Cycle times in the supply chain have a large part to play in your company’s working capital. The ability to reduce inventory levels is only one of a number of reasons to target cycle times as a way to reduce your working capital needs.
Moreover, improving cycle time performance can have other positive effects on your supply chain operation in addition to working capital reduction–improved profitability being an important example.
Cycles Within Cycles
One advantage of choosing to target cycle times is the ability to “eat the elephant” in small bites. This is because you can take the main cycle, known as the “cash conversion cycle” and break it down into components, each of which can receive a concentrated focus for improvement. The key cycles to target for working capital reduction include:
- The customer order cycle time
- Supplier lead times
- Customer delivery lead times
- Invoicing cycles
- Purchase order cycle time
Generally speaking, a reduction in any of these cycles should positively impact the cash conversion cycle and reduce the need for working capital. However, there are some cases where the opposite is true. For instance, shortening customer delivery lead times may actually increase working capital, since you may need to use more resources (or more expensive resources) to meet those lead times.
Unless your customers are demanding shorter lead times, you might wish to leave them alone or (if you are currently over-servicing your customers) even increase them.
On the other hand, if your customers are prepared to pay a premium for shorter lead times, offering expedited services for a fee becomes almost a no-brainer of a decision. After all, not only will you be shortening the cash conversion cycle, but you will also be able to increase profit a little by including a margin in your expedited delivery fees.
Reasons to Target Cycle Times
Notwithstanding the requirements of your customers, which must of course drive the way you manage operational processes, excessive cycle times almost always increase working capital and often curtail opportunities for profit gains. Here though, are some more specific reasons to target cycle times for working capital reduction and profit improvements:
- Excessive cycle times are a symptom of inefficiencies, which generate the need for working capital.
- The longer the cycle time, the more room there is for uncertainty in the supply chain. Uncertainty creates the need for buffer inventory–which equals increased working capital.
- Global sourcing creates longer and longer cash conversion cycles (unless expensive air freight is used). If your company is sourcing globally, you have even more of an incentive to reduce elements of cycle time where possible.
Areas in Which to Target Cycle Time Reductions
Key points to focus on when looking for cycle time reduction (and consequently, working capital reduction) are as follows:
Vendor Management: A focus on the inbound flow of materials (and outbound flow of payment) can contribute significantly to working capital reduction, perhaps enabling improvements of 10% or more.
One method used to target cycle time improvement is active vendor management, ideally through the implementation of a scorecard or similar process for objectively monitoring inbound delivery lead times, on-time delivery, and order fill performance. This process should of course, be coupled to a service level agreement ensuring that suppliers are incentivised (for example, via penalties for non-compliance) to meet goals which reduce your company’s cash conversion cycle.
How does vendor management improve cycle time?
It does so by putting the spotlight on the aspects of supplier performance that matter most. Shorter lead times make your supply chain cycle move faster. Accurate deliveries reduce uncertainty and the consequential need for safety stock, as do inbound deliveries that arrive on time.
Systems Integration: It isn’t just the flow of materials which impacts working capital. In order to optimise cycle times, you need information to flow quickly and freely between supply chain partners. If you seriously wish to target cycle times for working capital reduction, you need to minimise the effort involved in transmitting and receiving data.
Without the leverage of integrated technology, information bottlenecks can easily afflict your supply chain. For example, you send data to your suppliers, who must then interpret it and enter it as inputs into their own business information systems. They then go through the same process with their suppliers, and so on.
When data transfer is slow, so is the movement of materials. By integrating systems where possible, you can reduce information bottlenecks and therefore keep materials flowing.
Again, this reduces the need for buffer stock and the working capital tied up in it. Although you may not be able to integrate with all your supply chain partners, you should at least focus on doing so with those which you rely on most. Fortunately, the cost and effort of integration is coming down, thanks to cloud computing and SaaS solutions.
Reduce Material Handling: Every time materials are touched on the way through your supply chain is a point at which your cycle time takes a hit.
Apart from the labor costs involved with material handling, inventory touches increase the risk of stock loss or damage, a wasteful erosion of working capital and of course, if your supply chain is already lean, damaged stock may lead to your failure to fill customer orders.
This can slow down the cash conversion cycle if customers delay payment until orders are fully completed and might even result in lost sales, harming profitability.
You can target cycle time improvements through an exploration of handling reduction in the following areas:
- Warehouses: can you streamline warehouse processes to reduce or automate material handling?
- Elsewhere within the supply chain network:
- Can you change transportation modes to create more direct routes and bypass supply chain nodes?
- Can you utilise transfer facilities at ports to move materials directly from shipping containers to onward transportation?
- Can you reduce the need for warehousing by implementing cross dock operations for some categories of materials or for some customers?
- Can you make use of drop shipping to transfer finished goods directly from manufacturer to the end customer?
The cost of automation is becoming less prohibitive as time goes on, so where handling can’t be eliminated it might be worth exploring possibilities to automate, to reduce the risk of inventory loss or damage through human error and shrinkage.
Speed is Key to Working Capital Reduction
While it’s not necessarily an easy task to speed up your supply chain, you can start by targeting cycle times within the areas fully under your company’s control. After that, collaboration with partners will become critical in order to move bottlenecks up and downstream.
Remember to home in on specific cycles and work on improving them systematically. By chipping away at cycle time delays, you may be able to make worthwhile inroads into inventory reduction, as well as improve the speed at which cash flows into your operation. Don’t forget too, that improved cycle times are good for your customers, so you can earn some valuable kudos by helping them to improve their own working capital situation.
Do you have a success story to tell about improving cycle times or reducing working capital in your organisation? If so, don’t be shy about sharing your experiences–we love to receive your stories and comments to our posts on the Logistics Bureau blog.