By now every supply-chain executive has gotten the message: Success in business today is all about satisfying the customer. All else is secondary.
Or is it? With the latest economic downturn, managers are being forced to revisit the age-old problem of cost. And, despite the purchase of software that was supposed to streamline business processes, they are discovering huge amounts of waste still to be ferreted out.
Their vision can be summed up in three words: cash to cash. The term defines the time between a manufacturer paying for raw materials, and getting paid for finished product. Appealing in both its breadth and evident simplicity, it's a devilishly hard concept to adopt.
Current business conditions are forcing companies to try. The slowing economy has them casting about for new ways of streamlining the supply chain. Shorter product lifecycles demand a faster return on investment from new systems and business processes. Outsourcing calls for better integration among business partners, not just within the enterprise. The hunger for new product requires greater flexibility in manufacturing.
Until now, managers have tackled the problem from the standpoint of physical goods and information. The third major drain on working capital, finance, has largely been ignored. (See "Finance and Logistics: Across the Great Divide," GLSCS, August 2000.) Yet it's the one with the greatest potential for savings today. "Usually it's about being more responsive to customers, rather than capturing the benefits of the financial aspects," says C. John Langley Jr., professor of logistics and transportation, at the University of Tennessee.
No systems-oriented approach will work unless underlying business processes are reengineered at the same time.
Companies are beginning to change their perspective, and the high-tech sector is leading the way. Few industries are so consumed by the need for speed, flexibility and cost control. Personal computers today have a marketing life of around 26 weeks, notes Mark Angelo, Agile Software Corp.'s director of industry development for electronics and high-tech in San Jose, Calif. Semiconductors can be sold for nine months, versus three years just a couple of years ago.
Even a single model of computer or high-tech component undergoes multiple versions. Dell Computer initiates up to 300 product changes a day, Angelo says. Yet its supply chain is extremely sensitive to error. Dell aims to ship product within five days of receiving an order. By stretching that period to 15 days, it would suffer 20 percent order cancellations.
Outsourcing is the order of the day among high-tech producers, creating the need for common processes and better communications between equipment sellers and those who actually make and move the goods. Forecasts, designs, specifications and change orders must flow effortlessly among partners. In such an environment, companies are forced to acquire a broader view, with an emphasis on how cash is moving all along the supply chain.
The solution begins with a strategy that embraces information technology but isn't limited to it, says David Bovet, vice president of Mercer Management Consulting in Boston. Some of the most obvious solutions, such as cutting down on accounts receivable, may be the best ones. Of critical importance is the ability to combine lagging with leading indicators - embracing both fulfillment and forecasting - to measure total supply-chain performance, he says. Only then can a company capture information at multiple stages of the chain, even at the level of tier two or three suppliers.
Electronic procurement is another good place to start, Bovet says. In place of expensive, full-blown software solutions on the procurement side, companies can set up intranet hubs with suppliers to facilitate better communications. But no systems-oriented approach will work unless underlying business processes are reengineered at the same time.
A good place to look for excess cash and inventory is in the connections between supply-chain partners, Bovet says. Where communication is less than perfect, physical product tends to fill in the gap. By moving away from the "sequestered" supply chain, companies have cut cycle times by up to two thirds.
Any effort to reduce working capital must look at accounts payable and receivable in addition to inventory, says Joseph Martha, vice president and leader of Mercer's supply-chain strategy practice. Consumer products makers are integrating trade terms into customer-service policies. Consignment, whereby the receiver doesn't pay for goods until they are actually sold to the consumer, is gaining popularity among big retailers who have the clout to impose it. No longer are they willing to provide a buffer for manufacturers attempting to push excess product into the market.
Manufacturers, in turn, are forced to do a better job of calibrating output to demand. Often they'll turn to upstream suppliers to help flush excess inventory out of the inbound portion of the chain. Through a build-to-order approach, their own cash-to-cash cycles can be dramatically reduced. And they'll have less capital tied up in non-productive inventory.
