4 Replies Latest reply on Apr 12, 2010 11:08 PM by James

    How to free up working capital by improving supply chain efficiency & visibility?

    James Apprentice

      Global inventory visibility is one of the ways to free up our working capital as highlighted at http://bit.ly/ReduceWorkingCapital

      but what are the other potential ways and methods which can help us in reducing the working capital so that it can be invested in expansion plans or other strategic initiatives?

        • Re: How to free up working capital by improving supply chain efficiency & visibility?
          Trevor Miles Apprentice

          Hi James


          You bring out the classic conflict between reducing inventory (reduces working capital) and customer satisfaction (increases working captial becuase of increased inventory requirements):


          • Reduction in inventory through
            • Reduction in item obsolescence
            • Higher inventory turns
          • Higher customer satisfaction through 
            • Higher ontime delivery


          Working capital can be defined in many ways.  As a supply chain practitioner - not a Finance person - I find Cash-to-Cash (C2C) to be the most useful way to measure what is in my span of control and is a better measure of supply chain efficiency than working capital, though C2C is not perfect.  Please have a look here for some discussion on the topic on the best KPI's to use to assess, diagnose, and correct supply chain issues.  In case other readers do not know this, C2C is defined as days-of-sales-outstanding (DSO) + days-of sales-in-inventory (DOI) - days-of-payables-outstanding (DPO).  While a supply chain organization is not (usually) responsible for the agreed payment terms with customers and suppliers, the manner in which the supply chain is operated should be consistent with reducing C2C, and therefore working capital.


          All processes are made up of an information flow and a physical flow, and this all occurs in the context of a customer's enquiry-to-order-to-delivery lead time.  If we assume a fixed enquiry-to-order-to-delivery lead time, every minute that is taken up by the information flow (enquiry-to-order) reduces the amount of time allowed for the physical flow (order-to-delivery), because it is a zero-sum game.  Afterall, when a customer makes an enquiry, they already have a delivery date in mind.  By reducing the enquiry-to-order lead time you can either

          • reduce the FG on-hand inventory through postponement, because you now have more time to source the items from further up the supply chain
          • increase customer satisfaction by having more time to deliver the order within customer expectations from FG on-hand inventory
          • a bit of both


          The last components of DSO (order-to-cash) and DPO (procure-to-pay) are largely out of the control of supply chain organizations.  Nevertheless, if the order can be delivered earlier or by using lower FG inventories, there will be a reduction in working capital.  Similarly, if the purchase of goods can be delayed or the amount of raw material inventory can be reduced, there will be a reduction in DPO.


          Postponement is a very powerful way of decreasing C2C and therefore increasing working capital.  Reducing the information processing time for enquiry-to-order for both sales and purchases is one of the most effective methods of increasing the postponement potentail.  Have a look here for more discussion on time based competition.



          Trevor Miles



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          • Re: How to free up working capital by improving supply chain efficiency & visibility?
            Jim Wood Elite

            Before commenting on other ways to reduce working capital I want to comment on how one actually accomplishes execution of leveraging global inventory visibility as mentioned in the link on your post.  I recently joined Kinaxis after many years at a high-tech manufacturer of complex automatic test equipment.  In my experience, allowing people to see global inventory is insufficient without also having ways to make it easy to use the information and developing execution processes.

            The best way to do this can vary considerably from company to company. (Disclaimer: I am a Kinaxis employee and have an interest in promoting Kinaxis’ software.)  Kinaxis’ RapidResponse software is highly configurable to make it easy to focus people’s attention on the actions they can take to decide how best to share inventory across sites based on the particulars of a company’s situation.  It is this ease of configuration and reporting that made me a fan of the software and factored heavily in my joining the company.  In my former environment we had visibility to the contract manufacturer’s inventories and RapidResponse is well suited to integrating planning data from various sources, though the integration work is not a small task.

            Moving on to the question of ways to reduce working capital, there are endless actions a company can take and I offer just two thoughts from my experience. 

            1)      Outsourcing manufacturing moves inventory and fixed assets to the balance sheet of the contract manufacturer, though it may not reduce your overall inventory liability.

            2)      Lead time reduction efforts for purchased components can have a big impact, particularly if your industry is volatile.  There are many well known ways to do this but I will mention an unusual program I participated in. 

            Our team worked with suppliers to authorize them to procure key materials based on a contractual authorization quantity that was set monthly. Liability was limited to the components that were unique to our company and the supplier was authorized to procure and build based on pull/kanban logic.  The result was a 15-30% reduction in liability, 90% reduction in order release lead times and more demand flexibility due to a built in kanban buffer.  On one part, liability was reduced $5mil and in a business downturn on hand inventory was reduced $5mil compared to what it would have been with traditional long lead time PO’s.  This process was not easy to develop or execute but it paid big dividends.  The lesson is that if you put your mind to it you can reduce lead times and liabilities, with a net result of lower on hand inventories.

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            • Re: How to free up working capital by improving supply chain efficiency & visibility?
              gautam_sunil Novice

              Reducing working capital requires attention on- short-, medium- and long-term cash generation through a series of targeted initiatives. Examples are improving collection activities in short term, designing new credit terms for medium term. In the long run, investment in information technology would be helpful to increase visibility in supply chain, inventory movement and replacing physical flow by information flow.

              Sometimes the right system is in place and the need is to put right metrics in place. For example, if we emphasize lower costs in supplier selection, chances are the total cost of service increase by cost of rework and bad relationship. Resulting increase in project completion work needs more working capital. So procurement/sourcing function can look for criterions more than only face cost to reduce working capital needs.

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              • Re: How to free up working capital by improving supply chain efficiency & visibility?
                James Apprentice

                Thanks Trevor, Jim and Sunil for the nice pointers. These are extremely