Cash and the Supply Chain

Feb. 4, 2009
Money management is the life blood of the supply chain

Shortages of cash, reduction in labor, and breakdowns of entire industries send a clear message to leadership: cash flow reigns supreme, and supply chain is its humble servant. But it is not a typical master-servant relationship. Cash flow and the supply chain are more like twin souls -- tightly linked, and destined to sink or swim together.

Slashing pricings in order to compete is a common trend today in many industries. But if a company lowers prices -- and thus margins -- to increase or maintain sales, without adjusting and leaning the both the cash and physical processes that are essential to the supply chain, it may be living on borrowed time. The order to cash cycle becomes critical, and must be shortened to offset the decrease in margin.

And yet, overages in sales can actually reduce margin if production slips in China and goods need to be expedited in order to meet a customer's service level agreements. We all know freight can literally destroy all margin. With the increased pressure on supply chain efficiency, operations must align in lock-steup with finance to understand the implications of short and long term risk, allowing supply chain to do what it does best -- serve to increase cash flow.

New Opportunities with Your Suppliers

Globally, suppliers are urgently looking for new sources of income. his is a manufacturer's golden opportunity to form favorable new relationships with suppliers that have not been available before. These relationships can create a new competitive advantage, by providing new services and options to the manufacturer. If a manufacturer can literally prevent smaller suppliers from going out of business, there is new opportunity for loyalty and win-win relationships that can withstand the test of time. Conversely, current market conditions can benefit resourceful companies who can find new ways to offload excess inventory There can also be new opportunities for financing that create better options for both buyer and seller.

Focus on What You're Best At

Manufacturers with multiple facilities and disparate systems are wise to consider the short and long term implications of consolidation. However, consolidation offshore to take advantage of cheaper labor and materials should not be the obvious conclusion that some would believe. We have found that often when we analyze the true cost/benefit scenarios of moving or consolidating manufacturing, logistics, warehouses or distribution centers, we weigh variable what-if scenarios that include labor costs, product range, tooling, transport, storage, culture, and other factors that are not so obvious on the surface. Sometimes, "offshore" can be "off course."

It is important to remember that companies can more easily save money and improve throughput by reengineering traditional operational models. Two solutions that we commonly evaluate in order to facilitate the supply chain support for order to cash, are Shared Services (SS) and Business Process Outsourcing (BPO).

Shared Services can break through the bottlenecks of siloed systems by focusing the cenralized core compentencies within a company on specific activities. Shared services eliminate costs and better incorporate best practices, particularly when multiple operating companies are involved. Two common examples of this are centralized Accounts Receivable and Collections. Shared Services reduces duplication of effort while still allowing the individual business units to maintain controle over those areas that are better managed locally. Therefore, a key consideration when moving to Shared Services is to ensure that the centralized team is communicating any critical data back to the business units. For example, a credit and collections shared services center must have the tools to notify the each units sales and operations of trends within their distinct customer groups.

Business Process Outsourcing (BPO) is a shared service that is outsourced. This option is particularly attractive when downsizing, needing to do more with less, or when there is a need to "go back to basics" and focus more intensively on business core competency.

On-Demand BPO, which can include management of both daily operations and hosted software, involves a company only paying for fees when services are completed, with a pay-as-you-go model, also known as software as a service (SaaS).

As always it is critical to fully consider the effects on the Order to Cash cycle, and explore all areas of risk prior to implementation.

On Time Shipments

In today's economy, on time shipments and reduced shipping costs are more essential than ever, and involve a collaborative effort between all trading partners. This collaboration not only delivers an extremely positive benefit to the order to cash cysle, but more and more is demanded by customers for VMI and JIT in their service level agreements. Vendor managed inventory (VMI), DTS (Direct to Store) and just-in-time (JIT) production are common examples of ways to rightsize inventory and improve planning, which directly impacts order to cash. Taking the extra step of collaboratively working with trading partners to create win-win scenarios can result in great results.

Electronic Invoicing -- Getting to 100%

The method in which a company invoices has an enormous impact on cash liquidity. Invoicing has long been automated through methods such as EDI and electronic commerce. We find that customers typically reduce day sales outstanding (DSO) by three to eight days by using EDI (while at the same time reducing manual errors and rework). But many companies are not completely on EDI, and they don't see what this is costing them.

For example, if a $500M supplier does 94% of its business through EDI, and the remaining 6% is manual, the amount of money manually invoiced is $30,000,000 per year. If DSO on this paltry 6% of revenues can be reduced from 36 days DSO down to 33 days DSO (given industry average of 3-8 days), then attaining 100% electronic invoicing will result in $5.4M in additional cash flow per year.

Suppliers argue that their trading partners are not able to trade through EDI. In this scenario, it makes sense to explore lower cost workarounds that will enable a win-win benefit, such as eInvoicing or managed file transfer. These days, $5.4M per year in additional revenues is worth the effort involved in jointly exploring alternative electronic integration between manufacturer and supplier.

Reducing Order to Cash Proactively

One major area of efficiency improvement is supported by integrating data between external trading partners and internal systems. In short, it always pays to have a single point of truth.

Too often, electronic data between supplier and customer is not truly automated, because integration throughout the company and between systems are not automated. For example, a company that runs multiple instances of SAP or Oracle, or multiple accounting systems throughout its operating companies, may not have its systems integrated, resulting in extensive manual processes, which influences day sales outstanding (DSO).

A common result of lack of integration is that a supplier only becomes aware of an invoice discrepancy at the point of collections, which can be 30-45 days after invoice. Integrating electronic commerce and EDI with backend ERP systems can provide the visibility to capture and act upon this information proactively, and make adjustments as close to the original invoice date as possible. Best practice achieves an operationally-proactive level of automation, whereby there is automated and exception-based notification of invoicing errors before the invoice leaves the office.

Even in hard times, the financial and physical supply chain are interlinked and tightly dependent upon each other. What we always like to ask is, if you could gain the knowledge of one aspect of your supply chain that would dramatically impact your cash flow, what would that be? Finding the answer may be closer than you think.

Marlo Brooke is the president of Avatar Partners, a systems integration and software development company with solutions that help companies improve cash flows and manage cash throughout the supply chain process. Avatar Partners implements best-in-class solutions in electronic commerce, EDI to ERP midddleware, eInvoicing, receivables and payment reconciliation, order to cash, credit and collections, and cash management.

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