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09.15.06
Creating Supply Chain Value W/ Cycle Time & Inventory Yield
 By
Thomas Craig
Businesses whose operations rely on supply chains have to manage inventories of a large variety of assorted items.
As a result, there are supply chains within each supply chain. With supply chains, the emphasis is on logistics because that is the vital driver of the supply chain.
The success of the chain depends on many things. How well and how clearly the key player in the chain, the large retailer/mass merchandiser or whoever, has defined what he is doing and why he is doing it that way. For suppliers located within the chain, this is important. There is no one standard universal chain. What you are dealing with are multiple, different supply chains and logistics processes and supply chains for each customer. That means developing agile, tailored logistics solutions to meet the requirements of each customer.
Supply chains work on a pull approach. This applies whether the product is made to stock or made to order. Each chain is really a series of buyers and sellers of products and services. That means that each link participant has his own objectives, and sometimes conflicting and objectives, which can work against supply chain effectiveness. The diversity of participants in the chain can create a complex and long process. Companies buy and sell and participate in the supply chain for their own reasons. This is an important and sometimes overlooked fundamental of developing a working logistics process, both for the entire chain and for each link in the chain. There must be collaboration between and among various buyers and sellers. Think of the supply chain as a relay race with good speed by each runner and a great handoff and exchange of the baton between runners.
The initial purpose of SCM was to reduce inefficiency in the supply chain. That inefficiency was defined with time and inventory. But that purpose was put on hold in the drive for cost reductions, often focusing on freight. Supply chain management is now transforming into its original purpose. Two key drivers for change are increased velocity for cycle time and inventory. These two are interconnected.
Cycle Time Velocity. Time is not on any financial statement; but its effect is. Inventory is not on the monthly P&L; it is on the balance sheet. The point being that gaining needed commitment to reduce cycle time may be difficult because it is not readily identified and measured. It also contributes to a customer service paradox. Accounting systems have their origins going back to the Ford Model A; that can add to the challenge in a globally competitive business world.
There are numerous financial and non-financial cycle time metrics, for example-on-time customer order delivery, manufacture to order complete, cash conversion cycle and days sales outstanding. A good one should be a measure of the length of time for a process, especially one that crosses the organization. The cycle time metric should be important to the company. It should recognize pain points or should add value and competitive advantage for the company.
A key process that crosses the organization is days in inventory that measures the number of days that inventory is held. Days-in- inventory is an important part of the cash conversion cycle. Reducing inventory levels and days of inventory improves profits, improves shareholder value and frees up needed capital. These please CEO, CFOs and shareholders.
This measure is often calculated as Inventory/(Cost of
Goods Sold/365 Days). This method of calculation can be
misleading and understate the total inventory in the supply
chain. It excludes inventory that is on order and is being
manufactured at suppliers and inventory that is in-transit.
This is an omission that results in an understatement
of the real days of inventory and the cash conversion
cycle.
Retailers realize how critical the time from placement of purchase orders on suppliers until delivery is on inventories. With Section 404 of Sarbanes Oxley, adding this inbound portion to the calculation is valid for internal controls and risk assessment. Regardless of the technical issue of when title transfers, there is the company commitment and need for the material being ordered and shipped.
Read the entire article here.
About the Author:
LTD provides logistics consulting for strategic and tactical
needs. The scope of capabilities is broad--supply chain
management, outsourcing, transportation, warehousing,
inventory management, and more for both domestic and international
needs. |
