The Lean Supply Chain
Order to Cash Cycle -- Show Me the Money!

Order to Cash Cycle -- Show Me the Money!

Much of the discussion for Lean and other continuous improvement programs tends to focus on the shop floor. When talking Lean in Supply Chain & Logistics Management, one area that needs to be carefully looked at is the “Order-To-Cash” (OTC or O2C) cycle, which is made up of a series of processes starting with a customer order and ending with the receipt and payment by the same customer.

Order cycle components to be considered (and typically controlled) by Supply Chain Management are order placement, processing, preparation and shipment. Both the length and variability of these components are critical and have a large impact on cycle and safety stock inventory (and the greater they are, the more waste in these processes.

It seems that more attention has been given to process improvement in the last two parts of the cycle (preparation and shipment), but we can’t ignore order placement and processing when considering process improvement either.

A white paper by the IT consulting firm Wipro (“Improving Order-To-Cash Cycle”), takes a more holistic approach to the OTC by looking at it from multiple views:

  • People/Organization Roles/responsibilities - Skill sets, Organization alignment
  • Policies & procedures Credit - Terms of trade, Escalation protocols
  • Technology Automation - Workflow, ERP, Data integrity
  • Culture Accountability - Cross—functional teamwork
  • Measures & controls Benchmarks – Service Level Agreements, Accuracy

While the Wipro white paper is focused on the telecom industry, many of the challenges sound familiar to any industry:

  • High number of orders with incomplete information (their experience shows that typically > 30% of orders received are either incomplete or carry incorrect information).
  • High percentage of non-standard orders leading to disparity among what the system and processes were designed to do vis-à-vis what now needs to be achieved.
  • High level of rework in the process.
  • High level of dependency on various internal functions and suppliers to drive the orders to completion.
  • System inability to easily adapt to in -- flight changes from the customers.
  • Ease of tracking progress of orders through various stages in the O2C lifecycle.

Their focus in this white paper was on a reduction of order backlog and overall cycle time of orders.

In terms of backlog reduction, they concluded that process improvement methodologies like Six Sigma and Lean can be used in areas of improving Cycle time (CT) and Right First Time (RFT).

In this telecom example, they were able to reduce the number of incomplete orders from 35% to 25% and to complete the order entry of clean orders (those with full information) within the same day. They also improved upstream data quality to reduce downstream impacts (clean vs. unclean orders).

In the end by using this methodology and tools described at the telecom client, they were able to reduce order backlog from 45% levels to less than 5% and cycle time from 70+ days to mid 20’s.

So it is clear that we need to leave “no stone unturned” when it comes to identifying and eliminating waste in all areas of our Supply Chain and Logistics function. The quicker the customer order gets to the shop floor or warehouse, the faster it’s shipped and the sooner we get paid...which is critical to the long term success of any business.

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