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In the January-March 2018 issue of APICS magazine, APICS CEO Abe Eshkenazi contends that if supply chain leaders bring business success then that makes them business leaders. Mr. Eshkenazi goes on to state “organizations that consider their supply chains as strategic and competitive assets outperform the market”.
Indeed, superior supply chain performance does drive business success in very measurable ways. How can supply chain justify and measure process improvement initiatives using a metric that finance can relate to? As cash management is a top priority for finance, sharing the Cash Conversion Cycle (CCC) metric allows supply chain and finance to speak a common language when measuring business success.
The Metric That Finance and Supply Chain Can Agree On
Per Investopia, the CCC metric “measures how fast a company can convert cash on hand into inventory and accounts payable, through sales and accounts receivable, and then back into cash.” Actually, the CCC is combined of three separate financial metrics:
- Days Inventory Outstanding (DIO); how long it takes to turn inventory into sales.
- Days Payable Outstanding (DPO); how long it takes to pay invoices from creditors, such as suppliers.
- Days Sales Outstanding (DSO); how long it takes to collect payment after a sale has been made.
All three metrics indicate how long an organization will be deprived of its cash – the lower the number of days, the better. So how can supply chain improve DIO, DPO and DSO?
Days Inventory Outstanding & Just-In-Time (JIT) Replenishment
JIT replenishment has the potential of releasing a ton of capital previously tied up in inventory because goods are received only when needed. With JIT, lead-time demand does not figure into your safety stock calculation (i.e. goods sold/consumed from the time the order is issued until the goods are received) because the system can project the rate of depletion, determine when safety thresholds would be impacted and then back date the replenishment order accordingly.
For example, a SKU with a 14 day lead time is projected to reach its safety threshold on May 10th therefore an order must be issued no later than April 26th. Achieving JIT requires SKU level forecasting and inventory accuracy both of which fall under the domain of supply chain.
Days Payable Outstanding & the Perfect Purchase Order
Achieving the perfect purchase order at the lowest possible cost requires item data quality, automation, vendor engagement and efficient receiving. Quality item data will prevent costly errors – this includes up-to-date vendor pricing. An automated procurement process allows for a continuous review of inventory levels to protect safety thresholds in support of JIT. Furthermore the system should look for consolidation opportunities to reduce overall procurement costs.
With a truly integrated system, all the information relating to a vendor transaction is available in real-time to procurement, warehousing and finance. With the right tools, supply chain will transform this transactional data into performance metrics that help provide direction on potential optimization opportunities.
Days Sales Outstanding & the Perfect Customer Order
The fastest way to turn a sale into cash is to deliver in full and on time – error-free from start to finish. Again supply chain plays an important role by ensuring the right balance between monies invested in inventory and desired service levels.
Data accuracy plays an important role in shortening order cycle times. In fact, data errors are often the reason the wrong product/quantity was shipped. Picking errors occur for a multitude of reasons; the wrong product in the right bin, a pack was picked instead of an each, the list goes on.
Aiming for the Same Goal
When you think about it, almost all supply chain processes affect either DIO, DPO or DSO in some way. At the end of the day, supply chain and finance both aim for business success – both can and should be considered business leaders.
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