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Maximizing Business Success with Speed-to-Store Efficiency in Supply Chain Management
Global supply chain blogs
About the Author
Vivek Sood: Sydney based managing director of Global Supply Chain Group, a strategy consultancy specializing in supply chains. More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available www.globalscgroup.com
Vivek is the Managing Director of Global Supply Chain Group, a boutique strategy consulting firm specialising in Supply Chain Strategies, and headquartered in Sydney, Australia . He has over 24 years of experience in strategic transformations and operational excellence within global supply chains. Prior to co-founding Global Supply Chain Group in January 2000, Vivek was a management consultant with top-tier strategy consulting firm Booz Allen & Hamilton.
Vivek provides strategic operations and supply chain advice to boards and senior management of global corporations, private equity groups and other stakeholders in a range of industries including FMCG, food, shipping, logistics, manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities.
Vivek has served world-wide corporations in nearly 500 small and large projects on all continents with a variety of clients in many different industries. Most of projects have involved diagnostic, conceptualisation and transformation of supply chains – releasing significant amount of value for the business. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, supply chain systems, negotiations and all other aspects of global supply chains.
Vivek has written a number of path breaking articles and commentaries that are published in several respected journals and magazines. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. He received his MBA with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.
More information on Vivek is available on www.linkedin.com/in/vivek and more information on Global Supply Chain Group is available on www.globalscgroup.com
Introduction
One of the key metric we used to measure supply chain efficiency of a company ,is the $seed to $tore cycle. The $seed to $tore cycle or commonly known as cash to cash cycle measures the time it takes for a company to convert its investments in their inventory and other assets into cash through sales. It includes the time it takes to pay suppliers, manufacture and transport products, and collect payments from customers. A shorter cash to cash cycle indicates that a company is able to generate cash quickly and reinvest it in growth opportunities or return it to shareholders.
On the other hand, a longer cash to cash cycle can indicate that the company is facing challenges in managing its working capital, which can lead to reduced profitability and liquidity. Or sometimes the company is based in such an industry where to cash to cash cycle alone cannot determine the profitability of a company. Take for example the fashion industry , they have high cash to cash cycle but a lot of fast fashion brands are troubled with being profitable. However, it’s important to note that the relationship between cash to cash cycle and profitability is not always straightforward. While a shorter cash to cash cycle can lead to higher profit margins, there are cases where companies with long cash to cash cycles can still achieve incredibly high profit margins.
In this blog, we will explore the importance of cash to cash cycle as a metric to judge the supply chain capability of a company.
What is $seed to $tore efficiency
One of the key metrics used to measure success in Supply Chain 3.0 is the $eed-to-$tore Efficiency. This metric measures the time it takes for a product to go from the initial order to delivery at the retail store. The goal is to ensure that the right product is in the right place, in the right quantity, and at the right time. This is known as the “four Rs” of supply chain management. The $eed-to-$tore Efficiency metric is particularly important to those coming from a logistics background, as it emphasizes the importance of optimizing the supply chain process. By streamlining the process and reducing lead times, businesses can get products to market faster, which can lead to increased revenue and profitability.
The ultimate goal of the $eed-to-$tore Efficiency metric is to improve cash flow by getting products to market faster and reducing inventory carrying costs.The cash to cash cycle is an important financial metric used in supply chain management to measure the effectiveness of a company’s inventory management, sales, and collections processes. This metric reflects the time taken to convert raw materials into cash by measuring the number of days between when a company pays its suppliers for raw materials or inventory and when it receives payment from its customers for the sale of finished goods. The cash to cash cycle metric is a useful tool for businesses to identify areas of inefficiency in their supply chain and improve their financial performance. It can be used to measure the effectiveness of inventory management, as well as the efficiency of the sales and collection processes.
To calculate the cash to cash cycle, businesses need to determine the number of days it takes for inventory to be sold (days inventory outstanding), the number of days it takes for customers to pay for goods (days sales outstanding), and the number of days it takes to pay suppliers (days payable outstanding). The formula for calculating the cash to cash cycle is as follows:
Cash-to-Cash Cycle = Days Inventory Outstanding + Days Sales Outstanding – Days Payable Outstanding
A shorter cash to cash cycle is generally considered better as it indicates that a company is able to convert its investments in inventory and other resources into cash more quickly, which improves liquidity and cash flow. However, what is considered a good cash to cash cycle can vary depending on the industry and the specific characteristics of the business.
The cash to cash cycle metric can be used to measure the efficiency of a company’s supply chain and identify areas where improvements can be made. For example, a high days inventory outstanding figure may indicate that a company is holding too much inventory or that it is experiencing supply chain disruptions.
There are several benefits to using the cash to cash cycle metric. Firstly, it helps businesses to identify areas where they can improve their cash flow, which is critical to the success of any business. Secondly, it can help businesses to optimize their supply chain processes by identifying areas where there are bottlenecks or inefficiencies. It can be also used as a benchmarking tool to compare a company’s performance against industry standards or competitors.
