SUPPLY CHAIN STRATEGIES FOR CASH FLOW OPTIMIZATION. Unleash Opportunities for Cash Flow Optimization through End-To-End Supply Chain Strategies

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1 SUPPLY CHAIN STRATEGIES FOR CASH FLOW OPTIMIZATION Unleash Opportunities for Cash Flow Optimization through End-To-End Supply Chain Strategies

2 SUMMARY What are the Major Challenges Facing Companies Today? Optimizing Cash Flow Where to start? Looking at Supply Chain from a CFO Perspective An End-to-End Approach for Supply Chain What are the Three Flows in Supply Chain? Understanding the ROI of Supply Chain and Cash Flow Optimization 14 Supply Chain Strategies for Cash Flow Optimization

3 Three Major Challenges that are facing companies today: 1. Maximizing Profits, 2. Conserving Cash Flow, and 3. Creating Shareholders Value All of which can be solved through Cash Flow Optimization. The question is where to start?

4 Optimizing cash flow? Supply Chain is the place to start! The key to the optimization of cash flow is to look at Supply-Chain in a more of a holistic approach (End-To-End Supply Chain) to identify the opportunities at each area, the interrelations and how to best impact cash flow by increasing sales while optimizing costs.

5 Supply Chain often represents an untapped area with opportunities to capture short-term and long-term cash flows as well as realize cost savings.

6 When we talk cash flow which part of supply chain do we care about? Irrespective of the industry and the company size, Supply Chain can be the starting point for cash flow optimization A wholesome view at supply chain enable companies to identify hidden opportunities that lead to efficiencies and result in cash flow optimization.

7 Cash Flow Optimization (CFO) Looking at Supply Chain from a CFO Perspective

8 End-to-End approach Companies striving for best-in-class performance should take an end-to-end view to transforming their supply chain processes particularly in: Forecasting & Inventory Planning, Sourcing and Procurement, Fulfillment and Logistics Vendors/Suppliers Management The context of an end-to-end supply chain process, offer many opportunities for improving the company s cash position.

9 End-to-End Supply Chain Management

10 Understanding the ROI of Supply Chain Optimization in terms of The Three Flows in Supply Chain Downstream: Material, Information & Financial Upstream: Material, Information & Financial

11 Managing Supply Chain for Cash flow optimization Each company is different, but the big picture focus areas are identical people, processes and systems.

12 14 Supply Chain Strategies for Cash Flow Optimization A Roadmap Towards Gaining Competitive Edge.

13 1. Cash is King -- Cash Flow Planning Building a sustainable reserve is a key for any business. According to a recent study, companies performing monthly cash flow planning have an 80% survival rate, more than double the 36% survival rate for those only planning once a year. Having a solid cash reserve enable businesses stay afloat during supply chain crises.

14 2. Demand Planning & Forecasting A company should recognize the risks in forecasting future demand based only on historical data. Improving Forecast Accuracy and recognizing it as a major KPI is strategic for any supply chain management in order to reach: improved service levels and reduction in inventory costs. synchronized demand planning and adjusting sales estimates to reduce sourcing costs.

15 Sales & Operations (S&OP) Planning -- A pre-requisite for Inventory Optimization Constantly improve Sales and Operational Planning (S&OP) Process. Collaborate with internal organizations and external partners on a common set of Consensus Demand, supply and budget data.

16 Sales & Operations (S&OP) Planning -- A pre-requisite for Inventory Optimization Consider developing a Constrained Forecast to help determine the most profitable use of your resources. This constraint forecast will become your input to the detailed S&OP operations analysis.

17 3. The Balancing Game of Inventory Optimization Improving visibility of inventory across the supply chain. Reducing inventory build up through improved visibility on material scheduling Adopting a customized approach to inventory planning. Factoring in variability/seasonality within the planning cycle. Implementing adequate material and distribution requirement planning. Reducing Total Cost of Ownership (TCO)

18 Top 10 Best Practices of Inventory Optimization 1. Criticality Analysis 2. Demand Forecasting 3. Lead-Time Forecasting 4. Issue Size Forecasting 5. Economic Modeling 6. Economic Reordering Points 7. Exception Management 8. Inventory Segmentation 9. Knowledge Capture/Historic data 10. Inventory Key Performance indicators (KPI) Manage Cash by Managing Inventory

19 4. Working Capital Optimization Optimizing the working capital tied up in organization s supply chain is a winning strategy for cash flow optimization. Working capital levels are largely influenced by inventory levels, which are determined by how effectively a company manages/executes a strong and efficient supply chain strategy.

