There are all kinds of ways to measure the performance of a supply chain, but only one really gets to the heart of the matter. And that's cash.
Lexmark International, Inc. has embraced that philosophy in a big way. The $5bn maker of laser and inkjet printers chose cash-to-cash cycle time as one of its primary metrics, when it launched a sweeping program to boost customer service, reduce inventories and drive supply-chain efficiency.
Based in Lexington, Ky., Lexmark was born in 1991 as a spin-off from IBM. It went public in 1995 and has since carved out a substantial market share in printers both for business and retail consumers. But the competition is intense, especially from industry leader Hewlett-Packard Co., and margins can be challenging. So Lexmark decided to take a close look at the financial end of the organization, and how it affects key supply chain processes.
Supply chain analytics have a way of turning into abstruse mathematical formulas and numbing statistics. But nothing is simpler than the cash-to-cash measurement. In essence, it's the period of time between paying a supplier and getting that money back in the form of revenue. (To calculate the actual amount, add inventory days of supply and days sales outstanding, then subtract days payable outstanding.) By reducing cycle time, a company firms up its balance sheet, improves cash flow and cuts working capital requirements.
Together, the three components that make up the cash cycle-inventory, receivables and payables-can present an accurate picture of supply chain performance. Take the inventory measurement. Excess stocks could signal problems with forecasting, raw-materials planning, supplier reliability or distribution processes. Days sales outstanding, in the form of high receivables, could mean snags in order fulfillment and invoicing. And high accounts payable are a symptom of poor relations with suppliers, or a company's inability to leverage its buying power.
In 2001, around the time of its 10th birthday as a stand-alone company, Lexmark set out to correct some of these flaws. Its strategy would focus on three key elements: customers, cash and total supply chain costs. Customer service was the most important of the three "Cs", but Lexmark was also seeking a balance between cash and cost, says Donna Covington, vice president of customer services. Both elements could be addressed from the perspective of cash-to-cash cycle.
In the "deep-dive" phase of its initial assessment, Lexmark's purchasing organization scrutinized payables, finance looked at receivables, and existing information about inventories was added to the mix. The company then benchmarked its performance against major players both inside and outside its industry. By identifying the leaders, it could get a handle on how much work there was to be done. Says Covington: "It helps you to understand the difference between continuous improvement and breakthrough thinking."
The benchmarking effort was undertaken with the help of Miami, Fla.-based Adjoined Consulting Inc., a specialist in inventory management. The consultant helped Lexmark to select companies that had demonstrated leadership in key performance metrics, says John A. White III, managing officer of strategy. Industries surveyed included consumer electronics, computer hardware, communications equipment, household appliances, packaged goods and apparel accessories.
"It became obvious that Lexmark had a continued desire to improve its supply chain operation," White says. "They are a learning organization."
The effort was collaborative from the start. All Lexmark divisions and locations around the world were included. Getting everyone on board was a time-consuming process, Covington acknowledges, "but you save time in the execution portion." Lexmark's suppliers, including contract manufacturers and logistics service providers, were also brought into the program at an early stage.
New Product Intros
Under the direction of Covington, who has responsibility for all supply chain operations, Lexmark moved ahead on multiple fronts. New-product introduction was a priority. The company set up cross-functional teams to attack product design and development. Goals included more design flexibility to allow for product differentiation at the point of distribution, fewer "touches" during final assembly and distribution, early review of size and weight specifications to lower shipping costs, and optimization of pallet configuration at the factory, to streamline handling at the distribution center.
Lexmark was determined to ease the transition of data between phases of new-product development. In companies with strict corporate "silos," that can be tough to achieve. So the supply chain development team launched a series of weekly Transition Management Team (TMT) meetings. Attendees included representatives of development and manufacturing engineering, tooling, supply chain management, demand and supply planning, information technology, packaging design and software development. The team was also given oversight of parts purchasing for both old and new products. In that area, the goal was twofold: to minimize inventories of product reaching the end of life, and avoid stockouts.
Regular "milestone" meetings, held before the ordering of components with long lead times, helped to synchronize the transition from outgoing to incoming products. For the first time, the purchase and production of end-of-life items could be executed by the entire group, based on demand as well as status of the replacement product.
Part commonality was another important consideration. Good planning at the outset can maximize the number of old parts and add-on features that can be reused in later models, Lexmark says. The practice might add to the bill of materials cost up front, but it pays off in greater efficiencies down the line.
Under Covington's direction, supply chain management became intimately involved in new-product introduction. Planners sought to devise a controlled production schedule that could reach desired volumes in the shortest time possible.
Again, corporate silos can frustrate such efforts. So the supply chain, engineering, quality assurance and manufacturing departments of Lexmark came up with a common Product Quality Process (PQP). It lays out a series of milestones for the various steps of a production line. Each station must meet certain quality and volume goals before it can advance to a higher level of production. That forces the entire operation to focus on product quality. And it helps Lexmark to do a better job of managing outside contract manufacturers, who make the majority of the company's hardware.
