In today's many organizations are struggling to drive revenue — some may already be seeing shrinking revenue — which naturally focuses attention on the supply chain. The knee-jerk solution would be to seek cost savings by cutting supplier costs, however, squeezing supplier margins could actually end up hurting profits in the long run.
That is why it's time to look at cash as the new cost. Freeing up cash flow instead of cost cutting will not only allow a company to mitigate losses from slow revenue growth, but it will also increase shareholder value through proactive measures like stock buybacks and R&D investment.
So what's the secret? Focusing on reducing days of supply and building a lean-cut yet fast-moving supply chain.
How much can you really cut?
Poor macroeconomic conditions may cause many companies to suffer unnecessarily when their supply chain isn’t optimized for action. In a constant struggle to increase profits while fighting against sluggish growth, CFOs often turn to procurement for a quick fix.
A wave of companies demanding price cuts, which is a quick way to free up cash, is traditionally a sign of a sluggish economy. However, in a down economy, as margins shrink with a company’s revenue, the organization can cut as much costs as it wants and still run out of cash.
What are the real risks of costs over cash?
Suppliers won’t make you a priority. When a customer keeps squeezing supplier margins, they will stop prioritizing that company as a customer. Some suppliers choose to end business with companies after payment terms are extended too far while others will put different clients ahead of you when it comes to last-minute asks or special requests.
Disruptions will hurt more. Without a strong supplier relationship, it’ll become increasingly more difficult to get a response from suppliers after a big disruption floods them with calls. In situations in which a company faces massive losses due to disruptions it helps to have already built up a cooperative relationship with suppliers who could help save your operations.
You won’t even know you’re losing money. Excessive days of supply are by far the biggest waste of money in an operation, but it takes a psychological — and monetary — investment to analyze the supply chain and understand where the organization is holding unnecessary inventory. A single-minded focus on cutting costs just detracts attention from that holistic analysis of spending.
The Missing Cash Flow
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.
So how do you reduce days of supply and free up cash flow without increasing risk?
Two ways: build more strategic supplier partnerships, and set up mechanisms to manage issues across the supply chain in real-time.
Since many companies would rather maintain complete control over their design process they are reluctant to develop products with their suppliers. And while this may offer some intellectual property protection advantages, it doesn’t bode well for the partnership. In fact, companies that develop parts with their suppliers actually benefit the most.
Real-Time Issue Management
Ultimately, the best way to reduce days of supply is to utilize the wealth of data at your disposal to make your supply chain work for you in real-time. Chances are, lackluster technology is shrouding much of the operations in the form of delayed, self-serving, or miscommunicated updates. And because supply chains typically buffer against uncertainty with inventory, poor information leads directly to an increase in days of supply.
In order for supply chain teams to stay up-to-date on both risks and opportunities they need to be organized in a way that promotes open, transparent, and real-time information sharing. Tools and processes need to be in place to contextualize and transform communication into swift decision-making ability.
If you don’t know where your inventory is being held, and how that relates to demand spikes or disruptions, then you can’t safely remove any of it from your supply chain. Real-time issue management provides organizations with the ability to not just know faster, but act faster.
A company’s supply chain executives want to support company growth while still meeting margin targets — and those achievements start with freeing up cash flow from the entire supply chain, rather than just cutting costs from procurement. Optimizing for fewer days of supply will allow a supply chain to run faster and with more agility, all while providing a cash boost when the company may need it the most.
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