Published in “The ACA Group” website, March, 2011
Click here for original article.
As we are emerging from the recession, we are by no means returning to the high growth days of the past. Instead, the new normal is here to stay – slow growth for those who stay ahead of the curve, tight cash flow and customer demands at a high point. Thus, accelerating cash flow is a key to success in this environment.
The good news and the bad news is that there are countless ways to accelerate cash flow through supply chain improvements. There is opportunity yet it’s important to prioritize in a way that will drive results. Resources are lean, and so it is vital to focus efforts on what will provide the best return on investment. Often, it depends on your industry, the state of your company (how tight cash is/ whether there is even small amounts of cash to invest etc.), and on your specific people, processes and systems. Yet, there are a few strategies which typically drive the bulk of the results: 1) Inventory management. 2) Supply chain collaboration. 3) Take a fresh look at your business.
1. Inventory management – In 80% of the cases, this strategy can have the quickest and most significant effect on freeing up cash. The key to success is not just to reduce inventory but to reduce inventory while maintaining/ improving service levels and lead times. Otherwise, it will have the opposite effect on your cash flow – there isn’t much worse than a lost, valued customer.
The secret to success in achieving this goal is to not consider each company to be a cookie cutter example to another company. After reducing inventory levels 40%+ in multiple companies in various industries, I’ve found that each situation required a different approach; however, the big picture focus areas were identical – people, processes and systems.
P.S. In my experience, although leveraging systems has always been included in the formula for success, I’ve yet to run across an example that required a new system to make significant progress.
2. Supply chain collaboration – Although the specific strategy can vary greatly depending of the type of business, whether it’s a manufacturer, distributor or service organization, and several other variables, I’ve not yet run into an example without an opportunity in supply chain collaboration.
For example, in one company, we implemented vendor managed inventory with a key customer, which improved not only our cash flow but also the customer’s cash flow. In another example, we partnered with suppliers and customers to develop innovative product and packaging design solutions to reduce cost (and increase cash flow) and improve performance. Lastly, in another example, we partnered with key customers and carriers to develop a transportation model which reduced freight costs (and increased cash flow) while improving service levels.
3. Take a fresh look at your business – Amazingly, not all customers are good customers. Low and negative profitability customers should be reviewed in detail. Is there a compelling strategy to keep them or are you throwing good money after bad? Instead, focus efforts on growing profitable business. Similarly, are a few of your customers tying up significant amounts of cash? Is there a way to change that and evolve the relationship successfully? Another radical thought – instead of immediately jumping to the conclusion that costs must be reduced as your sole focus, what if you spend the same amount of time and energy on strategizing how to increase revenues? What if you hired an expert or brought in someone to focus exclusively on profitable growth?
Cash is king in today’s business environment. Supply chain offers vast opportunity in accelerating cash flow. Put the two together, and you can be one of the few companies to leapfrog the competition in the new normal.