20 5. Strategic Sourcing & Intelligent Procurement Sourcing/procurement processes have a direct impact on a company s bottom line through cost of ownership for the goods and services that an organization purchases. Best-in-class organizations have adopted strategic sourcing as standard practice and leading enterprises are moving beyond strategic sourcing to drive savings and deliver cash to the bottom line. Sourcing Process Standardization along with Supplier Performance Management. Implement compliance driven savings through detailed Spend analysis and Cost analysis

21 Strategic Sourcing Decisions and the Impact on Cash Flow Manufacture in-house or outsource? Single source versus multi source? Should Safety Stock levels vary over time? How sensitive is the supply network to sudden changes? How to optimize purchasing and transportation costs?

22 6. Network Optimization/Industrial Footprint Warehousing Management Decrease fixed costs. Warehouse slotting optimization. Reducing the number of redundant facilities while maintaining the current fulfillment and customer service levels. Network Optimization.

23 7. Fulfillment & Logistics Transportation Management Decrease direct variable costs by optimizing shipment lot sizes, consolidating shipments and improving freight terms. Recognize and track the Net Landed Cost Per Case as a major Supply Chain PKI. High inbound and outbound transportation costs and higher costs per unit costs affect both COGS and SG&A expenses.

24 7. Fulfillment & Logistics Optimizing fulfillment and logistics operations can result in savings that impact cash flow Efficient transportation network support supply chains. Periodic network redesign, benchmarking carriers cost and performance. Implementing processes and technologies to enable greater visibility into in-transit inventory. Consolidation and efficient utilization of assets by monitoring metrics. Benchmarking to identify gaps and areas for cost savings and optimization.

25 7. Fulfillment & Logistics Net Landed Costs a major Supply Chain KPI Recognizing Net Landed Costs as a major KPI for Supply Chain. Adopting Net Landed Costs Optimization as a strategy for cost reduction. Net Landed Costs analysis trigger Network Optimization.

26 8. Streamlining Reverse Logistics Reverse logistics -- the process of moving product back through the supply chain to accommodate overstocks, returns, defects and recalls. An efficient and cost effective Reverse Logistics process has a direct impact on cash flow.

27 8. Streamlining Reverse Logistics Reverse logistics can cost up to four to five times more than forward logistics. (Accenture) A study by Aberdeen Group indicates that reverse logistics in the US costs companies+$100 billion/year. On average, it takes 12 times as many steps to process returns (assessing, repairing, repackaging, relabeling, restocking, reselling, etc.) as it does to manage outbound logistics

28 8. Streamlining Reverse Logistics Reducing reverse supply chain costs by enhancing reserve logistics capabilities impact cash flow. Reverse logistics represents a huge source of untapped value and therefore addressing them can be a quick win for any company looking for immediate cost savings. Explore new ways to reduce inventory levels. Simplifying returns/repair processing can increase the speed of inventory back through supply chain. Improved demand planning can help improve inventory levels related to new product introductions or promotions.

29 Supply Chain Strategies and Cash Flow Optimization 8. Streamlining Reverse Logistics Reduce Dump and Obsolescence Cost. Reduce Dump/high obsolescence costs/high write-down costs and unusable year-end inventory. Decrease direct variable costs by developing better forecasts, deploying proper inventory management processes Reviewing inventory policies and implementing/ enforcing FIFO/LIFO principles.

30 9. Supply Chain Visibility and Data Sharing enable collaboration The single biggest reason for inventory buildup is attributed to the lack of end-to-end visibility into the supply chain. Optimizing the entire supply chain offers huge potential for both short and long-term improvements in a company s working capital position. Implementing adequate technology to handle/process data and analytics enabling visibility of end-to-end supply chain metrics. RELY ON DATA AND ANALYTICS TO MAKE INFORMED DECISIONS!

31 10. Supply Chain Process Improvement Optimizing and automating supply chain processes alleviate cash crunches resulting from process failures. Managing supply chain and cash flow via technology investments should be a priority. Reducing direct variable process costs by redesigning the information flow from sales to accounts receivable. Decreasing order management costs. Applying Six Sigma Lean concepts into the processes to drive continuous improvements across various areas in supply chain. Leverage appropriate technologies that enable the adoption of new processes.

32 10. Supply Chain Process Improvement Supply chain processes are the backbone of any company s cash flow. Inefficient supply chain processes significantly affect company s cash position. For example: Lack of dynamic inventory planning capability result in excess inventory buildup. Ineffective techniques can negatively impact supplier on-time delivery. Failure to benchmark freight rates/not using lowest-cost carriers increase freight costs. Each of these broken processes represents is an opportunity! Each represents a cash leaking out of a company s operations. The cumulative impact of this lost cash can drain the company s competitiveness and profitability. Improving any segment of the supply chain process yield incremental efficiency.

