AMN Perspectives by Thomas Group: Experience at Work

Posted: Sept. 28, 2004, 9 a.m., EST

by John Steidl, Thomas Group consultant and David Demers, president of Avicon

IRVING, TX — The New Measure of Success

How do the top performing companies measure success within their new supply chain operating models? Traditionally, supply chain models have sought a trade-off between three strategic values: order-to-delivery cycle time and predictability, cash-to-cash velocity and revenue and margin contribution. These outcomes are opposing forces; optimizing one can result in a negative affect on the others. For example, a company transforming to a build-to-order supply chain model will directly benefit from reduced inventory levels, which will result in improved cash-to-cash velocity. If not carefully implemented, however, the company could see an increase in order-to-delivery cycle time as a result.

Companies have often focused on one or two outcomes based on the highest business priority of the moment. In a difficult economy, the priority typically is cost and cash-to-cash cycle time. In good times, market dynamics offer more flexibility for leveraging service-level performance improvements.

While these trade-offs will always be in play, the bar is being raised to create a supply chain design that can effectively address these opposing outcomes and optimize all three at the same time. As depicted in Exhibit 1 the challenge is concurrent optimization of the three outcomes; companies must adopt DNA building blocks that result in high-speed processes to achieve cash velocity, improved margins and customer loyalty simultaneously.

Exhibit 1

To illustrate, “response time” necessitates shorter lead times, and “predictability” entails on-time delivery to ensure customer growth and loyalty. The challenge is how to reduce response time and improve predictability for customer orders without building excessive inventory or incurring added costs. The solution is no longer to build products to a forecast of future demand but rather to shift to a demand-driven model.

Traditional supply chain models are based on forecasts that often lead to excess inventory and erratic response times. Demand-driven models, by contrast, are based on tight integration, collaboration within trading-partner communities and flexible processes that can respond to customer demand within short lead times. These new integrated supply chain models result in reduced inventory investment, shortened lead times and greater delivery predictability.

Furthermore, high-speed models enable business agility, allowing companies to focus their resources on enhancing margins and generating revenues, the second key outcome. Improved flexibility allows operations and financial managers to calculate and pinpoint specific products and services that can yield higher margins without the need for additional resources to support growth.

Cash-to-cash cycle time is the financial measure of working capital, which essentially represents the amount of time it takes to turn a dollar spent with a supplier into a dollar received from a customer. Operations and financial managers use this as a measure of efficiencies and inefficiencies. High-speed models facilitate improved cash-to-cash cycle times by reducing days of inventory, sales and/or payables. In a tight economy when margins are thinning, cash velocity can become a company’s secret to boosting bottom-line profits and increasing shareholder value. Even in times of shrinking margins, companies can achieve a good return on working capital by increasing the velocity of assets.

Competitive benchmarks set the stakes of the race-with improved response time and predictability, margin and revenue, and cash-to-cash cycle times as the prizes. Ultimately, by reducing the working capital tied up in a supply chain, companies can maximize cash flow. The excess cash can then be reinvested, thereby fueling future growth.

This leads to the final question: What is the roadmap that successful companies follow in order to transform their supply chain? We’ll cover this next time.

For additional information, visit www.thomasgroup.com .

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“AMN Perspectives by Thomas Group: Experience at Work” is written and sponsored by Thomas Group. The opinions expressed in “AMN Perspectives by Thomas Group: Experience at Work” articles appearing on aftermarketNews.com do not necessarily reflect the opinions of AMN or Babcox Publications.