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The Fortenberry Cash to Cash Series:The Missing Equation: A formula that determines your company’s financial health

whitepaper

cashto

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Days of Inventory + Days of Receivables

-Days of Payables=Cash-to-Cash Cyclecash to cash=i(d)+r(d)-p(d)

Fig. Working Capital = (Cash to Cash)

Executive Summary 2

Purpose of the White Paper 2

Introduction 3

The Fortenberry Cash to Cash Method 8

Element 1: Cash to Cash and Running the Business 9

Managing the Culture and People 10

Financial Controls 13

Sales, Inventory & Operations Planning (SIOP): A Continual Process 18

Portfolio and Product Review 21

Business Continuity 31

Element 2: Cash to Cash, Cycle Time

and Optimizing the Supply Chain 34

Supply Chain Design: An Approach for Improving Cycle Time 36

Element 3: Building a Productivity Machine 47

A Climate for Continuous Improvement 48

Conclusion 49

Contents

whitepaper

1The Jay Fortenberry Cash to Cash Method

Executive Summary The old adage that “cash is king” is truer than ever. But handling cash effectively, with foresight, insight and top-down management awareness of the stakes involved can mean the difference between merely surviving and long-term, profitable viability. Unfortunately, many companies don’t know how to leverage and optimize their cash, working capital, free cash flow and the cash to cash cycle—and how those financial management tools are interconnected.

This paper maintains that a company’s health is determined by reviewing and refining its working capital and cash to cash positions. Here are some of this paper’s major conclusions that underscore the importance of cash flow in your business, optimizing your supply chain and building a company-wide productivity machine:

Purpose of the White PaperEvery company has to deal with issues involving cash, cash flow, working capital and debt. How efficiently these issues are handled can determine their long-term success or failure. This is why the “cash to cash” cycle is important.

The cash to cash cycle is a process to calculate how long cash is tied up in a company’s cash producing and cash consuming areas, including receivables, payables and inventory. It can determine the financial health of a company. Yet few companies are aware it exists. Or, if they are, only one in three of them understand its importance.

This paper explores the three elements of the cash to cash cycle and shares how companies can leverage it as an effective way to improve their bottom lines and create efficiencies in their business.

The fact that only one in three companies consider their cash to cash cycle important is a costly mistake—on the order of tens of billions of dollars—that can be fixed. That is the purpose of this white paper and why almost any business executive with concerns about cash and working capital can profit by implementing the Fortenberry Cash to Cash Method.

• The cash to cash cycle is the period of time between when a company spends a dollar on purchases from a supplier until it is turned into a dollar of revenue from the customer. Thus, the shorter the timeframe the better.

• Aggressively managing the speed and agility of the cash to cash cycle by managing end-to-end cycle time is a key driver for cash performance.

• It all begins at the top. A company may have the processes and tools to manage through a cash or operational crisis, but if the leadership team is not actively engaged and/or is second-guessing the frontline managers’ abilities to execute the plan, then all could be lost very rapidly.

• Contrary to a popular myth, inventory is located throughout the entire business, not just in a manufacturing or a distribution center. By managing cycle time, a business brings together all of its processes from customer service to delivery in order to direct how its cash is used.

• Optimizing supply chain design is about positioning resources in ways that enhance profitability and working capital while producing shareholder value.

• The simple but vital message to convey is that your cash is a major asset. It must be used effectively to make all aspects of your business—from finance to manufacturing, from inventory to the supply chain—run smoothly, reliably and profitably.


Introduction

“Cash...is to a business as oxygen is to an individual,” says Warren Buffett. “Never thought about when it is present, the only thing in mind when it is absent.” 1

According to the New York Times, of the Top 10 Reasons Small Businesses Fail 2, six of those reasons revolve around money and money management, including poor accounting and the lack of a cash cushion. Whether it is out of control growth, operational inefficiencies or declining markets, the old adage that “cash is king” remains as true as ever because it allows companies to grow, become, and remain profitable.

