A recent article in CFO Magazine called “Focus on Cash, Not Costs, in the Supply Chain” argued that it was more important for companies to focus more on overall supply chain management rather than just supply costs.
The author writes that in the face of stagnant sales growth that:
“The knee-jerk solution ... to seek cost savings by cutting supplier costs, but in today’s economy, indiscriminately squeezing supplier margins could actually end up hurting profits in the long run.... Freeing up cash flow instead of cost cutting will allow a company to not just mitigate losses from slow revenue growth.... The secret? Focusing on reducing days of supply and building a lean-cut yet fast-moving supply chain.”
Based on our extensive experience providing outsourced CFO services to small businesses and startups in the San Francisco Bay Area, we have seen many companies with negative or poor cash flow due to a working capital tied up in their supply chain.
As the article points out:
“You won’t even know you’re losing money. Excessive days of supply are by far the biggest waste of money in an operation, but it takes a psychological — and monetary — investment to analyze the supply chain and understand where the organization is holding unnecessary inventory.”
Many companies (large and small) have not truly analyzed or identified opportunities for improvement in their supply chain, and, especially, with respect to their inventory and supplier payment terms. This is true for both technology companies (e.g., hardware, software, Internet) as well as for non-technology companies (e.g., manufacturing, services, retailing, food).
The article points out the missed opportunities and potential benefits:
“Days of supply is one of those concepts that most people are reluctant to tackle for fear of stock-outs and missed sales opportunities, but remember: every dollar of inventory you can take out of the supply chain equates directly to a dollar of free cash flow. For a typical Fortune 100 company, this represents $50 million to $100 million of free cash for each day of supply chain saved. Take it from a company who succeeded: Flex, a global supply chain solutions company, showed savings of more than $350 million in their annual report — by taking just five days out of their 65-day supply chain. Plus, their faster supply chain allowed them to react more quickly to revenue opportunities.”
In the pursuit of sales and customer growth (especially in Silicon Valley), there is a strong fear of missing sales due to an inventory stock-out. However, both large and small companies often have inaccurate information with respect to their supply chain and working capital situation:
“Chances are, lackluster technology is shrouding much of the chief procurement officer’s operations in the form of delayed, self-serving, or miscommunicated updates. And because supply chains typically buffer against uncertainty with inventory, poor information leads directly to an increase in days of supply.... If you don’t know where your inventory is being held, and how that relates to demand spikes or disruptions, then you can’t safely remove any of it from your supply chain. Real-time issue management provides organizations with the ability to not just know faster, but act faster. That newfound agility will reduce the uncertainty and delays that bloat operations and tie up working capital.”
One area that we do not necessarily agree with the article is its assertion that supply chain management is more important than pushing for supplier cost reductions. Based on many years of practical experience providing part-time CFO services, we often see small businesses and startups that have been taken advantage by larger suppliers with respect to costs and payment terms. Both cost management and supply chain management should be pursued simultaneously.