If the word collaboration was listed on a card as a drinking game at supply chain conferences, we would be drunk at many. The word, while bandied about frequently in speeches, is largely meaningless due to overuse and abuse. Here I share perspective on cash-to-cash abuse.
While we speak of collaboration, the focus is on driving enterprise results not value in value chains. Today, most processes are a win/lose not win/win. Let me explain. I define collaboration as the ability to establish long-term win/win value propositions between and among companies. In a win/win relationship, both parties derive value. The value does not have to be equal, but it needs to be real and sustained. In a win/lose relationship, one party gains at the expense of the other. True collaboration is systemic. In an effective collaborative relationship, the relationship is owned by the organizations. While the processes are kindled by individuals, it must be owned by the corporations.
So, why is Lora writing this post? I am troubled. We are in the middle of a pandemic, and our supply chain processes are woefully out of step with the need. As the second wave descends, we will feel the impact of the economic downturn. The traditional supply chain leader’s paradigm is a supply chain process design focusing on driving an efficient response. Traditional processes respond, but they do not sense. As a result, they are largely out of step with the market.
Inventory, in this time of uncertainty, is the organization’s most important buffer to protect against variability. However, organizations are not good at managing inventory. Supplier development programs are essential to be sure that suppliers get the cash that they need to drive resiliency. Yet, only 20% of companies actively manage supplier development programs to get cash to suppliers in need.
In times of uncertainty, cash is king. Management of the cash-to-cash cycle is critical to maintaining working capital. Cash-to-cash is a compound metric:
(Days of Receivables+Days of Inventory)-Days of Payables=Cash Conversion Cycle
In times of growth, when companies are funding inventory builds, cash is needed. It is easier to adjust payment terms than seeking bank financing. Some firms like Dell manage a negative cash conversion cycle. However, as will be seen through this analysis, we are propping up the cash conversion cycle by not collaborating with trading partners through transactional financial reengineering versus managing the processes to improve value.
I find it ironic that technology has never been able to move funds quicker, yet we are accelerating financial reengineering processes to make money at the supplier’s expense. Brand owners have the lowest cost of capital and could redefine the value chain to drive sustainable value, but they don’t collaborate and use these new approaches to drive value. Instead, the focus is on reducing the costs of finance by eliminating labor costs through Business Process Reengineering (BPOS) and elongating payables.
Please let me know your thoughts when you read through these dismal results. May we never again say collaboration unless we mean it.
The impact of the elongation of payables on receivables varies by industry, but on average across the industries increased eighteen days when comparing the past five years to the pre-recession years. It is worse in some industries. Note the elongation of the cash-to-cash cycle in the chemical industry of 38 additional days when comparing the 2014-2019 averages to the pre-recession period of 2004-2006. With technology advancements in banking (ACH, EFT, SWIFT, and wires), money has never been able to move faster; but the issues resulting from the lack of collaboration elongated payables in ten of the twelve industries listed.
While we have set up many Business Process Outsource Services (BPOs), their effectiveness is abysmal. I have my fingers crossed today, that I may finally receive payment from one of the largest Indian BPOs. While touted as a digital procurement provider, it took the Company nine days to onboard me as a vendor, and two weeks to process a Purchase Order. I shook my head in disgust at the waste in the process. This was not a new relationship. I have been onboarded with this vendor for nine years.
Many companies using BPO services like Accenture, IBM, Infosys, CAP Gemini, Tata, and Wipro have no idea of the inefficiencies of what should be an efficient service. The company in an effort to reduce costs outsourced payments. As a small vendor dealing with receivables across the industry, I find the worse process automation in the Accenture and Infosys relationships.
My takeaway? If you care about your relationships with your suppliers avoid BPO services. If you cannot sidestep outsourcing, closely monitor the effectiveness of the BPO services. You may be surprised at the inefficiency and the impact of your decisions on your supplier’s cash flow. As companies elongated payables, to improve cash-to-cash cycles, the increase in BPO services, and the lack of holistic design radically impacted receivables.
Table 1. Days of Receivables by Industry
I apologize in advance if I sound like a broken record. I write so much about inventory that the frequent reader may feel like I am preaching, but please bear with me.
All industries operate today with more inventory than in the pre-recessionary period of 2004-2007. The average is twenty-five days. (The average company operates with almost a month more inventory than fifteen years ago.) The increase in inventory is despite the evolution of lean process advancement and the implementation of advanced optimization like Multi-Enterprise Inventory Optimization (MEIO) technologies and the improvements in Just-in-Time (JIT) and Vendor-Managed-Inventory (VMI) processes. What do I believe happened? As complexity increased, we did not design the supply chain to absorb greater variability. Most companies focus only on safety stock levels and do not holistically manage the form and function of inventory. We need to actively design inventory buffers; yet, only 9% of companies actively design their supply chains.
My takeaway? Let’s learn from the past to unlearn to rethink supply chain excellence. Inventory management is about much, much more than safety stock management. Actively design your supply chain to focus on the management of variability and implement inventory buffer policies. In parallel, focus on eleminating excess inventory quickly. In lean terms, we have too much muda (waste) and too little inventory working for us.
Continually use simulation and inventory optimization techiques to educate your financial teams. Unfortunately, many see inventory as a pot of money to dip their hands into at the end of the quarter or to produce year-end results. Push to stop this behavior. Continually educate the executive team to help them understand that right-sizing and managing inventory is the most important risk management technique available.
Table 2. Days of Inventory by Industry
Across industries the Days of Payables increased 20 days. All industries increased payables across the past fifteen years. I find the industry very short-sighted in the management of payables.
Do you find it ironic that the companies with the highest margins like pharmaceuticals, beverage and beauty increased payables the most? When you think about the impact on a shared value chain like chemicals, contract manufacturing and transportation, the pharmaceutical companies making 20-22 percent margin are asking companies making 8-10 percent margin to fund their supply chains. Drink if you think that this is collaboration.
Table 3. Days of Payables by Industry
Impact on the Cash-to-Cash Cycle
The impact on the average supply chain is an increase in the cash-to-cash cycle is 28 days. In short, we have not done a good job of managing inventories and our failed efforts at financial reingineering are coming to roost. Want to talk about waste? It is here in spades. Want to discuss collaboration? Read between the lines, sadly, it is not existent. We have let high profit brand owners hold the value chain hostage. Sadly, the BPOs are the best supporting actors.
Table 4. Impact on Industry Cash-to-Cash Cycles
Bite your tongue when you say the word collaboration. We do not know how to walk the talk.
The processes of large brand owners artificially managing cash-to-cash cycles is a contributor to a less sustainable world. The world would be more sustainable if we clean out our warehouses of inventory that we do not need. There would be less waste in landfills if we built products to market demand, but this would mean that we would have to redefine our processes outside-in and care about our suppliers and customers. And, that folks is a tall order that is not possible in the world of inside-out processes run by a CFO that is artificially propping up a balance sheet without understanding the impact on the value chain.