This isn’t new. Every company must deal with issues surrounding cash, cash flow, working capital and debt. There is a process called cash to cash that directly impacts cash flow, working capital and how companies access and handle debt. Few companies are aware it exists, and among those that are, one of three don’t understand its importance. 3

The bottom line: the cash to cash process illustrates the financial health of a company.

Companies such as Honeywell and Toyota do have internal processes for cash to cash and working capital management, but based on my years of experience, many large as well as small companies don’t know what cash to cash is. And if they do know something about it, many top level executives “don’t really understand how to go after it,” 4 says Dave Cote, Honeywell CEO.

Cote’s point was underscored by J. Paul Dittmann, Ph.D., The University of Tennessee’s Executive Director Global Supply Chain Institute: “When the CFO at Whirlpool asked us if we could somehow use our supply chain to cut working capital in a major way, I was clueless. In fact, I’m embarrassed to say I couldn’t even define working capital. I was stunned when I discovered the huge impact working capital has on the firm’s overall financial health, cash flow, and ultimately shareholder value. And I was surprised and gratified when three years later we had taken $600 million out of working capital using supply chain projects.” 5

Because there is a lack of knowledge about cash to cash or how to “go after it,” companies often take on debt rather than cleaning house by clearing up bad processes. Instead of having what could be an intense, even emotional, conversation with their suppliers, they have a matter-of-fact conversation with their banker about borrowing money.

It is easier to borrow than it is to clean up cash management practices. But debt comes with its own set of potentially harmful complications. As Warren Buffett says, “I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.” 6

Even with current financial conditions where money is cheap, one might surmise that after the tumultuous financial upheaval of 2009, business leaders would hoard as much cash as possible as a defense mechanism and hedge against another downturn in the highly volatile global economy.

While some companies do maintain large “rainy day” cash reserves, the Hackett Group’s 2015 Working Capital Survey 7 found that seven years after the Great Recession, debt continued to grow at the alarming rate of more than 113%.

“It was the global financial crisis of 2000-2009 which brought a renewed focus to risk mitigation and liquidity in supply chains,” observed Lisa Ellram in a report (with Ryan Fernandes) on “Unlocking the Potential of Supply Chain Working Capital Finance.” 8 The report continued: “Cash was in short supply, and those who had cash were heavily favored by analysts. Cash was difficult to access through conventional credit channels as banks tightened their belts, lending criteria and in some cases withdrew from certain countries or segments.”


I believe that companies trying to access credit, or that already have sizable debt, are largely indifferent or often ignore best-practice cash management practices. In addition, they don’t implement a cash to cash process. These companies can get into serious trouble when they overextend themselves with debt, rather than focus on cash management.

Also, I have observed that companies don’t manage cash very well during difficult economic times or emergencies. Don’t wait for a crisis to occur before you start to take the cash to cash cycle or debt seriously.

So, what exactly is the cash to cash cycle? The cash to cash cycle is usually defined as the period of time between when a company spends a dollar on purchases from a supplier until it is turned into a dollar of revenue from the customer. Thus, the shorter the timeframe the better. Furthermore, a dollar of profit does not necessarily generate a dollar of cash in the bank as there are obligations to pay employees, suppliers, etc.

THE FORTENBERRY METHOD

© 2016 Jay Fortenberry

RECEIVABLESINVENTORY

(DAYS) (DAYS)

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cash to cash = i(d) + r(d) - p(d) Days of Inventory + Days of Receivables- Days of Payables = Cash to Cash Cycle

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By reducing its cash to cash cycle a company firms up its balance sheet, improves cash flow and cuts working capital requirements.

Cash to cash cycle time reductions (the smaller the cycle time reduction the better) are vital in a globalized world with complex supply chains. Ted Farris, Paul D. Hutchison and Ronald W. Hasty of the University of North Texas note that “Increased global competition has made firms take a hard look at their efficiencies in manufacturing, distribution, and marketing as well as financial management.” 9

Companies that are best at supply chain management have a 40-60% advantage in their cash to cash processes, according to Seock-Jin Hong’s white paper, “Is Cash to Cash Cycle Appropriate to Measure Supply Chain Performance?” 10 Hong says an even more impressive statistic is that those top organizations “carry 50-85% less inventory than competitors.”

