Supply Chain Practices and Technologies to Improve Cash Flow

In a recession, cash is king.  What can your supply chain team do to improve cash flow?  What processes and technologies can help?

The most obvious action is to lengthen payment terms with key suppliers.  Finance may do this without informing supply chain managers, but this works against the mantra of establishing an adaptive, demand-driven supply chain.  An adaptive supply chain can efficiently respond to unexpected surges in demand.  You will have a hard time responding to these surges if you are not a preferred customer.  And if you screw your key suppliers today, they’ll remember for a long time after the recession ends.

Your suppliers are apt to see supplier inventory management programs as being a fairer alternative.  One way this can work is that while suppliers may still deliver raw materials or components to a factory warehouse in large quantities, they are not actually paid until the materials or parts are scanned out of the warehouse and used in the production of finished goods.  Similarly, lean processes that allow a manufacturer to receive goods in smaller quantities on a just-in-time basis will reduce outlays for raw material inventories.

That is the supplier side of the equation.  On the customer side, you can segment your customers and provide the best deals and service levels to “preferred customers”-e.g., profitable customers that pay their bills on time.  The Sales and Operations Planning (S&OP) process has begun to merge with Integrated Business Planning processes.  In some companies, S&OP is chaired by the finance group.  In addition to looking at demand forecasts and supply plans, the executive S&OP team also reviews the profitability of key customers and products.  This profitability analysis is based on activity-based costing or theory of constraints costing so that true profitability by customer and by product is understood.  In balancing supply with demand, the most profitable customers get preference.

Just as the supply chain team may end up with action items based on the executive S&OP meeting, the sales team should as well.  For example, if a preferred customer starts to delay payments or takes other actions that negatively impact their profitability, the account manager should engage with the customer to take corrective action.

From a technology perspective, any solution that facilitates achieving the perfect order metric (i.e., the right goods, in the right quantities and undamaged, delivered on time, and billed accurately) will improve cash flows.  Resolving order fulfillment disputes is not only costly, it also prevents timely payments.

A new generation of very low priced Warehouse Management Systems (WMS) has emerged.  Traditional WMS solutions have a considerable amount of functionality designed to maximize labor efficiency in the warehouse.  In contrast, these very low cost WMS solutions have limited labor efficiency capabilities, but they provide substantial improvements in inventory visibility and delivery accuracy.  In many cases, companies that use paper-based pick lists and do not use AutoID to confirm pick locations will improve their pick accuracy from about 92 percent to over 99 percent.  Another payback bucket is not ordering inventory that is already present in the warehouse but put-away accidently in the wrong location.

Higher end WMS solutions have functionality that help ensure Value Added Services (VAS) are performed correctly.  This prevents charge backs by large retail customers, as well as lengthened payments cycles due to disputes.

Proof-of-delivery solutions allow electronic signature capture, which confirms shipment receipt and could automatically trigger the financial settlement process.  Also, a variety of Supply Chain Execution (SCE) solutions now use AutoID devices capable of taking digital pictures.  These images, which might show, for example, that a pallet was delivered undamaged, can then be associated with the delivery record in the SCE system.

In international trade, bonded warehouses should be used where possible.  A bonded warehouse is a warehouse in which the duties on the goods remain unpaid until they are actually shipped out of the warehouse to a customer.  Leading Logistics Service Providers offer these services.

In conclusion, cash is king in a recession.  But you don’t want take actions today that constrain future profitability when the economy recovers.

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