Two new research projects have highlighted ways for companies to make big savings.
supply chain costs will be every bit as important in 2010 as it was in 2009, and two new pieces of research have highlighted just how much cash is at stake and why industry leaders are doing better than the laggards.
Consultancy Booz and Company has calculated that there is £110 billion excess working capital sloshing around in British companies – and the key to making use of it is more efficient supply chain management.
Booz looked at 202 publicly traded companies with combined annual sales of more than £1.2 trillion, and analysed three components of working capital: receivables, payables, and inventory across 31 industry sectors. It points out that the figure of £110bn is more than five times the economic stimulus of £20bn announced by the government in 2008.
It reckons that there are four levers that companies can use to improve their working capital performance:
Rebalance supply and demand requirements through sales and operations planning, supply policies and commercial levers to enable companies to move excess inventories and avoid over-building.
Optimise end-to-end supply chain structure. This involves looking again at traditional supply chain trade-offs, especially for extended global supply chains. In some cases, the cash tied up in inventory could more than fund the development of local production facilities.
Align incentive structures to reward cash management. Publicly held corporations can create liquidity by offering incentive to management to address short and long-term opportunities.
Think radically about architecture or operating philosophy – for example pull versus push, or agreements on financing with third parties. Booz has even developed an online working capital profiler, that analyses the positions of hundreds of companies across multiple sectors to enable companies to assess their standing against their peers.
There are parallels between the Booz research and work done by the Aberdeen Group on reducing the amount of inventory in the pipeline and cutting landed costs. On-time delivery at best-in-class companies was 15 percentage points higher than the laggards.Aberdeen looked at more than 200 leading global players with the aim of distinguishing the characteristics of the best versus the worst performers.
Globalisation has resulted in a dramatic increase in both the amount of inventory in the pipeline and landed costs. Factors such as competition, ongoing business transformation, increased lead times and complexity have all played a role in this.
Aberdeen’s report, “Supply chain visibility excellence: reduce pipeline inventory and landed cost”, found that complete and on-time delivery at best-in-class companies was 15 percentage points higher than the laggards. There was also a 13 percentage point greater reduction in year-over-year unit landed costs.
In particular, it found that best-in-class companies were 1.5 times more likely to treat in-transit inventory as available inventory for safety stock calculations. They were also 46 per cent more likely than all other companies to have online visibility into accrued supply chain costs. In addition, they were almost three times as likely as the laggards to use commercial business intelligence systems.
Clearly, there are big prizes available, but who will step up to the challenge?