Category Archives: Finance

Supply Chain Challenges for 2009

Industry Week recently ran an article on the “top nine supply chain challenges for 2009”. Some were dead on. Some less so. But it got me thinking … what were the obvious challenges for 2009, and what were the challenges that were most likely to be overlooked.

The obvious challenges are getting their fair share of press.

  • Risk Mitigation
    Between risk of supplier financial failure; the volatility in the energy, commodity, and global financial markets; and the unpredictable nature of economic recoveries, every organization will have their hands full with risk mitigation this year.
  • Working Capital
    In a very short time-span, we’ve gone from a credit glut to a credit crunch, and chances are, unless you are among the small minority with flush bank accounts, you’re constantly facing working capital challenges.
  • Shorter Supply Chains
    Since you can no longer afford inventory, you have to move to a demand-driven pull-based model which requires a shorter supply chain to pull-off.
  • Renewed Focus on Safety
    After all of the recent salmonella, melamine, and lead-paint scares, there is a renewed focus on safety around the globe. You need to make sure your safety procedures and independent safety tests are in order, or risk massive fines and lawsuits.
  • Heightened Regulatory Compliance
    In response to the recent consumer product safety fiascos, many countries are stepping up import and export related requirements and introducing new documentary and testing procedures. Are you ready?

The most-likely-to-be-overlooked challenges, less so. But they’re just as important.

  • Technology Upgrades
    You have to do more with less, but your current, aging, software and hardware infrastructure won’t support it. You need new best-of-breed sourcing, procurement, trade, visibility, and analytic solutions as well as a new green infrastructure to run them. That costs money. And even though you can state case-study after case-study and customer success after customer success demonstrating the 2x to 5x ROI the upgrades will deliver, you’ll have trouble navigating the ridiculous obstacle course that the cost-focussed savings-blind CFO will force you through.
  • Sustainability
    Recession or not, the sustainability advocates are not going away. And neither is Generation Y. Since you have to redesign your supply chain anyway, you might as well make sustainability a core requirement.
  • Near Country Sourcing
    Shortening your supply chain is a good start, but you really need to find ways to take advantage of supply sources in your local geography if you truly want to win in the long term. LCCS regions come-and-go, but your neighbors will always be your neighbors. Find mutual opportunities for success and stick around for the long term.
  • Procurement Outsourcing
    Every procurement organization has functions and categories it does well, and functions and categories it does not. It needs to get a handle on the latter, figure out what needs to be done, and then outsource those functions and categories to a professional outsourcing firm that has the expertise to do those functions and categories well.
  • The Path to Procurement Mastery
    If you’ve been keeping up to date with the Hackett and Accenture research, not only do leaders do things different, but they structure their organizations different. In addition to adopting new technologies, methodologies, and supply chain structures, to truly overcome the supply chain challenges of 2009, you’ll have to restructure your organization and intersecting business processes as well. Change management is always a challenge.

Anti-Trends from the 21st Century Supply Chain

Kinaxis on Response Management, on its 21st Century Supply Chain blog, recently published it’s “anti-trends for the down economy”.

  • Procurement practices will become more adversarial in 2009
    as cash-strapped buyers try to force suppliers to accept longer payment terms (instead of adopting good supply chain finance)
  • Integrated Business Planning will remain a wish
    due to a lack of incentives for Finance and Supply Chain to cross the divide
  • Western brand owners will lose market share
    as Asia emerges from the global slump sooner than the west, Asian contract manufacturers will establish their own brands to beef up production

These are certainly well thought. I urge you to read the original post in full.

Be Smart About Working Capital

Now that we’re in a credit crunch, articles are cropping up everywhere with “ideas” on how to win more working capital. Some are good, some are not-so-good, and some are downright dangerous. To make sure you know which method falls into which category, I’ve decided to collect the most common “ideas” into one place and categorize them for you, so you don’t have to worry about selecting the wrong method and jeopardizing what might be an already hazardous cash-flow situation.