And as Jacob J. Bierley, Jr., succinctly notes in his “Cash to Cash Cycle” white paper, “Your business’s cash is out of reach when it is uncollected from customers and when it is soaked up by inventory that sits on the shop floor, in office storage areas, or on computer disks. 11


CASH TO CASH CYCLE AVERAGES

Athletic Apparel

Automotive

Chemical

Consumer Products

Food & Beverage

Hard-Disk Drives

High-Tech & Electronics

Medical Devices

Retail

Pharmaceutical

Semiconductors

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82

44

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25

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23

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93

110

89

78

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14

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168

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87

77

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40

15

5

309

13

182

92

INDUSTRY SECTOR 2000-2003 2004-2007 2008-2011

Source: Supply Chain Insights LLC. Corportate Annual Reports 2000-2011

It seems rather incredible, but why do only one in three companies view the cash to cash cycle as important? Also disturbing is that according to JP Morgan, each year Fortune 500 companies incur more than $81 billion of unnecessary supply chain and working capital costs due to cash flow inefficiencies and lack of visibility. 12

Former Supply Chain Insights Research Associate Abby Mayer asserts that the health of the supply chain can be “quickly assessed” through the analysis of the cash to cash process.

Her paper, “Supply Chain Metrics That Matter,” 13 says that while supply chain leaders have focused on the reduction of cash cycles, “little progress has been made. “For most, despite a decade of investments in channel connectivity and supply chain optimization, there is limited progress on receivables and inventory.”

As seen in the figure below, she says that over the last 15 years, “the only industry that has shown dramatic and continuous improvement in reducing cash to cash cycles is high-tech and electronics.”

The figure shows that major industries have had cash to cash cycle reductions that are quite dramatic. For example, during the period 2000-2011 cash to cash cycle time averages in the High Tech and Electronics industry decreased to five days from 25 days. But even a small reduction in the cycle averages can be highly valuable when it comes to the cash flows needed to operate complex operations.

The figure illustrates the value of using cash to cash in major industries.

Mayer’s analysis supports the need for supply chain teams to align in order to improve cash to cash cycles: “While companies have claimed to reduce cash to cash cycles, few have been successful. Industry results are often overstated and inflated, especially self-reported metrics. There is a wide belief, largely unfounded, that supply chain projects over the past decade have had a dramatic impact on reducing cash-to-cash cycles and inventory levels. What we see in the data is that progress has been slow for industries, but that the most marked progress is by a few leaders operating in several different industries.

“Those that have succeeded focused on year-over-year progress and consistent improvement. They managed the supply chain holistically and balanced the varying demands of the C2C cycle. They used technologies and valued planning processes. For leaders, the proof that supply chain matters is in the (cash to cash) numbers.” 14

Whether it was Messrs. Toyoda and Ohno at Toyota teaching us Just-In-Time (JIT), Bob Lane at John Deere talking about the obligations to shareholders for Estimate to Cash, or Honeywell’s Dave Cote’s boundless enthusiasm for reducing overall cycle time—all of these leaders have had a firm appreciation for how the supply chain worked and a vision for how it should evolve.


Management’s principal focus for a business should be on growing profits and cash flow as these are primary elements in creating shareholder value. A business can be profitable with a strong return on investments, but may not consistently generate cash. Cash—not earnings—reduces debt, and a business without sufficient cash ultimately is bankrupt.

I was deeply involved in reducing the cash to cash cycle, cycle time, JIT, working capital optimization for Toyota and Honeywell.

The two graphs below look at those two companies, which aggressively managed their ten-year free cash flow performance as result of reducing their cash to cash cycle. In both cases we see how working this process yields benefits both to the shareholders as well as to the business. The cash generated could be used for:

• Increasing growth opportunities

• Expansions into adjacent and other industries

• Mergers & Acquisitions (M&A)

• Research and Development (R&D)

• Retiring debt

• Shareholder dividends

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HON Toyota S&P DOW

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HON Toyota S&P DOW

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Also, if we look at how these two companies fared against the broader market we find that they consistently outperformed their peers and the other industrials.


