By Hugh Williams, Managing Director of Hughenden Consulting.
Here is a little exercise to help you take Supply Chain decisions. First, think about your company and imagine that your personal money is involved. Every time material is ordered, you have to write a personal cheque. Every time a client pays you, it goes to your bank account.
Now that you are focused, you probably want to know how much of your money is tied up. This is precisely what the Cash to Cash Cycle is about. In simple terms, it is the time elapsed between the moment you pay for something and the moment you get your money back once you sold it.
In Supply Chain terms, it measures the duration which a company finances its own inventory. It considers the number of days between the initial cash outflow (when the company pays its suppliers) to the time it receives payment from customers.
To calculate it, use this simple formula:
Stock-turn days plus debt days (owed by customers) minus credit days (owed to suppliers)
Are you comfortable with the result? Even if, in reality, this is not your personal money, what does this number mean to your business? Imagine if some of this cash was freed up and used elsewhere. You could buy extra capacity, grow your Supply Chain team, or finance a software implementation.
A Supply Chain Director recently expressed his frustration to us about his team not dealing with the returns to suppliers. They just left the stock to sit around. In effect, they were lengthening the Cash to Cash Cycle, which is a crime. In fact, the cycle is fast becoming an important Supply Chain Key Performance Measure. And if your business is suffering from the increasing costs of raw material, you really want to drive the cycle down.
It is no secret that 'running out of cash' is one of the most common factors in failing businesses. In the other extreme, you have the big retailers who have a negative Cash to Cash Cycle. They get the money from their customers first, before they pay the suppliers.
If this little exercise got you thinking, pass it onto your colleagues. Make sure that it is used in your business, as a focus for Supply Chain decisions.