportion of components can be shared across a range of possible finished items.
Postponement relies on an understanding of the best location for the ‘decoupling point’ in a supply chain. It may not be in your business; it could well be either forward or backward in the chain. This is the point at which it makes most operational and financial sense to place buffer inventory because demand can no longer be satisfied within acceptable timescales. It is at this point that forecasts are needed to decide on inventory levels.
Setting desirable inventory levels should be a structured, dynamic exercise and be based on critical analysis of available data and information. It requires a balancing of analysis and judgement; the core parameters should be set with buy-in and commitment from both commercial and operational leaders in the business and need to adapt with the needs of the business and market conditions.
This also means that key performance indicators and incentives should be set such that they support good planning and accountability to the operating parameters of the supply chain; it is no good having Production Managers continually working to reduce inventory whilst Sales Managers aim to hit demand targets that inventories cannot fulfil on time.
Few aspects of your business will operate in isolation; delivering customer orders and getting paid certainly do not. With every delivery comes a risk; were the products delivered what the customer expected? Did the quantities match those ordered? Were all items intact and labelled correctly? Was the delivery documentation accurate? Was the price on the invoice the price agreed with the customer?
Discrepancies cause delays: the effectiveness of distribution operations is fundamental to securing payment, and crucially, payment on agreed terms. This is not just about the physical delivery, it is also imperative that information about deliveries, including confirmed receipts from customers, is captured on a timely basis and that any apparent discrepancy or claim is resolved promptly to enable payments to be secured. The use of technology is important in supporting seamless data capture, but co-ordination of logistics and finance operations can make a significant difference to the level of outstanding account receivables due.
Extending supplier payment terms is often a knee-jerk response to cash flow improvement. Great caution needs to be exercised; collaboration and synchronisation are often untapped opportunities to dramatically reduce costs and working capital requirements. Supply chain resilience can also be significantly undermined by blinkered actions. A review of supplier performance, supply risk and the importance of the supplier to the business should be used to balance payment terms negotiations.
Assessing trends in the cash-to-cash cycle can indicate issues in supply chain operations; in-depth review by channel, customer and supplier will bring the transparency needed to target improvements. No aspect of a supply chain operation acts in isolation; for example, inventory level affects the amount of storage space required and handling costs, excess inventory needs more space and must be handled and managed, thus increasing costs. The quality of customer relationships has an impact on the information flow in the supply chain; more timely and accurate demand plans require less inventory in the form of safety stock to meet customer requirements.
Supply chain management is fundamentally about managing trade-offs; it is about designing and operating supply chains that balance service, cost, and capital to meet demand in a sustainable way. Capital efficiency can be greatly improved by:
· Managing product and service complexity to ensure it is genuinely value-adding
· Maintaining regular, systematic oversight of inventory processes and parameters to align policies to service expectations
· Taking an end-to-end supply chain perspective on cash flow and driving collaboration with customers and suppliers to swap inventory for information
For advice on how to get started on reducing your working capital, download our free Working Capital Optimisation Guide.
For a free, no obligation discussion on how to reduce your working capital, you can book a discovery call with one of our supply chain experts.
Calum Lewis is the founder of OP2MA, an innovative consultancy that focuses on transforming supply chains for sustainable growth.
Calum has extensive experience in leading businesses and delivering exceptional operational and financial performance. With the LEGO Group, he embedded best practice supply chain management to drive five-fold sales growth to £300m in the UK/Ireland market whilst supporting LEGO’s climb to No 1 UK Toy Supplier. More recently, with responsibility for planning and inventory management across EMEA, he enhanced the capability and effectiveness of managing supply to around 80 countries in the region.
Recognised for his clear insight on core issues and not being afraid to challenge prevailing thinking or ways of working, he is highly skilled at implementing innovative approaches to supply chain management. Calum believes it is now more critical than ever to combine creative and analytic thinking to make innovation really happen.
Creating OP2MA, he sees no reason small and medium-sized enterprises (SMEs) should not have access to the 'large corporate’ expertise and know-how that can transform supply chains to drive sustainable growth. The OP2MA team love working out what makes businesses tick, how they can improve, and applying pragmatic solutions. They believe that SMEs are critical for the economic prosperity and well-being of the communities in which they operate and are passionate about helping businesses grow and thrive.