33 10. Supply Chain Process Improvement Adopting New Supply Chain Technologies Managing supply chain and cash flow via technology investments should be a priority to maintain health and stability across your organization.

34 Responsiveness versus Efficiency in Supply Chain & Cash Flow Management * Developing alternatives to manage risks and contingencies through: Efficient Supply Chain Responsive Supply Chain Responsiveness trumps Efficiency * Essentials of Supply Chain Management, 3 rd Edition.

35 Responsive Supply Chain * Drum Buffer Rope RAW MATERIALS MANUFACTURER SUPPLIER DISTRIBUTOR RETAILER CONSUMER Market demand sets the drum beat or tempo of supply chain. Manage uncertainty with buffer of either inventory or production capacity. Reduce uncertainty and keep buffer low through data sharing and data visibility. Data is a rope that ties the entire supply chain together. * Essentials of Supply Chain Management, 3 rd Edition.

36 11. Production Cycle Optimization Decrease direct variable costs through cycle-time reduction. Providing visibility into the flow of material and information through layout optimization, automation strategies and station/production area organization.

37 12. Supplier Management & Collaboration Make it a Companywide Priority. Collaborate with vendors to drive the changes into their own supply chains and ensure broad acceptance of the changes. Secure senior-level executive support to drive these initiatives. Involve cross-functional teams to provide support Use best-in-class processes and technologies to enable these improvements. Plan and implement the transformation using an end-to-end approach that addresses the full range of supply chain processes.

38 13. Managing Cash through Days of Supply Every dollar of inventory taken out of the supply chain directly equates to a dollar of free cash flow. However, most companies tend to be reluctant in optimizing their Days of supply for fear of stock-outs and lost sales. So how to reduce days of supply to free up millions in 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.

39 14. Supply Chain Finance (SCF) An emerging concept Supply chain finance, also known as supplier finance or reverse factoring, is a set of solutions that optimizes cash flow by allowing businesses to lengthen their payment terms to their suppliers while providing the option for their large and SME suppliers to get paid early. Supply chain finance (SCF) is a term of recent coinage that refers to a specific set of tasks within the financial supply chain. SCF rely on facilitating technology, focused on solutions such as procure-to-pay automation, order-to-cash automation, and the use of a common platform for buyers, sellers and financial institutions.

40 Supply Chain Finance & working capital Supply Chain Finance (SCF) is a way to optimize working capital and reduce supply chain risk; Working Capital SCF allows businesses to increase supplier payment terms while giving them the option to get paid early. Supply Chain Risk

41 Breaking Down the Cash Flow Cycle The cash flow cycle is the period of time required for a corporation to receive invested funds back in the form of cash. The full cash flow cycle can be divided into two distinct cycles: The operating cycle - the time period between acquiring inventory from suppliers and the actual cash collection of receivables The cash cycle - the time period between the cash payment for inventory and the cash collection of accounts receivables generated in the sale of the final product. Therefore, the cash flow cycle is also defined as days sales outstanding plusdays in inventory minus days in payables. Reducing the length of the cash flow cycle will immediately create liquidity.

42 Financial Supply Chain Framework The creation of an integrated team that combines both finance and supply chain management expertise. Transformation "from a function focused only on real product flows and facilities to one that is concerned with corporatelevel risk, financial performance and shareholder risk and returns.

43 Optimization of Cash Flow and Working Capital through Supply Chain Finance Supply Chain Finance Framework

44 In Summary Take a fresh look at the business (people, processes and systems). Understanding the ROI of SC Optimization Cash Flow Optimization should be a priority for any supply chain organization. Adopt a CFO perspective when tackling SC Strategies to achieve Cash Flow Optimization Whether strategic or tactical, know your risks and how to mitigate them. Recognize Seasonality and its impact on cash flow. Adopt a responsive supply chain model Proactively adopt mitigation strategies to adapt to the changes in market conditions. Evaluate the impact of potential unplanned events, understand their impact, determine the most cost effective mitigation strategies, and formulate contingency plans. Always remember that supply chain is an untapped area full of potential for cost savings, efficiencies and impact on sales.

45 Unleash Opportunities for Cash Flow Optimization through End-To-End Supply Chain Strategies Rania N. Guirguis Principal Managing Director Strategize Systems LLC +1 (925) (818)