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."|
- Donna Covington of Lexmark International
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