A recent article in the Supply Chain Management Review, a publication which never fails to deliver high quality content month after month, tackled the fact that, for better or worse, in this economy cash is king and you need to do everything you can to improve your working capital without hurting your suppliers. That’s why this was such a great article, it wasn’t the usual “reduce days sales/receivables outstanding and increase days payable outstanding” BS that doesn’t really help anyone. It was ten well thought out points of advice to help you tackle and analyze your supply chain and working capital situation and make good decisions on how to improve it.
The article noted that the first thing you have to do is get the organization working off of one set of numbers. Sales, operations, production, and procurement often work off their own sets of forecasts, padded to insure they are not penalized for late delivery. Adding excess inventory in every step of the chain can tie up a lot of cash needlessly. Also, while operations focusses on lead time, work order, surplus, quality, part, and finished good metrics, finance focusses on ledgers, forecasts, reserves, write-offs, debt, capital, and cash. The organization needs to focus on a common set of metrics and numbers that take into account the needs of both divisions and manage of those metrics and numbers together. Then, focus on each of the following points.
- Get Back to Basics
Understand the planning parameters and whether or not they reflect (the new) reality. Only then can you build true models and forecasts.
- Get the Data from the Source
The best way to find cash is to follow the cash trail and see where it is needlessly tied up. Create reports that monetize cash-critical decision points in key processes.
- Educate Finance on Operations
Tie operational metrics to financial metrics to help finance understand the cash-flow requirements and break down the organizational silos.
- Educate Operations on Finance
Tie financial performance to operational impacts to help operations understand the working capital restrictions and break down the organizational silos. Make sure operations understands how they contribute to RONA, ROIC, and ROCE.
- Benchmark Performance to Policies, Industries, the Fortune 500
Are you exceeding your standards? Your peer group’s standards? The standard for big industry at large? If not, you have room for improvement.
- Establish a Metric Hierarchy Focussed on Freeing Up Cash
For example, casual metrics such as early receipt of material value, quality discrepant material value, surplus material value, early purchase order to need date material value all directly influence the top level metric of days of inventory outstanding (DIO), which ties up cash and influences your top level metrics of RONA, ROIC, and ROCE as every day you hold inventory adds cost which decreases profit which decreases return. Understand your metric hierarchy and monitor the low-level metrics daily to identify little problems before they turn into big ones.
- Establish a “Cash Council” of Cross Functional Executives
Improving cash flow and working capital needs to be everyone’s responsibility.
- Aim High, and Re-Evaluate the Business Model
Creating a goal to reduce working capital requirements of the business by 30 percent may not be attainable by efficiency improvements alone. The business model may need to be evaluated and updated in areas such as customer contract type and terms, vendor management of inventory, outsourcing of business processes, portfolio re-alignment, divestitures or acquisitions, supply chain restructuring, and new partnership or joint venture agreements. And that’s good. A better business model may bring other improvements as well.
- Invest in Systems to Automate (Working Capital) Performance Reporting
Don’t waste time building reports … spend time evaluating and diving into reports, getting to root causes, and solving the issues.
- Review Cash Policies on a Periodic Basis
External business conditions and internal performance capabilities can change, which requires periodic review and update of key policies driving cash and working capital consumption.