|CYCLE TIME REDUCTION-DRIVER TO SUPPLY CHAIN MANAGEMENT RESULTS||ftb Asia |
CYCLE TIME REDUCTION-DRIVER TO SUPPLY CHAIN MANAGEMENT RESULTS
Whether you are a 3PL, manufacturer, wholesaler, distributor, retailer, importer, exporter, supplier, customer, logistics service provider or other type of firm that participates in supply chain management, a major key to success is time compression. Increasing velocity, rapid response to changing market conditions, minimizing time-and sustaining that velocity--are the reasons for collaboration, integration, supply chain visibility and other endeavors to accelerate the movement of product and information.
There are numerous financial and non-financial cycle time metrics, for example-on-time customer order delivery, manufacture to order complete, cash conversion cycle and days sales outstanding. A good one should be a measure of the length of time for a process, especially one that crosses the organization. The cycle time metric should be important to the company. It should recognize pain points or should add value and competitive advantage for the company.
A key process that crosses the organization is days in inventory that measures the number of days that inventory is held. For manufacturers this would include raw materials and work-in-process. Days-in- inventory is an important part of the cash conversion cycle. Reducing inventory levels and days of inventory improves profits and frees up needed capital; and this pleases CEO, CFOs and shareholders.
This measure is often calculated as Inventory/(Cost of Goods Sold/365 Days). This method of calculation can be misleading and understate the total inventory in the supply chain. It excludes inventory that is on order and is being manufactured at suppliers and inventory that is in-transit. This is an omission that results in an understatement of the real days of inventory and the cash conversion cycle.
For purposes of this article, we will include the time from placement of purchase orders on suppliers until delivery. With Section 404 of Sarbanes Oxley, adding this inbound portion to the calculation is valid for internal controls and risk assessment. Regardless of the technical issue of when title transfers, there is the company commitment and need for the material being ordered and shipped. Including the purchased order at supplier time and the in-transit time gives a better picture and understanding of what drives inventory levels, days and turns is useful for product lifecycle management (PLM).
This new cycle time is total inventory days in the supply chain; and it is consistent with the length and definition of a supply chain. The supply chain cycle time runs from the purchase order placed on suppliers through to final placement on the store shelf or floor or to the customer's warehouse. Now we can measure the real, total time for inventory and by including the inbound side where the clock actually starts to tick on inventory.
Studies have shown that manufacturers and wholesalers have over 60 days of inventory and that retailers have over 90 days of inventory capital tied up. These times do not include the entire inbound inventory in the supply chain. Real supply chain inventory is likely 25% higher. This is a very significant amount of capital tied up in inventory.
Reducing supply chain cycle time takes analysis and effort. Points to consider are:
A supply chain is complex, made of many suppliers located worldwide, each of who has his own supply chain. There are chains within chains. The purpose of all this activity is to place product timely and correctly in stores or at customer facilities. It must be designed, directed and managed as a process, not as a series of order and shipping transactions. Pushing bad logistics processes and practices up or down the supply chain impedes time.
CONCLUSION. Reducing supply chain cycle time means decreasing the days of inventory held and reducing the cash conversion cycle. This can mean hundreds of thousands of dollars, even millions, reduction in inventory and in carrying charges.In turn this is capital available for other uses. All parties in the supply chain must understand their importance in gaining these benefits.