LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work

TIME COMPRESSION - A REQUIREMENT OF SUPPLY CHAIN MANAGEMENT

Omnichannel has elevated an important issue for successful supply chain management—time compression. It is important to achieve inventory velocity and to meet and exceed customer expectations. As the global supply chain revolution spreads across industries and markets, its importance increases.

Whether you are a manufacturer, wholesaler, distributor, retailer, importer, exporter, supplier, customer, you are dealing with time compression. Inventory issues are a pain point for many supply chains. Factor in that inventory increases with longer cycle times. Inventory buffers are related to uncertainty, such as extended times. The longer the time, the more inventory that is carried.

The required supply chain transformation understands that time compression and inventory velocity are based on recognizing supply chain management as a process. This contrast with traditional supply chains management built around a node-link activity with emphasis on logistics functions.

All this also plays into having stock on hand to meet demand. It is important to achieving the perfect customer order of delivered complete, accurate, and on time—a critical supply chain performance metric.

Increasing velocity, rapid response to changing market conditions, minimizing time-and sustaining that velocity. It is important for reducing the waste in lean of time. This is especially true with international/global supply chain with the complexity, scope, and number of stakeholders and participants.

There are numerous financial and non-financial cycle time metrics, for example-on-time customer order delivery, manufacture to order complete, cash conversion cycle and days sales outstanding. A good one should be a measure of the length of time for a process, especially one that crosses an organization. The cycle time compression metric is important. It recognizes pain points of delay.

Value Stream Mapping is an excellent tool to visualize the times of current activities. It is a starting point to identify excess time.

A key is days in inventory that measures the number of days that inventory is held. For manufacturers, this would include raw materials and work-in-process. Days-in-inventory is an important part of the cash conversion cycle. Reducing inventory levels and days of inventory improves profits and frees up needed capital; and this pleases CEO, CFOs and shareholders.

This measure is often calculated as Inventory/(Cost of Goods Sold/365 Days). This method of calculation can be misleading and understate the total inventory in the supply chain. It excludes inventory that is on order and is being manufactured at suppliers and inventory that is in-transit. This is an omission that results in an understatement of the real days of inventory and the cash conversion cycle.

For purposes of this article, we will include the time from placement of purchase orders on suppliers until delivery. With Section 404 of Sarbanes Oxley, adding this inbound portion to the calculation is valid for internal controls and risk assessment. Regardless of the technical issue of when title transfers, there is the company commitment and need for the material being ordered and shipped. Including the purchased order at supplier time and the in-transit time gives a better picture and understanding of what drives inventory levels, days and turns is useful for product lifecycle management (PLM).

This new cycle time is total inventory days in the supply chain; and it is consistent with the length and definition of a supply chain. The supply chain cycle time runs from the purchase order placed on suppliers through to delivery to customers or final placement on the store shelf.

Studies have shown that manufacturers and wholesalers have over 60 days of inventory and that retailers have over 90 days of inventory capital tied up. These times do not include the entire inbound inventory in the supply chain. Real supply chain inventory is likely 25% higher. This is a very significant amount of capital tied up in inventory.

Reducing supply chain cycle time takes analysis and effort. Points to consider are:

CONCLUSION. Compressing supply chain cycle time the days of inventory on-hand, releases working capital, and improves supply chain performance.