How to Optimize Your Supply Chain to Improve Cash Flow

Use EBITDA (earnings before interest, taxes, depreciation and amortization)

Manufacturers today face three significant organization-related challenges: maximizing profits, conserving cash flow and creating shareholder value. One way to solve these challenges, suggests consulting firm TMG-IMC, North America, is through the process of EBITDA (earnings before interest, taxes, depreciation and amortization) optimization. Citing statistics that show a company's supply chain performance and production performance have a 56% impact on cost of goods sold (COGS) and a 35% impact on sales, general and administration (SG&A) expenses, Sal Mistry, senior consultant, and Francisco Aguilera Iborra, president, offer the following strategies to enrich cash flow through EBITDA optimization:

  • Business Process Optimization.
    Reduce direct variable process costs by redesigning the information flow from sales to accounts receivable in order to decrease order management costs. Symptoms include high order management costs, high cost of capital and late payment of service fees, which negatively impact SG&A expenses.
  • Direct Effort Optimization.
    Decrease direct variable costs by increasing the value-added-to-nonvalue-added ratio by optimizing the wait, rework, travel, preparation (e.g., retooling) and administrative aspects of production labor. Symptoms include high production labor costs, high absenteeism, high inventory carrying costs, low quality, multiple shifts, overtime, poor customer service and poor cycle times, which negatively impact COGS.
  • Efficient Utilization of Tools and Non-CAPEX Equipment.
    Decrease direct variable costs by ensuring that the right number of tools are available and adequately utilized, cared for and stored. Symptoms include constant purchase of basic tools and carts, long wait times in production and unorganized stations and toolboxes, which negatively affect COGS.
  • ERP and Product Data/Lifecycle Management.
    Decrease divisional ERP/PDM/PLM software fixed costs by rationalizing all of the various ERP/PDM/PLM software in use. Symptoms include high recurring software costs and too many individual ERP/PDM/PLM providers, which negatively impact SG&A costs.
  • Indirect SG&A Optimization.
    Decrease direct variable headcount costs by deploying processes and procedures as well as organizational and software solutions. The symptom is high indirect-to-direct-labor ratio, which negatively impacts SG&A labor expenses.
  • Logistics Optimization.
    Decrease direct variable costs by focusing on how the item is packed, where it will be stored and the process necessary to break, and dispose of the packaging waste. Symptoms include high inbound packaging costs, disorganization, excessive process time in the receiving/staging area, high waste and low rack-space utilization, which negatively affect COGS.
  • Machine Optimization.
    Decrease direct and indirect variable costs by optimizing the use of each machine and its maintenance schedules. Symptoms include high maintenance costs, high machine downtime, high mechanic and service costs, and too many mechanics, which negatively affect both COGS and SG&A expenses.
  • Network Optimization/Industrial Footprint.
    Decrease fixed costs by reducing the number of redundant facilities while maintaining the current fulfillment and customer service levels by considering, among others, logistic, labor, regulatory, infrastructure and other costs related to the network. Symptoms include high rent and higher cost per unit, which negatively affect COGS and SG&A.
  • Obsolescence Cost Mitigation.
    Decrease direct variable costs by developing better forecasts, deploying proper inventory management processes and implementing/enforcing FIFO/LIFO principles. Symptoms include high obsolescence costs, high write-down costs and unusable year-end inventory, which negatively impact SG&A expenses.
  • Plant Layout Utilization.
    Decrease fixed costs by reducing the plant space needed for the same output. Symptoms include high rent costs and sub-optimal utilization of existing facility, which negatively affect COGS.
  • Product Management Optimization.
    Decrease indirect variable costs by improving product-use instructions. Symptoms include high warranty costs, customer rejections, failure rates in finished goods, high rejection in incoming inspections, high rework and high scrap rate, which negatively impact SG&A expenses.
  • Production Optimization.
    Decrease direct variable costs through cycle-time reduction by providing visibility into the flow of material and information through layout optimization, automation strategies and station/production area organization. Symptoms include high warehouse and raw material/WIP costs, high scrap rates, high WIP carrying costs, low productivity, low quality and poor cycle times, which negatively affect COGS.
  • Quality-Control Assessment of Production.
    Decrease indirect variable costs by minimizing failure rates and building early detection into the production process. Symptoms include high quality-control costs, customer rejections, high rework and high scrap rates, which negatively affect COGS.
  • Research and Product Development Optimization.
    Decrease indirect variable costs by reducing the need for engineering support staff and production line disruption during the production phase. Symptoms include dedicated engineering support costs, high scrap rates, production line disruption and rework, which negatively affect COGS.
  • Risk Management.
    Decrease indirect variable legal costs by assessing potential business risks. Symptoms include high legal costs and a high volume of litigious claims, which negatively affect SG&A expenses.
  • Safety Audits and Training and Insurance Spend Management.
    Decrease indirect variable costs by auditing the production area and offering training on safety/health-related issues that appear as a result of production work. Symptoms include high production labor overhead costs, high absenteeism, accidents/incidents and high insurance costs, which negatively affect COGS.
  • Spend Management.
    Decrease direct variable costs by evaluating existing assets to realize consumption cost savings. Symptoms include high utility costs and high telephone and Internet costs, which negatively affect both COGS and SG&A expenses.
  • Supplier Audit.
    Decrease indirect variable costs by ensuring material and information flows with the supplier are optimized in order to resolve failure and rejection rates. Symptoms include supplier quality issues, customer rejections, failure rates in finished goods, high rejection in incoming inspections, high scrap rates and rejections, which negatively affect COGS.
  • Supply Chain Management.
    Decrease direct variable costs by developing an optimal just-in-time/just-in-sequence structure by focusing on demand planning while taking into account risk. Symptoms include high finished goods warehouse costs and cluttered staging and yard areas, which negatively impact SG&A expenses.
  • Supply Chain Management Optimization.
    Decrease direct and indirect variable costs by focusing on financial, material and information flows in planning/scheduling, logistics and purchasing. Symptoms include high raw material costs, high inventory carrying costs, dusty racks, high waste, overworked treasury departments, unorganized plants and warehouses and year-end excess inventory, which negatively affect both COGS and SG&A expenses.
  • Transportation Management.
    Decrease direct variable costs by optimizing shipment lot sizes, consolidating shipments and improving freight terms. Symptoms include high inbound and outbound transportation costs and higher costs per unit, which negatively affect both COGS and SG&A expenses.

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