Merely taking time out of the process isn't enough. "The whole idea is to improve your rate of delivery and collecting cash, while not tying up your own cash in all sorts of assets such as inventory," says David Pope, a partner in the electronics and high-tech practice of Accenture in Dallas.
He proposes a new supplier-management program in which suppliers are asked to be more responsive to fluctuations in demand. That's the impetus behind vendor-management inventory (VMI) strategies, involving the creation of third-party sites to store product and feed it to the customer on an as-needed basis. An obvious boon to retailers, VMI won't help suppliers unless they can spread demand fluctuation over multiple customers, Pope says. Otherwise, inventory expense is just being shifted from the books of one entity to those of another.
Lasting solutions extend further up the supply chain, all the way to the design stage. The entire chain should be involved in product planning and design, says Pope. In the past, manufacturers scrambled to catch up with surges in demand for such components as CD-ROM drives in personal computers. Or they would be stuck with obsolete product when a new model of PC hit the market, just months after the old one.
Any discussion of a holistic supply chain eventually leads to the question of better cash management. A trio of consultants from A.T. Kearney Inc. speaks of the need for polishing financial links in the chain. John Macauley, vice president in the firm's San Francisco-based technology solutions group, argues that companies have been far less successful in cutting money out of the process than real goods. "Everyone is still carrying each other," he says. "It makes no sense."
One reason is a lack of standardized business practices. Companies are beginning to look beyond their own four walls, Macauley says, but they have yet to abandon their unique ways of performing back-office fulfillment. On a more basic level, comprehensive standards for moving data via the internet are still in their infancy.
Trade and product financing continues to occur on a piecemeal basis. And that leads to a surfeit of cash in the supply chain. In the U.S., Macauley says, nearly $9tr of business-to-business accounts receivable are trapped in multiple levels of the supply chain.
Eventually, he believes, financing terms will migrate to the best source of credit. Spurred by the move to outsourced manufacturing, partners will adopt the general contractor model, in which each "subcontractor" pays for its own work. The result will be "massive decapitalization," with a reduction of one-half to two-thirds in the amount of capital dedicated to holding financial assets over the next five to 10 years. But for now, each participant in the supply chain continues to bear the full carrying cost of getting product to market.
As with nearly every supply-chain innovation, big corporations - the ones with the power to impose solutions - will lead the charge. They can also prompt software companies to build solutions for collaborative commerce, not just problems within an organization. "The software tools frankly aren't dynamic enough yet," says Macauley.
In the U.S., nearly $9tr of business-to-business accounts receivable are trapped in multiple levels of the supply chain.
Foster Finley, a Kearney principal in Atlanta, focuses on improving balance sheets through better settlement strategies, from the bank's issuance of a letter of credit all the way to payment by the end seller. That, too, requires a view of the total supply chain.
The internet makes it possible. Finley promotes the notion of a web portal that is usable by the banks, carriers, manufacturers, underwriters and third-party logistics providers that make up a supply chain. More than a mechanism for tracking goods and purchase orders, such a portal can serve as a complete settlement engine, driving cash through the system with maximum efficiency. It provides the kind of control and visibility that facilitates payment to all participants.
For the most part, a trade super-portal remains a distant dream. Several industry pilots are under way, Finley says, although it's not easy to entice the full range of partners into a web-enabled community. Banks in particular tend to be wary of innovations in the world of trade finance. Web-based trading exchanges, also known as electronic marketplaces, are still in the formative stages.
But the appeal of internet portals is too great to ignore. According to Finley, the number of interactions in a typical supply chain runs in the high 80s - creating plenty of opportunities to eliminate redundancies and take cost out of the system.
Vivek Gupta, a Kearney vice president based in Cleveland, sees the potential for big savings at the front end of the supply chain, in billing and collections. One Kearney client was taking up to 90 days merely to obtain certification of a project's completion, a condition of payment. With the help of a web-enabled tool, billing was done in stages, according to standardized templates. The company ended up lopping 30 days off its 110-day cash-to-cash cycle.