Further collaboration takes place at the stage just prior to sale. All parts of the supply chain are involved in the design of product that can be customized to meet the needs of individual regions or customers. For example, Lexmark came up with a packaging design that allows the distribution center to reprogram a printer's memory without removing the machine from its box. The company also cut down on the size and number of unique parts required for each configuration. One solution was as simple as creating a snap-on attachment with the company's logo, instead of molding it into the plastic. Unique identifiers that couldn't be removed were reduced in size and designed to be easily replaced.
Customization is great for the end user, but it creates numerous headaches throughout the supply chain. Factories can only turn out so much product of a given configuration, making for short product lifecycles that are difficult to manage. Producers face the dual risk of investing in too much capacity or suffering lost sales due to inadequate supply.
"We're not trying to stick our partners. We want to talk about how you can shrink or shorten the pipeline."
One solution is to make a machine that isn't as unique as it appears. Lexmark is able to offer multiple models with a common printer engine. A handful of additional components can turn a regular printer into a premium model with a host of features, including LCD screen and network portal. Minor modifications can also yield printers with various price points and software configurations for the same market. And they have allowed Lexmark to experiment by quickly launching or withdrawing new products according to changing buyer tastes.
By altering the way in which product moves to market, Lexmark realized further efficiencies in the cash-to-cash cycle. The idea was to minimize physical "touch points" in the supply chain, while reducing the amount of inventory in storage.
Direct shipment, an idea that has been growing in popularity among many manufacturers, was one answer. Lexmark's traditional supply chain consisted of multiple links, including supply inventory, product customization, and cross-docks. Most of those middle stages are eliminated with the shipment of printers direct from the plant to retailers, resellers and distributors, bypassing Lexmark's own DCs. Between 2002 and 2004, direct shipments of customized product increased by 2,100 percent, and factory-direct movements rose 975 percent.
Product postponement and direct shipment can be viewed as contradictory strategies. Where, after all, will a printer be configured for customers if it doesn't stop at a Lexmark facility? But Covington says the dual approach presents no conflict. Direct shipment is used for basic printers with relatively low price points and destined for retail shelves. There, she says, keeping down costs is paramount. And demand for retail models is fairly predictable.
Two Supply Chains
High-end printers, loaded with extra features, are better candidates for postponement. In such cases, "you want to be able to customize at the last minute with applications for specific industries," Covington says. In fact, Lexmark supports two distinct supply chains, one a "no-touch" operation for inkjet printers sold in retail stores, the other a conduit for laser and multi-function machines that can cost up to $5,000 apiece, and are purchased by resellers or distributors.
The streamlining of Lexmark's supply chain has also led to channel consolidation. By reducing its shipping points, the company can make better use of economical full container and truck loads. Covington says Lexmark had previously cut down on the number of carriers with which it did business, boosting its buying clout with the rest. Today, regional reps no longer have the power to pick their own vendors. Transportation purchases are made through a worldwide logistics council, which also selects logistics service providers (LSPs) for each region.
Every business that doesn't demand cash up front struggles with slow-paying customers. So a look at Lexmark's accounts receivable was inevitable. Again, centralization of processes was the result.
Lexmark embraced a single worldwide credit policy. It covers which customers will be extended credit, how much credit will be permitted without executive review, and the criteria for credit suspension. All actions are guided by a series of strict trigger points and accounts-receivable metrics.
On paper, Lexmark has long followed the practice of prompt invoicing. Whether those invoices were accurate was another matter. A steady worsening of days sales outstanding suggested that they weren't. So another cross-functional team, consisting of representatives from customer management and order fulfillment, was assigned to the problem. They reviewed the entire billing process, from purchase order to receipt of payment.
The team even visited customers who had reported high levels of inaccurate invoices. In one case, it turned out that the customer wasn't using the shipping documentation provided by Lexmark for the receipt of product. The customer was mixing up orders on the receiving dock, making it difficult to come up with an accurate report of receipt. Other reasons for invoice discrepancies included picking error within the distribution operation, mistaken reports, notification by customers at the end of credit terms instead of when the error appeared, and the inability of Lexmark's customer-service department to handle claims quickly.
In response, Lexmark stepped up the number of quality audits for outbound shipments. With the proper data finally in hand, it saw the opportunity to redesign the warehouse in order to cut down on fulfillment errors. Parts with similar numbers were shifted in order to reduce picking error. And pallet-sizing rules for mixed pallet shipments were tweaked to reduce customer confusion.
In the end, Lexmark revamped and shortened its entire internal claims process. Personnel from order management and distribution became the central point of contact for problems reported by customers. Taken together, those efforts have led to a 300 percent reduction over five years in the average length of time needed to reduce claims, Lexmark says.
At the same time, the company shifted the focus of receivables management from past due to pre-collection, to ensure that customers were adhering to their contracted payment terms. As an incentive to the Lexmark sales team, bonuses were tied partly to customers' payment histories.