As shown, the failure of a business to recognize the importance of managing free cash flow can literally kill it.

The pages that follow introduce the Fortenberry Cash to Cash Method.

Terms

Following are some of the cash and cash management terms referred to in this paper.

Cash to Cash Cycle (cash conversion cycle): The cash to cash cycle is usually defined as the period of time between when a company spends a dollar on purchases from a supplier until it is turned into a dollar of revenue from the customer.

Cycle Time: Cycle time is the end-to-end total time from when a customer creates demand until the product is delivered and cash collected. It comprises all information and material flows, such as order processing time, inventory, manufacturing, and logistics/distribution, as well as any processing and queuing time.

JIT: From Investopedia—Just-in-time (JIT) is an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. This method requires producers to forecast demand accurately.

People, Process, Tools: A methodology defined as the three elements needed for successful organizational transformation. It is the foundation of the Fortenberry Cash to Cash Method: People (or the culture), the Processes (simple, repeatable methods of meeting the desired output) and Tools (software) are utilized.

Working Capital: From Investopedia—Working capital is a measure of both a company’s efficiency and its short-term financial health. Working capital is calculated as: Working Capital = Current Assets - Current Liabilities.

Free Cash Flow: Free cash flow (FCF) is a measure of how much cash a business generates after accounting for capital expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt, or other purposes. The formula for free cash flow is: FCF = Operating Cash Flow - Capital Expenditures.


The Fortenberry Cash to Cash MethodAll companies should know what their cash to cash cycle is and focus on reducing it as a key element of their financial health. This white paper shares my decades of experience working with companies of all sizes to implement and reduce the cash to cash cycle. That experience is embodied in The Fortenberry Cash to Cash Method.

Actively managing the cash to cash cycle involves multiple functions and processes of a company. The figure below shows that cash to cash is at the center of six vital areas of business, including Leadership, Business strategy, Operational Excellence, etc.

It’s often assumed that having world-class software and processes will solve almost any problem, making companies more efficient and therefore resulting in improved cash flow, but that is often an expensive non-solution.

I worked with a billion-dollar company’s consumer product division that had world-class processes and forecasting software. But the culture actually “conspired” to undercut positive results.

CASH TO CASH

OperationalExcellence

FunctionalAlignment

BusinessStrategy

Market Strategy

Leadership

ContinuousImprovement



Based on many experiences like that one, the foundation of my method is grounded in the People, Process and Tools methodology: People (or the culture), the Processes (simple, repeatable methods of meeting the desired output) and Tools (software) are utilized.

When it comes to the cash to cash cycle, everyone needs to be involved, from the owner (or CEO) to the CFO to the supply chain leader to the purchasing and logistics professional.

The Fortenberry Cash to Cash Method targets the various functions in a business in order to create and effectively manage cash. For example, the increased length and complexity of supply chains has a significant, negative impact on working capital—cash is tied up with in-transit inventories that are difficult to reduce due to the complex, global nature of today’s supply chains.

The Fortenberry Cash to Cash Method has three main elements:

1. Running the Business

2. Optimizing the Supply Chain

3. Building a Productivity Machine

These elements, discussed in more detail below, comprise the core organizational processes that instill and ensure a deep understanding of how a company operates, especially with respect to its working capital and cash to cash cycle times.

First however, answer the questions in the Basic Self-Assessment (see below) to gain a greater understanding of where you stand regarding your company’s working capital and the cash to cash cycle.

Basic Self-Assessment

View your company’s operations and perform a basic self-assessment. The key individuals who should participate in this assessment include the Business Leader, CFO, COO, Sales, Planning, Sourcing, Logistics and Manufacturing Leaders.

The fundamental questions to start the process rolling are:

• Is there a strategy for reducing inventory with end to end cycle time in the business?

• Are the metrics defined?

• Has there been a baseline analysis to determine key improvement priorities?

• Are there targets, with time periods, established?

• Is it clear who has the ownership for meeting the targets?

• Are plans in place that are focused on key improvement priorities to achieve objectives?

• Is there a process to regularly review the progress towards objectives?

