The cash-to-cash cycle is moving back up the corporate agenda in the wake of public spending cuts, rising inflation and jittery financial markets. Nick Allen looks at how supply chain professionals can respond.
Findings from KPMG’s recent CFO Insights global survey of 300 senior finance executives in the retail, food, drink and consumer goods sectors indicated that chief financial officers identified cost of inputs and merchandise as the greatest threat to profitability, closely followed by discounting and other sales incentives. The report highlights senior finance executives’ focus on cost control as a high priority.
According to KPMG, companies are most likely to improve supply chain efficiency by taking incremental steps with new technology, inventory management and supplier consolidation. Cost cutting may improve the bottom line, but in turbulent times cash is all important.
If a commercial organisation is to be successful, those in senior management must not only consider the profit line but must also be fully aware of the dynamics of cash-flow in the business. As cash is the life-blood of the enterprise, turning cash invested in stock into cash again as quickly as possible is a critical factor in ensuring the profitability of the business and ultimately, its very survival depends upon it.
Those in retail will be fully aware of this issue. However, in recent years, visibility of the cash-to-cash cycle has been clouded by the complexity surrounding multi-channel retailing. Choice of channel and method of fulfilment has placed the consumer in a very powerful position, where smartphones and social web sites are used to exacting effect. For the retailer competing in this rapidly changing landscape, the task of keeping track of cost-to-serve and cash-to-cash cycles has been difficult, resulting in many retail organisations finding themselves in a position where they are holding too much inventory across disparate locations, with little understanding of the costs involved.
“Multiple types of fulfilment and multiple types of stock holding and all the complexity that brings typically increases the time from cash-to-cash,” says Craig Sears-Black, managing director, Manhattan Associates UK. “The big theme with our retail customers is: how do you optimise the supply chain for each type of customer to make sure you are not increasing the cash-to-cash cycle, just because a customer wants to order in a different way or you need to fulfil in a different way?”
Manhattan Associates has invested heavily in systems that support multi-channel operations. He says: “If you look at the changes over the past few years in customer expectations it’s all been about click-and-collect or delivery in the shortest possible time, at the lowest possible cost. How do you compete in that environment without dramatically increasing the stock you hold and therefore increasing the cash-to-cash cycle?”
Sears-Black believes it is all about how you streamline those processes to fulfil orders within the customer’s expectation without increasing stock holding significantly. “So what we are doing is deploying software that looks at your various different stock holdings and then selects the most appropriate point to fulfil an order from. And once you have the ability to do that ie, optimise the fulfilment of an order based on best or lowest cost fulfilment method then you can start to minimise your cash-to-cash cycle.”
Velocity of goods through the supply chain has a major impact on the cash-to-cash cycle and to achieve effective command of inventory in the chain technology must be deployed to best effect.
“The starting point for all this is to have visibility of your stock,” says Sears-Black. “So wherever your stock is located, whether it’s with a supplier, en-route inbound on a ship or on a plane or being trunked from a port to your DC, having visibility of the status of every single item within your supply chain is a critical first step. For retailers, that means having stock visibility at your retail outlets, as well as having visibility of stock in your various distribution centres and at every point in your supply chain.”
How far advanced are retailers in adopting this sort of approach? According to Sears-Black, very few have developed systems capable of taking on these new challenges. “This is only just starting”, he says.
With increasing supply chain complexity comes a need for systems that are easier to use. Antony Bourne, global industry director, supply chain, at IFS, believes there is a growing need for more intuitive IT systems.
Findings from a recent global study carried out by IDC on behalf of IFS suggests that less than a third of companies find their enterprise applications intuitive and easy to use. “If you take on a student from university they are familiar with using Web2.O, Facebook and Google. So we have built similar features into our applications,” he says.
The IDC study also indicated that 45 per cent of respondents expect changes to their business over the next 12-24 months and yet 44 per cent believe their enterprise applications have a negative impact on business agility.
Andrea Harris, consultant at Davies & Robson, says: “The priority for cost reduction is to improve the supply lead-time the quicker the lead-time the less stock has to be held simple. So, whether it is negotiation of supply terms with a subcontractor or introducing lean into the manufacturing environment the answer is in the upstream supply chain, not the warehouse or stock policy.”
According to Harris, the recession has forced companies to review and reduce their stock holding to release capital and retain cash for paying creditors, wages and the VAT bill. For a supply chain to operate efficiently with reduced inventory all processes and systems must be aligned to the end goal that of meeting a firm customer order, on time and in full. She says that to achieve this: “companies should embrace the disciplines of lean logistics to ensure effective data gathering and analysis, communication and information sharing, process standardisation and control, performance measurement and problem resolution.”
Harris asserts that “Metrics are vital for stock level setting; customer demand and supplier lead-time being the two critical factors in all stock level calculations.” She adds: “It is also important to draw the distinction between forecast or speculative demand and firm orders to calculate and account for risk.”
However, Harris believes that purposeful and efficient communications underpin the effectiveness of all activity. “It is essential to prevent any delay or omission of information to be shared between sales, customer service, procurement, production and logistics,” she says.
One cost-cutting trend that appears to be gathering momentum is the trimming back of supplier numbers as highlighted in KPMG’s CFO Insights report.
In November last year, support services and construction company Carillion, announced that it was cutting its supplier base from 25,000 companies to just 5,000. In February this year, Balfour Beatty’s construction services UK division set out its plans to reduce the number of suppliers it uses from 27,000 to 10,000. Initiatives along these lines are met with great enthusiasm in the City as expectations rise for significant cost savings. For Carillion the slimming of the supply base is part of a drive to save £140m a year by 2013.
Such radical rationalisation of the supply base sends shock waves down the supply chain, and maybe, to some extent, that is the intention. According to Carl Millington, director of utilities at Achilles: “Keener pricing on contracts is achieved through a combination of a desire on the part of the supplier to retain business and the opportunity to discount on larger scale contracts. A smaller supply base also allows for closer collaboration between supplier and buyer, with all the potential for efficiency gains this affords.”
Consolidating the supply base may deliver cost savings, but what does it do to a buying organisation’s exposure to supplier risk? Does increasing your dependency on a smaller group of suppliers work for or against your long-term aims?
“In many respects, it is easier to manage supply chain risk when you have a fewer number of suppliers,” says Millington. “A clear focus can be applied to a more refined list, risk analysis is easier to conduct and closer checks can be carried out to verify data on higher risk suppliers. Costs for managing a smaller supplier base should also be lower as there are fewer reviews and audits to conduct…However, a prerequisite for both managing supplier risk and rationalising a supplier base is to have access to accurate, clean data that reflects the current status of regular suppliers.”
Millington points out that for many corporates the large number of suppliers they have on their database may be misleading. “There can be significant numbers of duplicated records, with the same supplier being entered onto the database several times due to misspellings or inaccuracies in address details, etc. Cleansing a list to remove duplication, errors and one-time purchases is essential to understanding your supply base. It is quite common to see lists of suppliers come down by 50 per cent through this process,” he says.
“Equally important records need to be regularly checked and updated to ensure accuracy is maintained.”