Looking for cash? Rethink your supply chain!

By Maersk Logistics

The current economic downturn is forcing many firms to re-assess their strategies moving forward, and in these times of financial challenges, cost is the main focus. Falling consumer demand as well as less readily available credit is increasing both cost and uncertainty within the supply chain creating operational and cost inefficiencies.

The degree of globalization and international outsourcing that modern companies have reached has never been so extensive, and the robustness of these business models will be tested in the period of economic downturn. Firms with global sourcing and distribution strategies more often than not have considerable amounts of working capital tied up in their supply chain particularly where inventory is concerned. Logistics costs are estimated to equal 8-10%[1] (this can differ across industries) of the cost of sales and so a review and optimization of the supply chain deserves closer attention.

The 'knee-jerk reaction'

Typically in tough financial times such as these, cash flow becomes more critical than ever and firms look for ways to improve their cash-to-cash cycles from bank credit to increasing credit days with their suppliers. With banks reducing lines of credit in the current crisis, delayed payments become an increasingly common occurrence. Whilst a seemingly simple solution for one party, payment delay not only strains the cash flow of the supplier but can also adversely impact your relationship. When widening the scope of the whole supply chain to consider the number of partners interconnected financially, a delay in the accounts receivables for any is neither a practical nor a sustainable solution. These days, 'cash is king' for all parties in the supply chain.

With no foreseeable end to the economic crisis, how else can firms reduce costs whilst not compromising service levels to their end customers during these challenging times ahead?

Review your current supply chain

To help identify Business Improvement Areas (BIAs) related to your supply chain, reviewing and benchmarking assists in pinpointing areas of vulnerability as well as provides a base case in which to measure the value of potential and implemented solutions.

Map your current supply chain and operational processes. BIAs can be quickly isolated and non-value adding activities identified. Additional data (if not already known) which can aid in measurement can be harvested such as logistics costs, lead times, seasonality, order patterns, etc.

Benchmark your business' key financial and operational figures such as inventory turnover net profit margins against your competitors or other 'best in class' performers from other industries.

Plotting the potential value of identified BIA's against complexity of implementation will provide an overview of quick wins and long term solutions. A clear understanding of the business priorities together will further fine tune rankings and create the list of actions from which to frame the optimal supply chain strategy.

Key areas to pay attention to

Depending on a firm's long term goals there are short and long term solutions which will not only help remove some of the financial strain from the supply chain, but also improve operational efficiencies. Below are some key aspects of your business to consider when reviewing your supply chain.

Inventory. During the best of times, firms struggle to decide between lean and agile supply chain strategies with minimal inventory or carry levels of buffer stock to mitigate any disruptions to supply. Inventory is associated with cost (storage, purchasing costs) and naturally an area of the supply chain whereby there are potentially significant savings to be achieved. The correct level of inventory for a firm to carry is dependant heavily on the optimal service level they wish to provide for their customers. Depending on a firm's desired service levels there are a number of solutions which can be applied ranging from changes in distribution strategy, to changes in purchasing behaviour such as order sizes and order frequency.

Focus on Efficiency. As firms source from low cost locations, their supply chains lengthen and contract manufacturing along with inventory management becomes key to success.  This imposes a heavy final cost and burden on the supply chain as additional critical points are created and the level of responsiveness of all these points become decisive in the overall result.  Further challenges arise once execution and strategy amongst suppliers are not aligned, especially amidst the crisis, where the monitoring of suppliers is imperative. Efficiencies improvements can be as simple as streamlining internal processes to larger scale operational improvements such as an over haul of existing distribution strategies.

Key Performance Monitoring. The need for increased control and monitoring of working capital will be one of the key aspects deeming the success or failure of companies throughout 2009 and the financial turmoil that waits. The ability of companies to strengthen relationships with suppliers and increase monitoring of key financial data will yet prove to be one of the best tools in maintaining a healthy working capital level. As companies source from multiple locations, different business environment (legal and political) combined with increasing the length and complexity of the supply chain further emphasising the need for monitoring. Key Performance Indicators (KPIs) will not only aid in monitoring quality and performance of internal operations and external suppliers but also in ongoing budget settings and contingency planning. Whilst firms are revising their forecasts for the year its also important that KPI's are revised to ensure that given the current climate that the right aspects are measured at the right levels. 

Focus on Core Competences. As means to reduce costs, firms may want to increase their focus in core competencies and consider outsourcing certain support functions as part of their strategy strengthening their position in an effort to ride out the current economic storm.  Global firms have a greater chance to pull through the crisis during the year due to their improved banking and crediting possibilities as opposed to smaller firms who are most likely to have an increased focus on mergers and buyouts.  Strategic options and focus should be re-evaluated eliminating "hobbies" and exiting all other non-major business focus. 

Communication. Analysts continually offer collaboration as the key to a successful supply chain operation. Often different units within an organisation are afflicted with 'silo thinking' leaving information unshared. A classic example is the lack of information flow between a sales and marketing department and production (or procurement) leading to misaligned forecasts which can result in an over or under supply of goods. Open communication and information exchange is vital to ensure that individual functions are working together to jointly achieve the business's set goals and strategy. External communication with customers and suppliers is just as paramount as it is the foundation to building healthy working relationships central to the success and cohesiveness of the supply chains. A recent white paper published by UPS in conjunction with the Economic Intelligence Unit found that 56% of the executives surveyed for their study 'place a high importance on building solid and lasting relationships as the best way to maintain the quality of their supply chains[2].

Conclusion

As uncertainty looks to remain throughout the year it is important for companies to strengthen their focus internally and externally in an attempt to adapt to the changing market conditions and challenges faced by all. Internally, a strong review of current supply chain setup and re-assessment of operational and financial measures are needed to ensure that current economic situation is duly incorporated. Even in the best of times firms with the most resilient supply chains regularly review their operations ensuring that they stay at the forefront of their industries in terms of service and market responsiveness, hence there is no period as crucial as now to maintain that vigilance. Mapping of the supply chain will enable underperforming segments to be identified allowing for revisions or seeking of new alternatives conducive to the business environment. Focusing on efficiency and strictly adhering to core competencies can help reduce unnecessary costs and exposure. On the other hand, external measures must also be conducted through high-level interviews and re-evaluating inventory and supplier needs.  Contingency planning in anticipation of changing conditions and uncertainties in the market to help navigate your business through the economic storm is imperative to ensuring that your business comes out on top during the eventual upswing.

References:
[1] Based on Maersk Logistics own experiences in conducting over 250 supply chain review for clients across a number of industries including retail, FMCG, electronics and petrochemicals.
[2] UPS & Economic Intelligence Unit, Dec 2008, 'Supply Chain Resilience: How are Global Businesses Doing?'

Contact details:
Mr. Cesar Presas, Regional Manager - Supply Chain Management
T: +971 4 5086 203, E: cesar.presas@maersklogistics.com