Scoring

1 = Does not exist 3 = Partially exists 5 = Complete and effective across the business

SALES ORDER MGT SOURCING MANUFACTURING QUALITY LOGISTICS

FINANCE



Element 1: Cash to Cash and Running the Business

Why do so few business leaders take the time to understand how their businesses operate? They spend their energy beating up sales teams, suppliers or manufacturing for a lack of delivery. Then they turn around and demand longer payment terms from these same suppliers or shorter reimbursement times from customers without grasping what really occurs from the time an order is placed until it is delivered at the customer’s dock.

Quite often these issues are not with the manufacturing or suppliers, but rather the business itself and the way the information is processed from the flows that have developed over time. Understanding how the business operates costs little, but yields huge benefits.

Standardizing the management of human resources, finance, planning and technologies stabilizes a business and gives a great opportunity for improvement.

In addition, building in a business continuity plan to deal with unexpected events and/or adversity ensures a company can survive these type of events, while protecting its cash flow.

Understanding how these areas function is where real pain is identified as well as where the investment of cash is required to be infused by the business. By grasping these issues, a business can discover whether these are self-inflicted wounds, a supplier or manufacturing delivery problem, or a demanding customer driving unprofitable behaviors.

The health of a business can be determined by understanding its cash to cash cycle. As noted, the cash to cash cycle is the time between when a company spends a dollar on purchases from a supplier until it is turned into a dollar of revenue from the customer, as illustrated in the figure.

Minimizing the effect of these three components takes effort from all functions within a business to manage the process from the time the product portfolio is planned until a product is delivered.

COMPONENT HOW TO CALCULATE IT

INVENTORY

RECEIVABLES

UNPAID BILLS

Days Cash is Locked-Up as Inventory

Average Dollar Value Inventory During the Reporting Period

Cost of Goods Sold/Number of Days

Days Cash is Locked-Up in Receivables

Average Dollar Value of Accounts Receivable During the Reporting Period

Average Dollar Value of Accounts Receivable During the Reporting Period

Days Cash is Free Because the Business Has Not Paid Its Bills

Average Dollar Value of Accounts Payable During the Reporting Period

Cost of Goods Sold/Number of Days in the Reporting Period

CASH TO CASH AND RUNNING THE BUSINESS



MANAGING THE CULTURE AND PEOPLE

Business Strategy Deployment

Over the course of my career I’ve seen many examples of how corporate culture can stand in the way of new initiatives and strategy deployment. It’s all about getting the culture to move in a unified direction and “drive around perfection.”

Actually, getting a corporate culture to adopt a new program or process takes more effort than simply designing and executing it. In a global organization, areas like languages, native customs, skills, etc. can have a profound impact on the success or failure of a program. A company can have world-class processes and tools, but can fail at sustaining improvements if it does not take the time to fully bring its people along.

In addition, often the company bureaucracy works hard to avoid change. People become comfortable with the way they are performing their job, scared that the change will have a negative impact on their lives, or they have developed a power base around the process to be changed. This can actually prevent improvements designed to enhance cash and the bottom line from taking place. Managing human resources is therefore a vital part of improving any process. Areas such as Leadership, Organization Effectiveness and Continuous Improvement are all areas of emphasis in order to achieve and sustain a business strategy deployment.

Business strategy deployment is an integrated approach to drive organizational development by focusing on company objectives and goals. It concentrates on employee engagement and continuous improvement to assure a process is sustainable, including these factors:

• Prioritizing: Critical business objectives are developed, prioritized and flowed from the business leadership to the point of execution.

• Alignment: All functional areas are clearly aligned with the goals of the business.

• Precision: Assures a disciplined management process that integrates the business objectives and that annual goals are developed, communicated and measured through all levels of the organization.

• Accountability: Ensures that the responsible functions drive accountability for achieving the objectives and annual goals. In addition, the focus is to integrate all functions so that they move in one direction.

The intent of clearly rolling out the strategy through the entire organization is to:

• Communicate expectations

• Remove all ambiguity

• Insure a complete understanding by the culture

• Hold the responsible parties accountable for their actions

Business strategy deployment is a tool to help focus the organization to meet the desired business results.

