CYCLE TIME REDUCTION-DRIVER TO SUPPLY CHAIN MANAGEMENT RESULTS
CYCLE TIME REDUCTION-DRIVER TO SUPPLY CHAIN MANAGEMENT
Whether you are a 3PL, manufacturer, wholesaler,
distributor, retailer, importer, exporter, supplier, customer, logistics
service provider or other type of firm that participates in supply chain
management, a major key to success is time compression. Increasing velocity, rapid response to
changing market conditions, minimizing time-and sustaining that velocity--are
the reasons for collaboration, integration, supply chain visibility and other endeavors
to accelerate the movement of product and information.
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 the organization. The cycle time metric should be important to the company. It should recognize pain points or should add value and competitive advantage for the company.
A key process that crosses the organization 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).
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 final placement on the
store shelf or floor or to the customer's warehouse. Now we can measure the real, total time for
inventory and by including the inbound side where the clock actually starts to
tick on inventory.
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:
Ø Start. The first step to reducing supply chain cycle
time is to measure the present process.
You must know where you are before you can begin to improve. Identifying factors that add time to the
cycle and implementing changes also requires seeing that there is an
interconnection and interdependence of events and actions throughout the supply
chain.Few events and actions have a
singular cause and effect; there are often domino effects.
Ø Recognize. There are basics to address:
A supply chain is complex, made of many suppliers located worldwide, each of who
has his own supply chain. There are chains within chains. The purpose of all
this activity is to place product timely and correctly in stores or at customer
facilities. It must be designed, directed and managed as a process, not as a series of order and shipping
transactions. Pushing bad logistics processes and practices up or down the supply chain impedes time.
ü Product and information
should flow. Operational effectiveness depends on process, technology and people that cross internally within the
company and externally with suppliers and customers.
The process should be assessed for gaps and
redundancies. Measure the time required in each action and the reason for the action. Watch for organizational dysfunction that can creep in and add unnecessary time.
Work with a cross-functional team. That will improve the quality of the
assessment and prevent invalid assumptions that can flaw the effort.
Inventory is created as a buffer for
uncertainty. Uncertainty increases, almost exponentially, as the time required to position it correctly
increases. So inventory increases as time increases.
Time is not on any financial statement; but its
effect is. Inventory is not on the monthly P&L; it is on the balance sheet. The point being that gaining needed commitment to reduce cycle time may be difficult because it is not readily identified and measured. It also contributes to a customer service
paradox. Accounting systems have their origins going back to the Ford Model A; that can add to the challenge in a
globally competitive business world.
Tradeoffs do exist between time (and inventory)
and cost. Evaluate them.
Global sourcing adds to time and to the
inventory that must be carried because of it.
factors exist that impact time and may be beyond control to be reduced. Homeland security for importers is one such
factor. It adds to how promptly suppliers located outside the U.S.
can ship orders. Logistics infrastructure in sourcing countries is another factor that can add time and impede the flow of
product from suppliers' facilities to ports and airports.
ü Supply chains work on a pull
approach. This applies whether the product is made to stock or made to order.
Ø Focus.With the extended supply chain, there are
numerous places to extend, not reduce, supply chain cycle time and inventory. Likewise there are key points
to concentrate on for reducing time.
ü Managing vendor performance
is a critical requirement for reducing supply chain cycle time. Suppliers, at the supply chain source, have
incredible impact on the supply chain as to time, inventory and costs, impact
that goes far beyond pricing and placing purchase orders. Visibility of purchase orders, at suppliers,
in-transit and at each step in the chain, from vendor's plant to delivery at
the warehouse, store or customer is vital.
ü Integration up and down the
supply chain, both external and internal, is mandatory. Non-integration adds to supply chain time and
the lack of responsiveness and dead spots in the cycle time. Integrate demand forecasting or other
inventory planning with suppliers for their build plans. Integrate purchase orders into transport load
planning. Everyone should be working from the same data, information and system or platform. Manufacturers integrate through the
Transferring data up and down the chain is not
enough.Data is not information. To collect, analyze, and forward data takes
time.Suppliers and service providers
then reenter the data into their systems. In turn they do this to their suppliers. All this quietly adds to cycle time. Conversely, integration reduces time and increases accuracy.
Integration may not be readily and easily doable
with all parties in the supply chain. Do
it with key suppliers and service providers, key as to volume or critical
products, parts or needs. Have key
suppliers integrate with their key suppliers so the benefit ripples through the
ü Collaborate with key
suppliers and service providers. Work together as partners and be open to the mutual exchange. Sending procedures and demanding compliance
with requirements is not collaboration. Work to align the process between both parties so that if flows smoothly
and with minimal time.
ü Analyze how inventory moves
and where inventory sits or is transferred for opportunities to move it more
quickly and with fewer handlings. Improvements are possible with:
Warehouse / distribution network.
Where warehouses are located as to time from stores or customers or
suppliers impacts supply chain cycle time by becoming fixed repositories based
on needs that may be outdated.
Multi-tier inbound logistics approach. What modes, carriers, service and ports are used can reduce transit time
and increase inventory and cash conversion velocities. Inventory in transit is not inventory
available for sell. Having a different approach for A inventory items (and some B items)--as compared to many B items
and C items--puts time emphasis where needed.
Bypass the distribution network where possible. Shipping inbound containers direct to store
or customer; using a transfer facility at a port(s) to quickly unload
containers and transfer directly to needed destinations, allocating inventory
in transit and cross docking containers at a distribution center provide time
Ø Use technology.Technology is a necessity; it is a process
enabler. However technology by itself will not result in needed improvements; it is not a silver bullet that solves a
flawed process. Technology should be used across the supply chain enterprise, both internal and external. It is a key to gaining much needed supply chain visibility. Such visibility is needed for multi-tier inbound and bypass the distribution network programs.
ü Global suppliers and
transport providers cannot be readily managed with emails.Technology is needed.
ü Supply chain complexity and
scope may require more than one software be used for effective control.
ü Portals provide tracking
useful tracking information and provide shipment visibility. But they are an after-the-fact tool and do
not manage inventory or time.
ü Tracking purchase orders and
contents of an inbound container has great value as compared to just tracking a
container number.Visibility into the
container sets the stage for significant abilities to reduce time and
ü Converting sales-point of
sales (POS)-data into replenishment orders on warehouses and, in turn, into
purchase orders on suppliers is critical.
ü Supply chain execution
technology may be the most valuable of the technology applications. It is a vital to integration and
ü Ease of connectivity-web enabled, interfaces and mobile access-is important.
ü Maximum supply chain process
coverage-order management, transportation, distribution, warehousing, vendor,
finance and more-is important to directing and managing the process and
reducing time and inventory.
ü Event management and
exception management capabilities should be part of the technology used; they
empower control of the process.
Reducing supply chain cycle time means decreasing the days of inventory
held and reducing the cash conversion cycle.
This can mean hundreds of thousands of dollars, even millions, reduction
in inventory and in carrying charges.In
turn this is capital available for other uses.
All parties in the supply chain must understand their importance in
gaining these benefits.
Top of Page |
LTD HOME PAGE