Cycle times have a direct impact on your organisation’s working capital and, ultimately, its profitability. This is especially true when it comes to cycle times linked to inventory.
Key Cycles to Target for Working Capital Reduction
Five cycles or lead times combine to make up what is known as the overarching ‘cash conversion cycle’. These are:
- Customer orders
- Supplier leads
- Customer deliveries
- Purchase orders
By shrinking one or more of these cycles, you can impact the cash conversion cycle positively and reduce the need for working capital.
Why Focus on Cycle Times?
It’s a supply chain given: Lengthy cycle times invariably add to working capital needs and, in the process, affect profits. There are two important reasons for this:
- Unconstrained cycle times are a pointer to the kind of supply chain shortfalls that necessitate extra working capital.
- Lengthy cycle times cause unpredictability in the supply chain and increase the need for safety stock—which in turn drives up the amount of working capital needed.
How to Reduce Cycle Times
Focus on the following points when looking for ways to trim cycle times:
Vendor Management: By focusing on inbound goods flows, a company can achieve savings of 10 percent or more on the amount of working capital required. This requires a vendor management system, with a scale of penalties, that tracks supplier delivery times, on-time delivery, and order-fill performance.
System Integration: The optimisation of cycle times requires the fast, free flow of information between all supply chain players that only integrated technology can provide. Slow data transfer has a knock-on effect to the transfer of materials, increasing the need for safety stock, and hence, the need for working capital.
Minimise Material Handling: Every touch of your materials as they move through the supply chain erodes cycle time and increases the risk of loss or damage.
You can reduce handling by:
- Automating your warehouse processes
- Creating more direct transport routes
- Moving materials at ports directly from shipping containers to transport modes
- Implementing cross-dock operations to reduce warehousing needs
- Using drop-shipping between manufacturer and customer.
Collaboration is the Key
While you will be able to monitor cycle times in areas that your company controls, it is vital that you collaborate with all your partners to remove costly bottlenecks throughout the supply chain.
Through regular analysis of issues that slow your cycle times you ought to be able to reduce stored inventory—and as a consequence, increase the speed of cash flow through your business.
Editor’s Note: This post was originally published on October 08, 2020, under the title “Target Cycle Times to Trim Your Working Capital Needs” on Supply Chain Learders Insights’ website.