Early issue resolution is equally important, says Gupta. Many companies let receivables age because they fail to address customer service problems. Faster payment can come from the alignment of performance metrics between sales and finance departments, leading to overall cycle-time reductions of between 10 percent and 20 percent. At the very least, sales should know when problems crop up, which isn't always the case today. The key, says Gupta, is that "all departments must be on the same page."
Further down the line, he sees the creation of data centers in places like Ireland and India, where skilled, low-cost labor is plentiful. Such centers will be accessible by all supply-chain partners via the net, making possible cuts in transaction costs of 20 percent to 30 percent.
Information that is both accurate and shared is the key to better forecasting, a critical component in eliminating waste from the supply chain. Having too much of the wrong product sucks up precious working capital. Having too little of the right stuff lengthens the order cycle, says Janice H. Hammond, UPS professor of business logistics at the Harvard University Business School.
Improvements in the supply and demand balance can run counter to conventional wisdom. Japanese automaker Toyota has pioneered a manufacturing system that turns out product roughly in the order that customers buy it. Termed heijunka, the system violates the assumption that plant economies are best realized through the making of product in batches - by color, model or special features. For example, instead of producing a large run of cars with sunroofs, and having them sit on dealers' lots for months until sold, Toyota makes smaller amounts that are tied to short-term customer demand.
The innovation has its roots in Toyota's origins as a textile maker, says Hammond. Instead of assigning each worker the numbing task of producing one small part of a garment, it relied on general purpose machinery and cross-training. As a result, it was better able to respond to changing market demands, while speeding up the production cycle.
At Toyota's automotive plants, faster sales means faster payment, to the manufacturer as well as to its many suppliers. In theory, the resulting drop in working capital is more than enough to offset inefficiencies caused by the need for more frequent re-toolings of the assembly line.
Such a program requires highly accurate forecasting of demand, but no system can ever be perfect. Hammond says manufacturers would be wrong to rely solely on either flawless forecasts or a quick-response capability tied to actual orders. The answer lies in a delicate balance between the two.
Again, success depends on adopting a complete, cash-to-cash perspective. A manufacturer will never reap the benefits of a re-tooled plant without simultaneously redesigning its distribution center to ship product in smaller lots, Hammond says. Order fulfillment must be streamlined at the same time. In short, speed of processing must be maintained throughout the chain.
"You can implement [changes] one at a time," Hammond says, "but you shouldn't expect to see major improvements until you do it all."
For most companies, even those claiming enlightenment, the walls still stand. Cash-to-cash is a familiar concept to many
Timely information cuts cycle time by bringing producers closer to the customer. Sometimes that happens literally, as in the case of parts warehouses built close to an assembly plant. Other times it means the adoption of postponement strategies, whereby product is customized at the last possible moment to meet the needs of particular customers or sales regions.
Whatever the method, agility is the goal. Chris Jones, executive vice president of marketing and corporate development with Atlanta-based SynQuest, cites one European consumer-goods maker that sliced out an entire layer of distribution by eliminating country warehouses. Although it ended up paying more for transportation, the extra cost was less than the savings realized through better responsiveness and reduced inventories. It was only through a high-level view of the supply chain that the company could understand the trade-off.
Thinking cash-to-cash means scrapping the notion of a linear supply chain and embracing collaboration across the network, says Jones, especially when it comes to planning. Under the old system, physical product was like cash today: There was too much of it, in too many places. "It's those over-the-wall handoffs that create inventory," he says.
For most companies, even those claiming enlightenment, the walls still stand. Cash-to-cash is a familiar concept to many managers; measuring it accurately is another matter entirely. According to Langley, they tend to focus on cutting out time in obvious areas such as transportation, which accounts for only a small part of the cycle. They shy away from wider-ranging processes, such as information sharing, that require the cooperation of multiple players in the chain.
Still, mere awareness of the need for a cash-to-cash perspective is a good start. It gets managers thinking about the steps they need to take in order to build competitive supply chains. "It's very encouraging," says Langley, "in that it means taking a soft cost of logistics, and making it more legitimate."
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