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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:

  1. Days Inventory Outstanding (DIO); how long it takes to turn inventory into sales.
  2. Days Payable Outstanding (DPO); how long it takes to pay invoices from creditors, such as suppliers.
  3. 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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I just read a blog post entitled How do you feel when someone mentions predictive analytics? Well, I feel like it’s a good thing. How about you?

 

One commenter replied that predictive analytics = forecasting and that it’s just a different label for the same thing. Well, true enough, given that the verb predict is synonymous with the verb forecast.

 

I submit to you two other synonyms: examine and analyze. An analysis of your historical demand will lead to a better understanding of the numbers. When one understands the elements that drove demand in the past then one can review these elements and assess their validity going forward. The result is a forecast achieved using both quantitative and qualitative methods. This is a very good thing!

 

That said, it is important to measure forecast accuracy both before and after human intervention. Measuring the impact of revisions allows the forecaster to spot bias. Bias exists when forecast accuracy is repeatedly and negatively affected by one or more individuals.

 

In practice, predictive analytics and forecasting should have the same meaning. Professional forecasters don’t blindly predict the future. Beyond looking for trends, they seek to understand the numbers. Nothing new here!  The big difference is that today’s forecaster is equipped with modern technology and fun stuff like graphical reporting. One thing I can tell you for sure is how forecasters feel about modern technology — pretty darn good thank you very much!


There has been a lot of focus on optimizing the supply chain for order fulfillment.  The on-going efforts to perfect the ‘order to cash’ process have yielded great rewards.  But what about returns?  Automation has reduced the number of returns due to errors however the world must move from a linear to a more circular economy and this will impact the entire supply chain.

 

The notion of a circular economy is really quite wonderful.  Imagine an industry that produces no waste or pollution, and where products are designed for safe and non-intrusive disposal.  Imagine an industry where 100% of unconsumed or partly consumed products are returned for re-use.

 

Kudos to the Association of Battery Recyclers for their contribution to the circular economy.  From their website:  “The members of the association share a dedication to environmental and community responsibility.” Spent batteries are turned into lead metal, plastic and sodium sulfate, which are used to manufacture new lead batteries and other useful products.  Their website also states that lead batteries have a 99% recycle rate within most of North America – impressive!

 

With greater awareness and increasing environmental pressures from various stakeholders, more companies are incorporating green practices into their daily activities.  I believe distributors can play an important role in the circular economy by selecting products and suppliers that behave responsibly and by participating in the efforts to recycle and/or re-use the products that they sell.

 

Goods are coming down the supply chain – we’re pretty good at that.  Now it’s time to move stuff back up.  Distributors can take an active role in balancing the financial responsibility of making money with their responsibility to benefit society as a whole.   This must include their responsibility to preserving the environment by actively engaging management into environmental thinking.


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There is a famous anecdote about Volvo car dealers heavily discounting green models because consumers preferred other colors. Volvo’s manufacturing plant, seeing the resulting spike in demand for green models, perceived it as consumer interest and upped the production. That’s right…even more green cars! Ouch!!

 

It’s a sad story that’s often repeated, and a story that begins with a demand-shaping strategy to offload unwanted inventory. It’s a prime example of how a dealer’s {read distributor’s} behavior can create confusion and lead to unnecessary increases in a manufacturer’s inventory holdings and, by extension, the stock of its suppliers, too.  


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When supply chain professionals plan for future demand, their thoughts gravitate to meeting customer service levels while minimizing the amount of capital tied up in inventory.  Demand planning is about having the right product in the right place at the right time … right? Four occurrences of the same word would cause my old English teacher to shudder at this excessive use of a word in a single sentence. However, let us return to the important business of meeting consumer demand without incurring the cost of excess inventory.


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Improved forecast accuracy leads to many downstream improvements in operations and ultimately, on the balance sheet. That is why Gartner, Inc., a highly respected information technology research and advisory firm, puts forecast accuracy at the top of its pyramid of supply chain metrics. In a study published in February 2012, Gartner stated that a 6% forecast improvement could improve the perfect order by 10% and deliver a 10-15% reduction in unnecessary inventory. These are very impressive numbers and a very good reason to work towards improving forecast accuracy.


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