Cash Is King: How to Optimize Supply Chain Operations for Strong Cash Flow

Aug. 8, 2014
Managing supply chain and cash flow via technology investments should be a priority to maintain health and stability across your organization.

For companies of all sizes and across all industries, cash is not only crucial—it’s king. It sounds simple: In order to survive, businesses must ensure that payments aren’t going out faster than resources are coming in. According to a recent study, however, not all businesses are following that formula: companies that do monthly cash flow planning have an 80% survival rate—more than double the 36% survival rate for those only planning once a year. This discrepancy is partially because careful planning enables your company to build up a solid cash reserve, and that reserve can serve as a life vest when you experience poor supplier performance, forecast errors, transportation breakdowns, weather disruptions, or other unexpected obstacles.

And while cash is important for all businesses, cash flow management is especially vital for mid-market companies in today’s economic landscape. Because of their smaller size, mid-market companies are armed with a smaller financial war chest than their larger competitors, which means they have a reduced margin of error for the timing of inflows and outflows, a thinner cushion for tough financial situations, and a smaller investment pool (including less access to capital) for financing growth. As a result, it can take more effort and precision for mid-market companies to remain in a strong cash position.

Why Seek Out Supply Chain Efficiencies?

Supply chain processes are the backbone of any company’s cash flow. Unfortunately, your supply chain can fail for a laundry list of reasons. According to a recent National Center for the Middle Market report about resilient supply chains, most companies will face a supply chain crisis every four to five years. A crisis, in these instances, can easily cripple your business for weeks or even months, so facing one even every four to five years could be truly dangerous. Other common supply chain kinks include unavailable materials, changing government regulations, pricing pressures and natural disasters, and these obstacles also become increasingly more difficult to predict and prepare for as your supply chain gets more complex and global.

As discussed earlier, having a solid cash reserve can help you stay afloat during supply chain crises. But optimizing and automating supply chain processes can also help prevent some failures, which can alleviate those cash crunches in the first place. And that’s just one reason why properly managing supply chain and cash flow via technology investments should be a priority to maintain health and stability across any organization.

Investing in your supply chain can also be a growth avenue given the current economic landscape. Despite being a few years removed from the depths of the recent Great Recession, businesses still face a relatively slow-growth economic environment. In Deloitte’s most recent annual survey of mid-market executives, respondents acknowledged a “new realism” regarding economic growth, and the number of mid-market executives expecting moderate to robust economic growth has been steadily declining for several years.

This reality—which many are calling “the new normal”—has changed the way companies approach fundamental aspects of their business, such as cost structure, cash flow and growth plans. A mid-market report issued by Sutherland Global in 2012 showed that 85% of respondents claimed to be more disciplined in keeping a “lean cost structure, strong balance sheet, and optimum levels of cash and liquidity.” Optimizing your supply chain—through better inventory management, increased automation and improved compliance controls—is one of the first steps toward achieving this leaner business structure and driving focused growth.

Manage Cash by Managing Inventory

One key area where many companies have room for improvement is inventory management. If your inventory arrives early, it can weigh heavily on your available cash flow. Extra shelved inventory can lead to wasted warehouse space, devaluation of the product, partially full shipping penalties and even higher taxes.

For many years, American grocery giant Kraft Foods was plagued by inventory management problems. Although Kraft is, of course, not a mid-market company, their experience should prove illustrative for mid-market readers. Around 20% to 30% of the costs associated with any Kraft product were tied up in inventory as of a few years ago. For some products, inventory costs could represent up to 50% of the total. It should come as no surprise that better managing inventory was a large part of Kraft’s recent strategic cash flow initiative—an initiative that resulted in a 20% year-over-year increase in cash flow.

The improvements that led to Kraft’s cash flow success can easily be imitated by mid-market companies. First, they phased out low-revenue products with high-demand volatility. Swings in demand can result in large fluctuations in pricing and delivery times, which in turn can cause cash flow issues. For products that don’t significantly contribute to your company’s top line, this variability and risk aren’t worth your while.

Second, investing in software to determine the right quantities and locations for stock is another way to avoid inventory issues. Materials requirement planning software can help your company calculate an appropriate “safety stock number,” which represents the inventory needed to stay above standard demand rates. This software also features field functions that factor in item usage, lead time and the safety stock number so that an order is actually triggered when needed.

Of course, it’s important to note that the situation and resources at a large company like Kraft Foods are different than those at mid-market companies, and that some inventory issues are unique to a company’s size. For example, mid-market companies often suffer from a lack of influence: They don’t purchase in large enough volumes to be a vendor’s top priority, or they aren’t critical enough for customers to allow flexibility. This can make it tougher for mid-market companies to negotiate deliverables and pricing. They also often face a balancing act between small suppliers who need quick payments and large customers that are slow to pay—a position that inevitably impacts cash flow.

Mid-market companies do, however, enjoy some strategic advantages. Because of its sheer size, Kraft faced some obstacles that made its cash flow initiative more complicated. With 23 divisions, the company was unable to roll out a one-size-fits-all solution; instead, it was forced to create an entire cash flow team and run numerous workshops to ensure the initiative went smoothly. This is where mid-market companies actually have a hidden strength; because they have fewer management levels and departments, implementing these cash flow and supply chain solutions is a much simpler process.

New Technology Puts Efficiencies at Your Fingertips

Technology can help your company with more than just inventory management; many organizations are installing solutions to automate their accounts payable and to facilitate purchase order collaboration. Automating the accounts payable process enables business users to prioritize payments to suppliers that offer early payment bonuses—a practice called dynamic discounting. Similarly, software and systems upgrades can help reduce the processing time of purchase orders. In some cases, purchase orders are actually generated by the enterprise resource planning software and then shared collaboratively to ensure accurate information. This provides both sides with real-time visibility, creating fewer delays, minimizing over-ordering, enabling businesses to catch problems before they ship and helping them more quickly track change orders. Taking advantage of these efficiency opportunities is an easy step towards better managing a supply chain and improving cash flow.

Investing in the right technology can also help you plan ahead to reduce international shipping delays, as upgrading to a proper digital operating system—as opposed to manually re-keying data into several different systems—makes it easier to maintain compliance and regulation. Other software provides insight into the best inventory routes, your best-selling (and problematic) products and alternative vendors in order to minimize variety in your supply chain.

A Simpler Solution Could Be the Smartest Choice

From building strong relationships to implementing new technology, there are a number of ways mid-market companies can optimize and automate their supply chains to improve cash flow. Of course, it’s important to note that making the decision to invest in automation technology or update a supply chain process is a cash flow decision in itself, and should thus be weighed carefully.

While it might be ideal to implement all available functionality—automating as many processes as possible, for example—there are times when a simpler solution is actually the smartest. Software that is very complicated to integrate, for example, can require custom functionality and advanced training, which in turn means higher upfront costs and steeper support and upgrade costs. It is also smart to spread out the technology costs when possible. Some software-as-a-service options are priced using a subscription model, as is the case with many cloud-computing solutions. Researching alternatives and carefully weighing all options can help ensure the solution investment is correctly configured.

Before making any decisions, however, a highly important recommendation for mid-market companies is to perform a cost/benefit analysis to determine if the cost of failure is higher than the cost of prevention through tech investment. Still, supply chain solutions and automation technologies more often than not are worth the investment for growing mid-market companies.

Brad Huff is EVP & general manager at TAKE Supply Chain, a provider of supply chain management solutions.

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