The Good

  • Cash-Flow Forecasting
    Identify the periods where you will need cash well before they happen so that you can dialogue with your customers, suppliers, and bankers to get you through those periods of cash-negativity.
  • Move to More Sustainable Product Lines
    Make sure that even if you’re in trouble now and have to “weather the storm” for the next few months, you’ll be in a state of financial health to take advantage of the opportunity when the market comes back — because history will compete and it will come back strong when it does.
  • Customer Relationship Management
    Understand your customers’ cash-flow situations, when they can pay, and how this will affect you. If they can’t pay on time, and you need cash, you need to know in advance so that you can arrange to borrow against, or sell, the payable. If they can’t pay on time, and you can wait an extra 30 days, agree to treat it as a “cash loan” and charge a fair interest premium. It will save your customer money while improving your future cash situation.
  • Inventory Optimization
    Inventory costs you overhead. Up to 30% or 35% of the product value. Streamline your supply chain and take out as much inventory as you can. It will improve your cash flow by reducing cost and improve your cash flow by reducing the amount of working capital tied up in inventory.

The Bad

  • Identify Cash-Thirsty Areas
    Knowing where you need cash isn’t good enough. You need to know why. If it’s a failing operation or product lines, you need to axe it and refocus on more profitable operations or product lines.
  • Focus on the Biggest Projects First
    This might sound good in theory, but the biggest projects might not yield the largest cash savings opportunities. If it’s a people intensive project, you can’t just cut people and expect to reduce cash-flow. In the short term, with legal costs and severance pay, you’ll increase cash-flow. Then, when you need to hire them back, you’ll have recruiting costs, HR costs, and ramp-up costs. Sometimes the smaller projects, such as replacing a telecommunications infrastructure when you might be able to save money just be renegotiating a new support agreement with a lower-cost service provider, might have larger savings opportunities.
  • Shift Inventory to Suppliers
    While VMI is good if done right and implemented up-front (so that products are not produced until needed), forcing your suppliers to hold your excess inventory (without warning) is bad as your suppliers will be counting on your payment to pay their raw material suppliers and payroll, which could worsen their financial situation to the point of bankruptcy.
  • Factoring as your Main Financing Strategy

    Although factoring sometimes makes sense if you can get a good deal and it will cost you significantly less than a loan, relying on it as your primary fall-back strategy is problematic, especially if a number of your suppliers all of a sudden get their credit worthiness downgraded.

The Ugly

  • Extending Days Payable Outstanding Across the Board
    If a strategic supplier is hurting, and you’re its largest customer, this might force it into bankruptcy. What’s that going to do to your already ailing cash flow when you have to rapidly switch to a higher cost supplier and expedite shipments?
  • Use a Debt Collection Agency
    Nothing improves supplier relations like a third party collection agency that will call your supplier everyday and threaten to sue its deadbeat ass off. Just don’t do it.

An Update on the Kiva Micro-Finance Experiment

Last September, I introduced you to Kiva, the world’s first person-to-person micro-lending initiative in a post where I posed the question Can Micro-Finance Make a Macro-Difference? after being referred to the site by a fellow hoser.

In an attempt to answer that question, I decided to conduct an experiment. Since last July, I have been making two loans a month under the hypothesis that if it works, after a year I will have enough capital in the Kiva system to help a new person every month as previous micro-loans get re-payed. To date, the doctor has made fourteen $25 Kiva micro-loans (which get bundled with other micro-loans to fund loans to individuals and groups through Kiva’s micro-finance partners):

Individual Institution Total Loan Loan Funded Disbursed Repayment Term Repaid to Date*
Gulchehra Rahimova LLC MLO Humo and Partners 1,175 June 28, 2008 July 12, 2008 12 months 33%
Din Ly CREDIT (World Relief) 250 June 28, 2008 July 12, 2008 18 months 22%
Araba Awotwe Christian Rural Aid Network (CRAN) 350 August 14, 2008 August 28, 2008 7 months 43%
Serigne Cisse UIMCEC (Christian Children’s Fund) 975 August 15, 2008 August 29, 2008 12 months 25%
Mavluda Tosheva LLC MLO Humo and Partners 450 September 1, 2008 September 15, 2008 12 months 17%
Mario Aguilar Fundacion Paraguaya 475 September 1, 2008 September 15, 2008 11 months 18%
Irene Microfinanzas PRISMA 1,200 October 11, 2008 October 25, 2008 6 months 17%
Sokhna Sene UIMCEC (Christian Children’s Fund) 300 November 1, 2008 November 15, 2008 12 months 0%
Essoneya Tchindo WAGES 300 November 1, 2008 November 15, 2008 12 months 0%
Guillermo Microfinanzas PRISMA 325 November 1, 2008 November 15, 2008 10 months 0%
Olinda Microfinanzas PRISMA 325 November 27, 2008 October 31, 2008 6 months 0%
Sron Chea Group AMK 200 November 27, 2008 October 28, 2008 4 months 0%
Kayi Lawson Microfund Togo 1,175 January 2, 2009 November 17, 2008 18 months 0%
Abdulhokim Azimov LLC MLO Humo and Partners 600 January 3, 2009 January 17, 2009 10 months 0%
Averages 508 11 months