Relation between Profit margins and cash to cash cycle
There is a direct relationship between profit margin and cash to cash cycle in any given business. A shorter cash to cash cycle can lead to higher profit margins, while a longer cash to cash cycle often associated with lower profit margins.When a business has a shorter cash to cash cycle, it means that it is able to convert its inventory into cash quickly, which can help to improve cash flow and reduce working capital requirements. This, in turn, can lead to higher profit margins, as the business is able to reinvest its cash into growth opportunities or return it to shareholders.
On the other hand, a longer cash to cash cycle can lead to lower profit margins, as the business may need to carry more inventory or extend longer payment terms to suppliers, which can tie up cash and increase working capital requirements. This can limit the business’s ability to invest in growth opportunities or return cash to shareholders, which can ultimately impact its profitability.
Cash to Cash Cycle | Profit Margin |
Shorter | Higher |
Longer | Lower |
Walmart
According to Walmart’s annual report for fiscal year 2021, Walmart had a cash conversion cycle of 7.7 days, which is well below the industry average of 40-60 days for retailers.
Walmart’s strong cash to cash cycle performance can be attributed to their efficient supply chain management practices. The company has implemented various initiatives to optimize its inventory management, reduce lead times, and improve logistics efficiency, which has helped to reduce the time it takes to convert inventory into cash. Additionally, Walmart has a strong bargaining power with its suppliers, which enables it to negotiate favourable payment terms and reduce its working capital requirements.
By maintaining a short cash to cash cycle, Walmart is able to generate cash quickly and reinvest it in growth opportunities or return it to shareholders. This has helped the company to maintain a strong financial position and continue to grow its business despite the challenges posed by the COVID-19 pandemic
Despite having long Cash to cash cycle , Tesla has high profit margins
According to Tesla’s annual report for fiscal year 2020, Tesla had a cash conversion cycle of 57 days, which is higher than the industry average for automotive manufacturers.
Despite the long cash to cash cycle, Tesla has been able to achieve incredibly high profit margins due to its unique business model and innovative products. The company has a strong brand reputation and a loyal customer base, which has helped it to maintain high demand for its products despite the long lead times and delivery times. Additionally, Tesla has a direct-to-consumer sales model, which enables it to bypass traditional dealership channels and retain more of the profit margin.
Furthermore, Tesla has been able to reduce its production costs through innovation and vertical integration. The company has invested heavily in battery technology and manufacturing, which has helped it to reduce the cost of its electric vehicles and improve their performance. Tesla also produces its own electric motors and inverters, which enables it to reduce its reliance on suppliers and control its supply chain more effectively.
Conclusion
The cash to cash cycle is a critical metric that businesses can use to measure the efficiency of their supply chain management. A shorter cash to cash cycle can lead to higher profit margins and increased liquidity, as it enables companies to generate cash quickly and reinvest it in growth opportunities. However, it’s important to note that the relationship between cash to cash cycle and profitability is not always straightforward, and there are cases where companies with long cash to cash cycles can still achieve high profitability.
To optimize their cash to cash cycle, businesses can focus on improving their inventory management, streamlining their production processes, and reducing the time it takes to collect payments from customers. By doing so, companies can reduce their working capital requirements, improve their cash flow, and increase their profitability.
Introducing.....
The global supply chain of products is an immense and complex system. It involves the movement of goods from the point of origin to the point of consumption, with intermediate steps that involve resources, materials and services to transport them. A supply chain encompasses activities such as purchasing, production, distribution and marketing in order to satisfy customer demands. Companies rely on a well-managed supply chain to meet their business goals by providing quality products and services at competitive prices.
Efficiently managing a global supply chain requires considerable effort, particularly when dealing with multiple suppliers located around the world. Complex logistics tracking systems are needed to monitor product movements from one place to another. Technologies such as artificial intelligence (AI) can help companies keep track of shipments across different locations for greater visibility into their processes.
what did Our Reader say?
GARRY BADDOCK
Chief Operating Officer Graphite Energy
I have experience with many of the well-known top-tier strategy firms but chose Global Supply Chain to support me on my supply chain projects. They always meet and exceed my expectations due to the quality of the work, the ability to work collaboratively with internal teams, and the flexibility to adjust the project approach when required.
PHILLIPPE ETTIENNE
CEO - Large Global transnational corporation From: FOREWORD - OUTSOURCING 3.0
When I engaged Vivek’s services for supply chain transformation in one of the companies I was heading, we expected the careful and methodical approach that he was famous for... I was pleased to note that the original target set for 3 years was surpassed by almost 70% in just 18 months.
TONY FEDOROWICZ
Vice-President Supply Chain Asia Pacific
I have used their services for several business transformations and workshops in many companies. Each time an outstanding workshop and project result was delivered ensuring the success of the business transformation project. Savings surpassed $25 Million per annum in one case. Very powerful ideas, were implemented very diligently.
Jean-Briac Le Dean
Co-Founder & Agen
Vivek is a very collaborative and open leader who leads teams by example. Whether internal teams, or clients teams, all are impressed by his intensity, energy level and drive to make things a little better.
Lorna Calder Johnson
Omni-Channel Product Marketing
P & L Executive
Vivek's transformation expertise is apparent from his results and dedication to operations and supply chains. His strategic expertise, knowledge and network make him a standout even among an excellent team.
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