The Human Factor

A company is not just a ‘for profit’ enterprise: it also bears a social responsibility to its customers, employees and the community to make quality products at reasonable prices. All of the facilities, equipment and capital don’t build a single product, employees are actually the ones that perform the work.

All companies have a set of core values. It is critical that employees grasp these values and actively work to put them into practice. These values must be used repetitively in order to become sustained and integrated as part of the culture.

There are five programs that can be implemented with little investment to assist in developing a company’s culture. They illustrate directly to employees leadership’s commitment to doing the right thing.


1. Safety First

A business’s relationship with its employees starts with safety. A company-wide safety policy is the first and primary method used to communicate a business’s commitment to its employees. It should set expectations regarding the management of health, safety and environmental policies and captures all issues and risks. This safety policy is used to communicate to a global workforce with the objective of conveying the business leadership’s commitment to employees and contractors. It establishes the framework and guidance for performance standards, strategic planning and setting of objectives and targets.

2. Mutual Trust

The building of mutual trust between a company and its employees is essential to any improvement process. Trust is earned through building a cooperative environment where the employees feel their contributions are valued. Equally, the company gains trust with its workforce when it recognizes that rules and policies are respected as well as employee contributions to productivity. In this environment, everyone works in the same direction for the prosperity of the business.

3. Employee Empowerment

For people accustomed to regimented work environments, employee empowerment can be quite intimidating. However, responsibility and authority to improve your work are motivational. Experience has proven that the more authority employees have to manage their jobs, the more they are inclined to pursue improvements. Employees that can translate their ideas into viable business improvements take pride in their work and the company.

4. Building a Culture of Continuous Improvement

Kaizen (or continuous improvement) is baby steps that add up to great big steps. Each day should be about continuous learning and improving. The business leadership needs to set the expectation that all employees think about process improvement as part of their daily work routine. A continuous improvement organization should:

• Integrate lean principles

• Anticipate the future

• Reduce cost

• Eliminate waste

• Create a learning experience for all

Ultimately, Kaizen is about job ownership. It entails giving an employee full responsibility and accountability for their job. By taking charge of turning out products that are desired by customers, employees receive the authority to modify and shape their work in ways that improve quality and enhance productivity.

5. Leadership

Leadership is the ability of an individual or organization to guide other individuals, teams, or entire organizations to a desired outcome. It involves:

• The capacity to establish, communicate and execute a clear vision for others to follow

• Providing information, processes and resources to make timely decisions

• Guiding the process by balancing conflicting priorities

• Insuring teams are accountable for the performance of the organization


FINANCIAL CONTROLS

Finance departments understand the cash priorities, protect the company from unethical and illegal behavior, insure accounts are properly used by uniformly applying general ledger coding of invoices and protect transparency of the entire process for accurately reporting Sarbanes Oxley.

Some believe that Wall Street focuses only on earnings while ignoring the real cash that a firm generates. Earnings can often be adjusted by various accounting practices, but it’s much tougher to mask cash flow. For this reason, some investors believe that free cash flow (FCF) gives a much clearer view of a company’s ability to generate cash and profits.

Free Cash Flow (FCF)

It is important to note that negative free cash flow is not bad in and of itself. If free cash flow is negative, it could be a sign that a company is making large investments in improvement. If these investments earn a high return, the strategy has the potential to pay off in the long run. FCF is also a better indicator than the P/E (price to earnings) ratio.

Additionally, while revenue, earnings growth and the quality of earnings are all important, cash is still king. The management of FCF has a direct impact on shareholder value-added, therefore, improved cash to cash processes create shareholder value.

Sales Growth

Cash Flow from Operations

SHAREHOLDERVALUE ADDED

Debt

Tax Rate Cost of Capital

Capital Structure

Dividend Policy

Operating Profit

Working CapitalFixed Capital

M&A


SHAREHOLDER VALUE ADDED

A leader drives changes in the way people think, work and act. Leaders create and set the expectations that shape the culture. They step up in times of crisis and can think or act creatively in tough situations.

