Logistics Beyond The Warehouse: Financial Implications of Supply Chain Management

August 11th, 2009

Whether striving to finance business expansions or day-to-day operations, these have been difficult times.  For this reason, many companies are increasingly acknowledging the strategic need to unlock large amounts of cash tied up in inventories, sales and purchases.

The working capital of a company, that is, the difference between its current assets and short-term liabilities is an indicator of two things: first, the financial health of the company and its ability to meet its immediate obligations; and second, the company’s operational efficiency.

The importance of optimizing and managing working capital resides in the fact that companies need cash to finance growth and ongoing operations alike - as it’s just not possible to pay suppliers and employees with inventory.

A common shortcoming many companies encounter when implementing cash-driven initiatives is: failing to understand the relationship between supply chain activities and financial performance.  For example, the way orders are selected in the warehouse can affect Days-Sales-Outstanding (DSO) in addition vendor delivery performance can be leveraged when negotiating payment terms.

The following are a few examples of factors sometimes considered “soft” issues that can, in fact, provide a quantifiable return when improved:

Perfect Order Rate

The collection of invoices with erroneous deliveries (i.e. undetected mispicks, scratches) will cause not only deductions and charge-backs but also delays due to customers’ payment cycles.

Safety Stock Levels

There are several factors affecting inventory, however, when launching an inventory optimization initiative, the first step is to determine what the level of safety stock should be, and although inventory levels will fluctuate due to legitimate business reasons, there should be a set target.  For example, the total inventory of a product shouldn’t be greater than its safety stock if the product is received and shipped every day in full truck loads.

Fast moving material handling systems

Introducing cross-docking, reverse line picking and flow-through programs for those items and vendors that meet the volume, quality, service level and cost requirements will impact inventory reduction capability.

Order fulfillment cycle time

Once the company has a firm order from a customer, the time it takes to fulfill that order is incorporated into the cash conversion cycle.  Given this, the ability to respond to demand faster and while maintaining or lowering cost should drive transportation and warehouse initiatives.

Vendor Collaboration

Working with Vendors can make a big difference.  For example, moving inventory off the balance sheet through the pursuit of Vendor Managed Inventory initiatives can reduce a company’s investment in inventory.

There are many other factors rooted in supply chain activities that impact working capital performance and should be incorporated into the supply chain performance metrics.  These include:

• Vendor lead times
• Supply chain visibility
• Real-time proof of deliveries
• Forecasting accuracy
• Vendor performance linked to payment terms
• Minimum order quantity

The extent to which each of these factors influence the financial results vary from company-to-company, however, in order to implement an effective working capital optimization initiative the following steps should not be overlooked:

Analyse end-to-end supply chain processes - to identify opportunities based on depth of research and data analysis from vendors to customers.

Define performance metrics - to measure not only results but also leading indicators (e.g. input variables that impact results).

Set goals - at tactical and operational levels to ensure execution effectiveness.

Align cross-functional accountability - create cross-functional teams to drive improvement initiatives across the supply chain.

By increasing overall awareness and the attention given to the relationship between the supply chain and financial performance, companies can strive to link their activities in this area to their Working Capital Optimization initiatives.  The above most specifically suggests how to do so in regard to warehouse operations and material handling systems, and stresses the importance of the related Supply Chain metrics used to support this effort.

Entry Filed under: Distribution Operations, General, Logistics Strategy, Material Handling