1. Supply Chain Consultancy White Paper
Supply Chain Consultancy
Unlocking cash in
the supply chain
A corporate focus on cash is placing the it takes from payment of outgoings to receipt
supply chain centre stage. Martin Arrand, of payment from the customer. Often the
Managing Consultant for Unipart Expert biggest element is right in the middle of this
Practices, highlights the key, fast-track ways cycle: the period when inventory sits on the
to freeing up cash in the supply chain. shelf waiting to be sold. And this is where the
cash-aware supply chain manager can deliver
With the UK economy remaining in troubled the results the finance director is looking for.
waters and business loans still hard to come
by, improving cash-flow continues to be a top Releasing value from obsolete stock
priority for most companies. ‘Cash is king’ is Step one in generating positive cash-flow
the clarion call of the finance director and is to release value from obsolete stock. As
it’s the supply chain managers in the front these products will have been written off the
line that are expected to deliver. With the balance sheet, their sale will not only bring
exception of Finance, no other part of the in cash but will also contribute to profit.
organisation has such a large opportunity to Depending on the industry, there are various
influence cash-flow as the supply chain. To put ways of doing this, but specialist traders
it another way, cash-flow is a good indicator operate in most sectors buying obsolete stock
of supply chain effectiveness. An effective in bulk.
supply chain will tend to generate good cash-
flow, whereas an ineffective supply chain will In sectors where the rate of product
Of course, cash is compromise it. innovation is high and product life-cycles are
short, stock often has little market value by
not the same as Of course, cash is not the same as profit. the time it is completely depreciated. But
profit. However, it However, it is the life-blood of a trading the residual book value on a product that
business. Even profitable companies go under is becoming obsolete will make a marked-
is the life-blood of a if they run out of cash. down sale look unprofitable. Cash generation
trading business. Even from end-of-life product can be increased
Many measures that improve productivity and in the longer term by implementing a more
profitable companies profit are cash-negative in the short term, aggressive write-down policy, albeit at the cost
because they require investment. The key to of a one-time P&L hit.
go under if they run generating cash is to look at what accountants
out of cash. call the ‘cash conversion cycle’. This is the time
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2. Supply Chain Consultancy White Paper
Small and frequent replenishment
If there are any quick wins in inventory reduction then they involve supplier minimum order
quantities (MOQ) and your own target order quantities. There are two main reasons for supplier
MOQs - economic production runs and volume discount.
In the first case, economic production runs are often unscientifically set or exist for historical
reasons. In a competitive market, MOQs present a great opportunity for negotiation, and
if the supplier is experiencing falling volumes then running more but smaller batches won’t
affect his ability to supply. It is advisable to target a 50% reduction in MOQs across the board.
However, it may be more rewarding to move beyond simply ‘beating up the supplier’. By taking
a more collaborative approach, an open discussion may reveal opportunities that had not been
previously explored. For example, sharing forecasts and being more open with plans for new
products, product deletions and manufacturing plans may enable the supplier to respond more
quickly and more flexibly.
In the case of volume discounts, these are most often a problem where the procurement team
are motivated by piece price reduction or gross margin. There is a place for volume discounts,
especially where margins are tight and the market is very price-competitive, but this argument
doesn’t extend much past top-selling items. At the middle or slower end of the range the cash
benefit of a smaller order will outweigh the better piece price, and this is without taking into
account the obsolescence risks of high stock holding. However, in order for a company to realise
the benefits, they will need to look at the way their purchasing teams’ performance is measured.
The use of gross margin as a performance measure is usually indicative of a ‘silo’ approach to the
supply chain and rarely benefits the business as a whole.
Even when unconstrained by suppliers, firms often order in large quantities. This is an obvious and
easy opportunity for a quick win. If a normal order is two months worth of stock for a product,
ordering for just one month could be a simple solution. The cost is another receiving line, another
order to raise and another invoice to match, but it will improve the cash conversion cycle for the
product. The greatest benefits will come from higher value products with larger order quantities.
Making the most from stock optimisation
Degrading customer service is not a great idea in competitive times, and reducing safety stock
without damaging stock availability is more complex than the measures we have looked at so
far. However, we have found that safety stock optimisation typically yields a 10 – 20 per cent
reduction in stock, seen as a cash benefit within 12 months. The best results come with upgrading
to a more capable planning system, but there are often ways to adjust existing systems or
supplement them with, for example, an inventory bureau service. These solutions aim to be cash-
flow positive within the first few months. However, ‘outsourcing’ the problem may not be the
answer. It is worth taking a careful look at the processes first to ensure that the root causes of
any current stock issues are fully understood.
Yielding cash from reverse logistics cycles
Less obviously, in some supply chains there are important reverse logistics cycles that can yield
cash benefits if they can be speeded up. Where vendors allow a proportion of purchased
material to be returned for cost (usually minus a handling fee), timely identification and despatch
of excess-to-requirement material will free up cash, and ultimately yield bottom line benefit too
in reduced obsolescence. Similar benefits can be had where vendor warranty credits for defective
material are significant, which is usually the case in service operations. Improvements to warranty
processes also increase warranty yields, which is P&L-positive.
Leveraging commercial arrangements
While commercial arrangements can only move cash management issues between parties
in the supply chain, rather than reducing them, they remain an option. Changes in vendor
payment terms or arrangements for consignment (i.e. vendor owned) stock may be a more
palatable competitive measure for a supplier than being squeezed on piece price, but it is worth
remembering that suppliers will have their own cash-flow issues too. In fact, changes in payment
terms by suppliers and customers are often used as an early warning sign that a firm is in financial
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3. Supply Chain Consultancy White Paper
trouble - so careful thought should be given to how this action might be interpreted by your
trading partners. If it seems that suppliers pose no risk in this respect, think again: it was suppliers’
unwillingness to supply product to Woolworths, due to credit risk, that precipitated the failure of
the once great retailer.
Planning for strategic advantage
As cash-flow usually appears on the management radar as an urgent problem, so far the options
examined here have been short-term and, if not easy, are achievable quickly with the application
of intelligence and a degree of effort. However, much larger prizes can be attained when planning
at a more strategic level and on a long-term basis - radical improvements to the supply chain that
can yield sustainable efficiency gains and cost savings.
Really lean inventory can only be achieved by improving reliability and responsiveness of supply.
But this requires effort and collaboration by all agents in the supply chain. Adopting true ‘pull’
processes requires a complete change of approach for most companies and takes time and effort
to implement. However, the benefits in terms of both cash and flexibility can be truly impressive.
This approach may not fit with the trading strategy of all organisations, but, where it does, it will
lead to lower operating costs as well as a less cash-intensive business.
There are other options, including the liquidation of capital assets, sale-and-leaseback
arrangements on property or capital equipment, but CFOs are adept at spotting these
opportunities. A call for cash can be a great opportunity for supply chain management to shine.
Unipart Expert Practices
As the consultancy arm of Unipart Logistics, Unipart Expert Practices (UEP) provides supply
chain consulting services. UEP has particular areas of expertise in inventory management, stock
integrity and supplier relationship management. UEP’s clients include ICI Paints, Vodafone, EDF
Energy, Finlays Tea, James Walker, Honda, Honeywell Holts as well as internal clients within the
Unipart Group.
For more information contact:
Unipart Expert Practices
Unipart House, Garsington Road
Cowley, Oxford
OX4 2PG
Tel: +44 (0) 1865 384690
uep.enquiries@unipart.co.uk
or visit our website:
www.unipartlogistics.com/consulting
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