A recent white-paper by GT Nexus on Holistic Supply Chain Management had some decent tips for improving WCM (Working Capital Management) that, amazingly enough, didn’t focus on DPO extension at the expense of the struggling supplier. Because of this, SI is going to review some of the better tactics identified in the white-paper and recommend that you read it.
Remembering that the goal of working capital 101 is to improve the Cash Conversion Cycle (CCC), which is generally defined as DIO (Days Inventory Outstanding) + DSO (Days Sales Outstanding) – DPO (Days Payable Outstanding), there is more than one way to improve the CCC. You don’t have to increase DPO, you can decrease DIO or DSO.
Starting with DIO, the paper recommends to lower the amount of buffer stock needed to maintain customer service levels. While there is safety in safety stock, there is also cost in safety stock. Cost that is likely unnecessary when you consider that most companies have way more stock on hand then is needed when you add stock in transit, stock in production, and stock at other locations that could quickly be moved if necessary. As a result, a company needs less stock than it thinks it needs.
Moving on to DSO, the paper recommends to use a collaborative platform for shipment planning and execution. This allows the company to ensure that inventory doesn’t sit idle and is shipped as soon as sales come in and to make sure that the shipments reach the customer quickly to allow for faster invoicing, and subsequent payment.
It also has other recommendations to balance DIO and DSO, reduce COGS, and minimize errors, but the primary point is the important one — you don’t have to increase DPO to improve your CCC and WCM. Remember that.