The interim verdict? All loans over 3 months old have had partial repayments, and the partial repayments appear to be more-or-less on track with respect to the requested repayment term. With an average requested repayment term of 11 months, repayments starting an average of 3 months after disbursement for most loans, and the very low default rates common to most of Kiva’s partners (the global average default rate is less than 3%), this indicates that one should expect, on average, 5% of all loans three months or older to be repaid on a monthly basis. This indicates that once I reach a point where I have over $500 worth of loans that have been distributed for more than three months, I should expect it to be the case that the monthly repayments are sufficient to cover the minimum micro-loan of $25 to a new individual or group. As I am loaning at a rate of $50 a month, this indicates that I should be able to start making new loans from partial repayments in month 14, which is close to my original expectation of being able to make new loans from repayments on previous investments after 12 months.

Conclusion? Still too early for the final word, but it still appears to work great. The site continues to disclaim (in the footer of every page) that lending to the working poor through Kiva involves risk of principal loss, but so does investing in the stock market and mortgage funds, but if you had invested in Kiva last year, unlike a lot of people, you’d still have your principal this year and the satisfaction of knowing you made someone’s life better.

Thus, I would still encourage you, if you’re still lucky enough to have any discretionary funds, to take part of them and try lending through the Kiva platform. Considering that you can start for $25, or the cost of one good bottle of wine (at the liquor store and not your local 300% mark-up restaurant), it’s an endeavor that the vast majority of us should be able to afford. And if even half of the 1.2B people in the developed world made even one loan a year, think of the sustainable difference it could make. That’s something worth aiming for. And if you do lend, remember to tell them that jeff <at> hosernews <dot> ca sent you (because one should give credit where credit is due). (And if you’re a Nova Scotian, you can even consider joining his team.)

And remember, there is a supply chain lesson here for all of us. If a good supplier is in trouble in these hard financial times, key customers can band together to keep it financially solvent until times improve through faster payments, guaranteed orders, and low-interest loans. And, in addition to the good feeling these customers will get from knowing they did right, they can also secure long-term capacity at a strategic supplier. Let’s face it — most business people want to do the right thing when given the choice, and many will be quite happy to sign a long term contract or guarantee if you bail them out. This means that if you stick by a good supplier when it’s having a bad day, it’ll stick by you through thick and thin.

*As of January 14, 2009

Getting the CFO on the Side of Supply Chain

A recent article in i2’s Supply Chain Leader on “linking the CFO to supply chain execution” made a great point when it notes that a company needs to have a good understanding of its total costs and sources of value to align business strategy with the supply chain. It made an even better point when it noted that sometimes the best person to help you do this is the CFO, whose skill set is a competitive asset in its own right. After all, who else in the organization is as focused on reducing cash-to-cash cycle times, achieving profitable growth, delivering predictable profit margins, and reducing the company’s risk profile?

So how do you get the CFO on your side? Take some tips from the i2 article and explain to the CFO how good supply management:

  • Reduces Cash-to-Cash Cycle Times
    Through the perfect orders and accurate purchase orders that result from properly implemented and utilized e-Procurement systems, companies can optimize purchases and eliminate overpayments through the invoice matching capabilities that are built into leading best-of-breed systems.
  • Reduces the Company’s Risk Profile
    Effectively optimizing total landed cost, despite global supply chain uncertainties, helps in the management of corporate budgets and gross margin erosions. Without good supply management, companies will frequently consider the lower unit costs in choosing global suppliers and fail to consider the uncertainties inherent in global supply chains. Several factors impact the total landed cost, including:

    • elevated transportation costs
    • longer lead-times that increase in-transit inventory
    • lost business due to customs delays or unexpected demand surges
    • increased inventory holding costs
  • Achieves Profitable Growth
    Good supply management systems not only measure and model cost reductions, but also track the KPIs necessary to quantify the impact on revenue.
  • Delivers Predictable Revenue
    Supply management helps to deliver predictable revenue and profits on a continuous basis as it utilizes systems that maintain accurate future supply and demand information and make it available on a timely basis.