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Freeing Up Cash In The Supply Chain White Paper


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Freeing Up Cash In The Supply Chain White Paper

  1. 1. Supply Chain Consultancy White PaperSupply Chain Consultancy Unlocking cash in the supply chain A corporate focus on cash is placing the it takes from payment of outgoings to receipt supply chain centre stage. Martin Arrand, of payment from the customer. Often the Managing Consultant for Unipart Expert biggest element is right in the middle of this Practices, highlights the key, fast-track ways cycle: the period when inventory sits on the to freeing up cash in the supply chain. shelf waiting to be sold. And this is where the cash-aware supply chain manager can deliver With the UK economy remaining in troubled the results the finance director is looking for. waters and business loans still hard to come by, improving cash-flow continues to be a top Releasing value from obsolete stock priority for most companies. ‘Cash is king’ is Step one in generating positive cash-flow the clarion call of the finance director and is to release value from obsolete stock. As it’s the supply chain managers in the front these products will have been written off the line that are expected to deliver. With the balance sheet, their sale will not only bring exception of Finance, no other part of the in cash but will also contribute to profit. organisation has such a large opportunity to Depending on the industry, there are various influence cash-flow as the supply chain. To put ways of doing this, but specialist traders it another way, cash-flow is a good indicator operate in most sectors buying obsolete stock of supply chain effectiveness. An effective in bulk. supply chain will tend to generate good cash- flow, whereas an ineffective supply chain will In sectors where the rate of product Of course, cash is compromise it. innovation is high and product life-cycles are short, stock often has little market value by not the same as Of course, cash is not the same as profit. the time it is completely depreciated. But profit. However, it However, it is the life-blood of a trading the residual book value on a product that business. Even profitable companies go under is becoming obsolete will make a marked- is the life-blood of a if they run out of cash. down sale look unprofitable. Cash generation trading business. Even from end-of-life product can be increased Many measures that improve productivity and in the longer term by implementing a more profitable companies profit are cash-negative in the short term, aggressive write-down policy, albeit at the cost because they require investment. The key to of a one-time P&L hit. go under if they run generating cash is to look at what accountants out of cash. call the ‘cash conversion cycle’. This is the time 1 of 3
  2. 2. Supply Chain Consultancy White Paper Small and frequent replenishment If there are any quick wins in inventory reduction then they involve supplier minimum order quantities (MOQ) and your own target order quantities. There are two main reasons for supplier MOQs - economic production runs and volume discount. In the first case, economic production runs are often unscientifically set or exist for historical reasons. In a competitive market, MOQs present a great opportunity for negotiation, and if the supplier is experiencing falling volumes then running more but smaller batches won’t affect his ability to supply. It is advisable to target a 50% reduction in MOQs across the board. However, it may be more rewarding to move beyond simply ‘beating up the supplier’. By taking a more collaborative approach, an open discussion may reveal opportunities that had not been previously explored. For example, sharing forecasts and being more open with plans for new products, product deletions and manufacturing plans may enable the supplier to respond more quickly and more flexibly. In the case of volume discounts, these are most often a problem where the procurement team are motivated by piece price reduction or gross margin. There is a place for volume discounts, especially where margins are tight and the market is very price-competitive, but this argument doesn’t extend much past top-selling items. At the middle or slower end of the range the cash benefit of a smaller order will outweigh the better piece price, and this is without taking into account the obsolescence risks of high stock holding. However, in order for a company to realise the benefits, they will need to look at the way their purchasing teams’ performance is measured. The use of gross margin as a performance measure is usually indicative of a ‘silo’ approach to the supply chain and rarely benefits the business as a whole. Even when unconstrained by suppliers, firms often order in large quantities. This is an obvious and easy opportunity for a quick win. If a normal order is two months worth of stock for a product, ordering for just one month could be a simple solution. The cost is another receiving line, another order to raise and another invoice to match, but it will improve the cash conversion cycle for the product. The greatest benefits will come from higher value products with larger order quantities. Making the most from stock optimisation Degrading customer service is not a great idea in competitive times, and reducing safety stock without damaging stock availability is more complex than the measures we have looked at so far. However, we have found that safety stock optimisation typically yields a 10 – 20 per cent reduction in stock, seen as a cash benefit within 12 months. The best results come with upgrading to a more capable planning system, but there are often ways to adjust existing systems or supplement them with, for example, an inventory bureau service. These solutions aim to be cash- flow positive within the first few months. However, ‘outsourcing’ the problem may not be the answer. It is worth taking a careful look at the processes first to ensure that the root causes of any current stock issues are fully understood. Yielding cash from reverse logistics cycles Less obviously, in some supply chains there are important reverse logistics cycles that can yield cash benefits if they can be speeded up. Where vendors allow a proportion of purchased material to be returned for cost (usually minus a handling fee), timely identification and despatch of excess-to-requirement material will free up cash, and ultimately yield bottom line benefit too in reduced obsolescence. Similar benefits can be had where vendor warranty credits for defective material are significant, which is usually the case in service operations. Improvements to warranty processes also increase warranty yields, which is P&L-positive. Leveraging commercial arrangements While commercial arrangements can only move cash management issues between parties in the supply chain, rather than reducing them, they remain an option. Changes in vendor payment terms or arrangements for consignment (i.e. vendor owned) stock may be a more palatable competitive measure for a supplier than being squeezed on piece price, but it is worth remembering that suppliers will have their own cash-flow issues too. In fact, changes in payment terms by suppliers and customers are often used as an early warning sign that a firm is in financial2 of 3
  3. 3. Supply Chain Consultancy White Paper trouble - so careful thought should be given to how this action might be interpreted by your trading partners. If it seems that suppliers pose no risk in this respect, think again: it was suppliers’ unwillingness to supply product to Woolworths, due to credit risk, that precipitated the failure of the once great retailer. Planning for strategic advantage As cash-flow usually appears on the management radar as an urgent problem, so far the options examined here have been short-term and, if not easy, are achievable quickly with the application of intelligence and a degree of effort. However, much larger prizes can be attained when planning at a more strategic level and on a long-term basis - radical improvements to the supply chain that can yield sustainable efficiency gains and cost savings. Really lean inventory can only be achieved by improving reliability and responsiveness of supply. But this requires effort and collaboration by all agents in the supply chain. Adopting true ‘pull’ processes requires a complete change of approach for most companies and takes time and effort to implement. However, the benefits in terms of both cash and flexibility can be truly impressive. This approach may not fit with the trading strategy of all organisations, but, where it does, it will lead to lower operating costs as well as a less cash-intensive business. There are other options, including the liquidation of capital assets, sale-and-leaseback arrangements on property or capital equipment, but CFOs are adept at spotting these opportunities. A call for cash can be a great opportunity for supply chain management to shine. Unipart Expert Practices As the consultancy arm of Unipart Logistics, Unipart Expert Practices (UEP) provides supply chain consulting services. UEP has particular areas of expertise in inventory management, stock integrity and supplier relationship management. UEP’s clients include ICI Paints, Vodafone, EDF Energy, Finlays Tea, James Walker, Honda, Honeywell Holts as well as internal clients within the Unipart Group. For more information contact: Unipart Expert Practices Unipart House, Garsington Road Cowley, Oxford OX4 2PG Tel: +44 (0) 1865 384690 or visit our website: of 3