In her appearance on Supply Chain Now, Kinaxis Chief Strategy Officer, Anne Robinson, Ph.D., said, “Senior leaders are realizing how critically important supply chain and supply chain performance are to their company performance. As a result, we’re seeing every executive and every CEO say, 'I need to become a supply chain manager.'”
That’s not to say that they’re shifting their day-to-day responsibilities, but rather, the trade-off decisions between efficiency and resiliency are bubbling up to the C-suite of major companies. These are the types of decisions that historically have been reactive in nature, occurring only after a disruption has occurred.
However, as supply chain’s influence on the entire business grows, these decisions are more proactive. In particular, the ability to generate actionable insights from data and dynamically understand the financial risks and potential trade-offs between cash, cost and service decisions is paramount to success.
Integrate models to drive stronger alignment
Inventory is perhaps the most debated of these trade-offs. By keeping extra inventory throughout the network, supply chains can ensure that they will have adequate supply in the event of everything from demand spikes to transportation disruptions. Maintaining that buffer stock comes at a cost, and over time, CFOs pressure supply chains to take a leaner approach with inventory to decrease working capital and free up cash flow.
With constant uncertainty, minimal inventory levels can also be a source of risk. To combat that and develop a more balanced approach, CFOs and supply chains can align on using other metrics, like cash-to-cash cycle time, to assess performance. By including both days of sales outstanding (DSO) and days payable outstanding (DPO) in the calculation with days of inventory outstanding (DIO), the business can see just how long it takes for cash expenditures (i.e., investments) to turn into revenue.
Some companies like Dell, Apple, and Amazon have managed this alignment so well that their cash-to-cash cycle was negative; they received revenue before expending cash based upon their sourcing terms and supply chain practices. More realistically, benchmarking leader APQC says, “Top performers on this measure have a [cycle] of 33.2 days or less on average while bottom performers take 74 days or longer to convert cash.”
Use technology to harmonize planning and performance
Delivering strong results, such as industry leading conversion cycles, is seen as a measure of the executive team’s success. That alone is not enough, though. Leadership needs to define appropriate performance expectations and measure progress against those goals.
Technology plays an especially important role in setting these expectations by harmonizing supply chain operational planning and financial forecasting to enable dynamic insights, facilitate strategic decision-making and improve efficiencies.
For example, APQC found that companies with advanced capabilities in analytics and scenario planning had shorter planning cycles than those that lacked these capabilities. Advanced analytics and predictive algorithms shortened a company’s average cash conversion cycle by about 10 days, from a 65 day average for those without these capabilities to a 56 day average for those with them. Companies that could model scenarios to a significant extent had an average cash conversion cycle of 49 days compared to 60 days for those that didn’t.
Once expectations for performance and relative comparisons are established, the business must act as a single entity, aligned across functions. By bringing together people and processes with technology, the most impactful decision points can be identified. Then functions like supply chain and finance can partner in the pursuit of specific objectives, whether it be via cash-to-cash conversion, or other metrics.
To hear more about how to align people, processes, and technology across functions, please register for our webinar, How Finance Leaders Align Forecasting and Supply Chain Planning to Improve Efficiency, Strategic Decision Making, and Performance.