October 22nd, 2009 by Joern Meissner
How to make your supply chain work during a recession.
The main problem with running your business during a recession is the major cash flow problem. There are no loans coming from the banks. Your inventory is languishing in a warehouse. Your customers are simply not buying like they used to. Freeing up capital is a must during these hard economic times, and since we’ve seen it can’t be done by slashing prices, it must come from your supply chain and by optimizing your inventory.
It doesn’t matter that you didn’t see the recession coming. Even most of the people who did see it coming didn’t think it was going to be this bad. Let this mistake go and focus on your company’s future. Now is the time to forecast. Now more than ever, you need to focus on what is going to happen to your company, in your market, on both local and global scales, in the next few years. Things are changing and if your company wants to be at the top, then you need to be able to see what’s coming.
In a boom, products don’t sit around waiting to be bought. Or rather, they sit around just long enough to move from the factory to the warehouse to the store to the customer’s home. In a recession, allowing your inventory to stall in the warehouse or store is going to drain the capital needed in other places. Since leftover inventory means slashed prices and slashed prices does nothing for your company’s image or profits, make sure that your inventory remains as a low as possible while still keeping your company’s customer service up to speed. Be able to forecast just how low your inventory can get. Less has become more profitable than more.
A cash-to-cash cycle is the period of time from which a business invests capital in a product to the time it receives payment for the product. Cash-to-cash cycles are essentially the chronological view of a business’s bottom line: the amount of time a product is paid for by the company to the time in which the product is paid for and a profit is made. And cash-to-cash cycles are an intrinsic part of the supply chain.
The supply chain begins whenever the business makes their first investment with purchasing the raw materials and goes all the way down to your customer buying your product, which often also results in the company being paid for that product. And while many executives are all over their supply chain management, they have yet to take a look at their company from a cash-to-cash cycle prospective. Find out where your investment begins and where profit is returned. By altering aspects of your supply chain, especially the amount of inventory purchased at the beginning of your cash-to-cash cycle, you can free up capital at the end of the cash-to-cash cycle.
Companies need free capital, even more so during a recession. The fight for customers, the competitive pricing, and the lack of profit margins are going to quickly decimate the money your company has to work with.
Maximizing your inventory optimization comes from supply chain management, and managing your supply chain is linked to how your cash-to-cash cycle is working. By collecting the data from each aspect your supply chain on a daily basis might seem like an overwhelming task, you must task yourself to do so.
Your capital is used to begin your supply chain, by purchasing your raw materials. You then create your product, using more capital, and then wait for your product to be sold, creating your inventory. When your inventory stalls, so does everything that comes after it, including your profits. To free up capital, go back to the very beginning and buy less raw materials, leading to less inventory.
Small problems in this economy, like extra inventory, can turn into business-destroying problems. Extra capital can be freed up by taking a look at how your inventory fits into your supply chain and your cash-to-cash cycle, so every executive needs to take a good hard look at what’s going on in their businesses at the points long before their products every make their way into the hands of their customers.