What Lexmark owes is just as important as what others owe it. Here, the company took an opposite approach. It sought longer payment terms from suppliers and other vendors, while identifying those offering the highest return. Lead buyers within the company were matched with top global suppliers to negotiate extended payment terms. The overall intent was to offer one face to suppliers on a worldwide basis, rather than rely on procurement specialists within each division.
The payment-term extension wasn't simply dictated to suppliers, says Covington. For one thing, it was more easily implemented with new suppliers, who didn't have a history with the company. Longer terms could therefore be negotiated up front, without complaint.
For veteran suppliers, the demand was sugar-coated. Lexmark offered to work with them to improve the overall supply chain efficiency of all parties. "We're not trying to stick our partners," Covington says. "We want to talk about how can you shrink or shorten the pipeline." Everyone benefits from less inventory in the system, she adds.
Lexmark was successful in implementing the new policy with suppliers new and old. The program has led to a 51 percent improvement in average payment terms, it says.
The company also made greater use of supplier-managed inventory (SMI). Also known as vendor-managed inventory, SMI puts more responsibility on the shoulders of the supplier, who holds title to product or parts until the last possible moment. The practice lightens the load on Lexmark's books, and ensures that the company is only buying the product that it needs. It has also shortened the time during which production is locked in for a particular model. As for suppliers, they get a "very large say" in the setting of inventory targets and how stocks are replenished, Covington says.
The Inventory Trend
Like consumer goods producers, Lexmark would like to see inventories go in just one direction: down. Since 2001, it has reduced inventory levels by 32 percent. To make that happen, the company launched several initiatives. They included a better planning process, greater visibility of inventory throughout the supply chain, SMI programs and direct shipment to customers.
On the planning side, the company shifted from a monthly to weekly process. The move has allowed it to react more quickly to changing consumer demand. And it has kept inventories low, with product flowing to end customers in smaller lots and shipment quantities.
Adjoined Consulting helped Lexmark to devise a strategy for better inventory management. According to White, the effort ranged over such considerations as customer service, forecasting and demand management, continuous improvement, sourcing and product design. "Inventory is a cross-functional impact area," he says. Multiple controls are necessary for handling supplier contracts, calculating lead times and assessing optimal inventory levels.
The method of determining precise inventory levels is far from perfect. Lexmark looks at the history of all product segments in order to predict sales for new and existing items. The exercise requires deep collaboration with customers, says Covington, including some access to point-of-sale data from retailers.
"We're trying to take that data all the way back through the supply chain on a weekly basis," she says, adding that the company can adjust to shifting patterns of consumption in a relatively quick manner.
One of Lexmark's major customers is Clearwater, Fla.-based Tech Data Corp., a large distributor to retailers and online consumers. Revenues were $19.8bn in the fiscal year ending Jan. 31, 2005. Tech Data recently awarded Lexmark the title of Best Supply Chain Innovator, based on work the partners have done to reduce touches in the supply chain. According to Tech Data, the effort has led to significant savings in warehouse space, management costs, labor and freight charges.
Tech Data participated in Lexmark's direct ship program, buying from the manufacturer overseas and shipping to its own logistics centers in full containerloads, says Brooke Powers, vice president of supply chain management and purchasing. The key was buying enough product to justify the effort economically and fill containers-not a problem for a distributor the size of Tech Data.
One consideration is product value. The program works best for less expensive printers with relatively low price volatility, Powers says. The company must be able to justify the extra time it takes to get printers from manufacturers in Asia, as opposed to buying them from Lexmark in the U.S.
Other suppliers of Tech Data are now embracing a similar strategy of direct shipment for certain items. "Lexmark has really caught the front of the wave," says Powers. "They've been increasing the number of products that they add [to the program]." At the same time, he says, the distributor will continue to rely on domestic sourcing for around half its total volume, in order to minimize order lead times and lessen the impact of potential supply-chain disruptions.
For Lexmark, the final piece of the puzzle is a renewed focus on the customer. Previously, the company had lacked a consistent view of its customer base across all departments. Now, a series of cross-functional teams, drawing on customer service, supply-chain management, sales and marketing and order management, work closely with retailer customers on every aspect of order fulfillment. At the same time, Lexmark is segmenting its customers according to their importance to the company's bottom line.
The results have been dramatic, and company-wide. In just four years, Lexmark has seen a 45 percent decline in cash-to-cash days, a 300 percent increase in cash flow from operations, and a 32 percent reduction in days of inventory.
But Lexmark isn't satisfied yet. It continues to experience intense pricing pressure from competitors, especially for its lucrative ink cartridges. According to Covington, there's more work to be done on customer service through multiple sales channels. And the supply chain can be made even more efficient. She says the company is on track to achieve another 15 percent reduction in its cash-to-cash cycle this year.
"We're looking at our touch points, the number of distribution centers, our infrastructure and how we can simplify and reduce cycle time," Covington says. "That's a continued challenge."
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