Focus on Cash, Not Costs, in the Supply Chain

by Steve Murphy 0

In the face of continued sub-optimal economic growth and a generally tepid sales environment, it can be tempting to squeeze suppliers through higher discounting demands. This article is a nice summary of why it is important for CFOs and Treasurers to take a broader view of the supply chain and the importance of managing working capital strategically, not necessarily as a short term-tactic. In many cases a company’s financial managers may opt for managing costs (through procurement) rather than other more comprehensive solutions that focus on cash. The author discusses one of the three components of the cash conversion cycle (CCC), in this case inventory. Inventory Conversion Period (ICP) in many industries is perhaps the least considered part of the CCC equation when managing working capital, since DSO and DPD are more expedient and easier to manipulate. The point being that thoughtful and effective management of inventory can reap benefits as well. This equation and the general focus of this article was fully explored in a recent Mercator research report entitled Supply Chain Finance is Coming of Age.

Days of supply is one of those concepts that most people are reluctant to tackle for fear of stock-outs and missed sales opportunities, but remember: every dollar of inventory you can take out of the supply chain equates directly to a dollar of free cash flow. For a typical Fortune 100 company, this represents $50 million to $100 million of free cash for each day of supply chain saved.

Another of the other interesting points made in this piece is that suppliers can in many cases be considered partners for innovative products, thereby extending the development reach to other beneficiaries of a stronger supply chain. The benefits may include faster development and a more efficient, risk reduced supply chain. The author also reinforces the need to modernize the technology in company P2P processes, creating more visibility into the supply chain for better supplier decisions and in effect, more intelligent financing decisions that correspond with working capital goals. This is something that many companies continue to struggle with, despite the plethora of highly-evolved, digital source-to-settle capabilities on the market.

As a consumer, there’s a wealth of information at your fingertips — so why do the supply chain technologies that underlie $25 trillion of the global economy still take weeks or months to deliver information a company needs to make business decisions?

Overall, a nice summary of perhaps surprisingly common issues that are very manageable in today’s techno-industrial environment.

Overview by Steve Murphy, Director, Commercial and Enterprise Payments Advisory Service at Mercator Advisory Group

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