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Leveraging Supply Chain Excellence to Optimize Cash Flow, Gain Competitive Edge


3/7/14

During the recession, many retail and consumer products companies found themselves with declining sales, bloated inventories, and limited access to lending, which forced CFOs to focus their attention on supply chain liquidity. Now that the economy and corporate balance sheets have improved, should these companies revert to old behaviors? The answer is a resounding “No!”

Optimizing the working capital tied up in their organization’s supply chain is a winning strategy embraced by leading companies. The visionary leaders of such companies understand that working capital levels are largely influenced by inventory levels, which are determined by how effectively a company executes a strong supply chain strategy.

When Inventory Is Not an Asset

Many organizations question whether inventory is always considered an asset. Keeping too little inventory often results in both lost sales and lost customers, while excessive inventory increases costs and adversely affects cash flow.

Effective supply chain management seeks to balance customer service and product availability with cost and risk. However, higher levels of inventory in the supply chain often do not translate to better service or increased sales.

The most direct effect inventory has on net profit can be measured via carrying costs. However, lagging supply chain performance also directly affects the bottom line in the following ways:

  • Cash tied up in inventory can’t be used for more productive purposes, so total return lags
  • In the short term, stock-outs have a direct negative effect on sales volumes, and in the longer term, customers and channel partners will seek out more dependable sources of supply
  • High inventory levels in the supply chain translate to slower realization of and reaction time to changes in customer demand, so sales opportunities are lost
  • High inventory levels in the supply chain increase exposure to risk that product will become unsalable or increase the need for discounting, thus damaging margins and brand status
     

One Solution: Designing an Efficient Supply Chain

In some cases, inventory issues can be addressed by innovative design strategies at the distribution-facility level. That was the case of one pioneering apparel e-retailer when faced with the risk of high inventory levels brought on by two challenges inherent in its corporate business strategy. The challenges included the frequent introduction of new products, and large return volumes stemming from a liberal return policy. To resolve these problems, the e-retailer planned a redesign of its distribution warehouse to incorporate efficient receiving and stocking of new products and the rapid processing of return products, emphasizing the need to quickly receive, process, and place items in inventory. One innovation included incorporating a free-standing photo/computer lab into the receiving area, allowing new products to be photographed and immediately posted to the e-retailer’s e-commerce website; concurrently, the product was physically moved from receiving to the inventory shelf. Similarly, returned products were also routed to the in-process lab in instances where the customer indicated the items were being returned due to product description, size, or color description errors, etc. Items could be quickly examined and appropriate corrections to the product descriptions or photos could be made and uploaded, minimizing both the delay in returning the item to stock and the potential for repeated returns due to the same issue in the future.

Competitive Advantages of a Well-Run Supply Chain

To be sure, in addition to experiencing better cash flow, companies with well-run supply chains continue to outperform other companies. According to Gartner, the average total return of companies in its “Supply Chain Top 25” significantly outperform both the companies comprising the Dow Jones Industrial Average and the Standard & Poor’s 500 Index. A study by Bain & Company showed that companies employing well-planned and executed supply chain methods enjoyed 12 times greater profit than their competitors.

What constitutes a well-run supply chain, and how does a company measure supply chain effectiveness? Essentially, supply chain managers measure the effectiveness of their supply chains by looking at cost and service levels. The cost dimension typically measures the expense of warehousing, order fulfillment, freight and transportation costs, and the cost of carrying inventory. To determine how well the supply chain is performing, cost and service metrics may be compared and measured against similar companies to identify opportunities for improvement and to quantify the potential available. Lastly, companies must examine total supply chain cost. According to the American Productivity & Quality Center (APQC), there is a significant difference between top performers ($15.92) and laggards ($109.92) in regard to total supply chain management costs per $1,000 in revenue. This represents a potential $470 million savings for a company with $5 billion in annual revenue.

Increasingly, suppliers also are being asked to measure the environmental impact of their supply chains as major retailers put greater demands on their suppliers to demonstrate movement toward enhanced sustainability. Walmart, for example, issues a sustainability scorecard that ranks its suppliers according to scientifically derived criteria in more than 100 categories. The criteria were developed by The Sustainability Consortium (TSC), of which Walmart and many of the world’s largest retailers and consumer goods manufacturers and brands are members.

What Does CohnReznick Think?
Market-leading companies continually seek to improve their revenue performance and to drive cost out of their supply chains. Thus, while it was once seen as a necessary adjunct of doing business, the well-managed supply chain, effectively aligned with a business’s strategy, is now viewed as offering retail and consumer product companies a distinct competitive edge.

Case Study: Addressing a Paradoxical Challenge

As supply chain experts, we are often retained by clients in the retail and consumer products sector to address entrenched inventory issues. For example, one client, a supplier of consumer healthcare products, faced the challenge of high inventory rates and low order fill rates – a case of having too much of the wrong product on hand and not enough of the right product. Our review found that the company did not have effective demand forecasting support. It struggled to manage a bloated product line and long lead times. High set-up costs led to overproduction in an effort to minimize per-unit costs. The result was, expectedly, low inventory turnover and low fill rates.

We identified and assisted the client in implementing a forecasting application, which not only increased forecast accuracy significantly, but also had the potential of saving the company $500,000 in lower inventory costs once the solution was implemented. We also recommended that the client adopt a postponement strategy, in which final assembly lead time was reduced from two months to one week, significantly lowering stock levels. Similarly, we developed a strategy and helped implement a packaging process that allowed the client to finish low-demand products to order, resulting in the drawdown and elimination of inventories of about 200 slow-moving items. In addition, we set out to reduce SKU rationalization, identifying product differentiations that had an impact on costs but were not valued by customers. This led to a 20 percent reduction in finished-goods’ SKUs within a single product line. These modifications created a leaner company with better cash flow, poised to be more competitive in the marketplace.

Contact

For more information, please contact Richard Schurig, Partner and Retail and Consumer Products Industry Practice Leader, at 973-364-6670.

For more information about CohnReznick’s Retail and Consumer Products Industry Practice, visit our webpage.


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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