Supply chain leaders are under constant pressure to optimize working capital and this is further compounded in an economic environment underpinned by uncertainty. In fact, according to the “Supply Chain Impact Survey” commissioned by Capgemini and conducted online in October 2013 by KRC Research, 87% of global supply chain managers reported top-down pressure to continually reduce costs and optimize working capital in the supply chain.
Cash is king and in many organizations, there is significant untapped opportunity to optimize working capital and improve cash flows.
In order to optimize working capital throughout the supply chain, companies must address the following issues:
- Inventory management: Reducing inventory turns working capital into cash. Companies need to strike a fine balance between finished goods inventory and customer service levels. A key enabler in achieving this is improved forecast accuracy coupled with a tightly managed product range. With globalization, most companies operate in a multi-echelon supply chain network and the ability to use advanced algorithms to account for volatility in demand and supply and accounting for risk pooling can help shave a couple of days from inventory. It is interesting to note that despite several analytical models being available in this space, a lot of them have not found their way from research papers to practical applications in real life!
- Cash conversion cycle: In order to shorten the cash conversion cycle, companies need to be focused on both their receivables as well as payables processes. Improved credit management and collection processes backed by analytics can help weed out customers with poor credit history and also focus on the right customer segment for collections. Negotiating innovative payment terms with suppliers can further help.
It is interesting to note that many organizations do not have an integrated approach across business, finance and supply chain to optimize working capital. While inventory is a critical element to achieving optimal working capital performance, it is important to note that accounts payable and accounts receivables have a significant role to play as well. How often do companies look at integrated approach to determining payment and credit terms and also days of inventory?
Optimizing working capital in the supply chain requires the right balance of process, technology and people enablers:
- Process: A level of process maturity which is foundational to drive best in class demand planning, product range and inventory optimization processes
- Technology: This is not just about the right technology application in supply chain planning but also in the finance function to leverage payment and receipt technologies
- People: A dedicated supply chain planning team is just one key element. An organization structure that supports common metrics across the business, finance and supply chain functions to measure performance on working capital is more critical.
Optimizing working capital in supply chain management can only be effective if the supply chain itself is adaptable and flexible, and companies are able to leverage real-time data and analytical models to react quickly to global market demands and changing consumer sentiment. Often with the right service provider partnership, companies can leverage a roadmap that blends supply chain management and financial management strategies in order to optimize working capital.