“Servant Leadership” is an ancient philosophy and set of principles that are still practiced today. Traditional management revolves around the accumulation of power at the top. Conversely, a Servant Leader shares power, puts the needs of the organization first and assists in developing team skill sets in order to perform at the highest possible capability. They make people better by building a safe workplace, nurturing the team’s growth and taking responsibility for their actions. They are fully engaged in the activities they are responsible for and encourage experimentation, celebrating success and empowering employees by giving up control.


Management’s principal focus for a business should be on growing profits and cash flow as these are primary elements in creating shareholder value. A business can be profitable with a strong return on investments, but may not consistently generate cash. Cash, not earnings reduces debt and a business without sufficient cash ultimately is bankrupt.

FCF is a measure of how much cash a business generates after accounting for capital expenditures. Shareholder value grows when a business generates free cash flow in excess of its investments. Therefore generating free cash flow is directly correlated to creating shareholder value, which is a fundamental for stock pricing and has a direct impact on the worth of a company.

As also seen in the introduction, the following charts below illustrate how two companies’—Toyota and Honeywell— aggressively managed free cash flow over ten years. In both cases we see how working this process yields both benefits to the shareholders as well as the business.

The cash generated could be used for:

• Increasing growth opportunities

• Expansions into adjacent and other industries

• Mergers & Acquisitions (M&A)

• Research and Development (R&D)

• Retiring debt

• Shareholder dividends

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HON Toyota S&P DOW

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20152005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


Also, if we look at how these two companies fared against the broader market, we find that they consistently outperformed their peers and the other industrials.

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HON Toyota S&P DOW

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HON Toyota S&P DOW

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The failure of a business to recognize the importance of managing free cash flow can literally kill it. When a liquidity crisis hits, options for raising additional financial resources include:

• Use excess cash

• Expand bank credit with associated increased debt costs

• Cut production, marketing, and/or product development activities

• Reduce dividends for shareholders

• Sell assets

Each of these activities may have a different timeline to generate funds and may negatively impact future growth. The best way to ensure business stability and value creation is to consistently grow cash flow generated from the operations of the business. Therefore, a successful business must make free cash flow a top priority.

During the financial crisis of 2008-2009 many companies developed collaborative relationships between Finance and the Supply Chain. This relationship was further extended with increasing globalization by insuring the business had improved cash management, flexible trade terms and the ability to secure funds from trusted resources around the world. This collaboration broke the traditional performance barriers by reducing errors and streamlining processes, increasing compliance and improving the ability to track cost by activity.

During the financial crisis, cash management was imperative for the survival of many companies. Therefore aggressively managing the speed and agility of the cash to cash cycle by managing end-to-end cycle time became viewed as a key driver for cash performance.

Finance’s role in the cash to cash cycle process is to create a cadence for reporting progress. This is established at the outset with the objective of reporting on each part of the supply chain by bringing all interested parties to the table. In addition, Finance leads the way by ending gamesmanship between functions as well as by clearly laying out the entire supply chain performance.

MATERIAL, INFORMATION AND FINANCIAL FLOW

MATERIAL | INFORMATION | FINANCIAL FLOW

ORDER ENTRY: SALES, PURCHASE

ORDER ENTRY: SALES, PURCHASE

SUPPLIERLEAD TIME

MANUFACTURINGLEAD TIME

DISTRIBUTIONLEAD TIME

Sales Entry to Planning

Sales Entry to Planning

PO Creation

PO Creation

Supplier Delivery

Receiving Inspection

Factory Queue

Schedule

Production

Plant to Distribution Center/Customer

Distribution Center to Customer

SUPPLIER LEAD TIME

Supplier Delivery Receiving Inspection

MANUFACTURING LEAD TIME

Factory Queue Schedule Production

DISTRIBUTION LEAD TIME

Plant to Distribution Center/Customer Distribution Center to Customer

FIN

AN

CE


FINANCE



Tools to Help

Identifying expenses and how they are applied is the beginning point of understanding the various components for how cash is spent in a business. We will review three components: Managing the General Ledger, Establishing Total Acquisition Costs and identifying Inventory Carrying Cost.

Managing the General Ledger

A fundamental for understanding how cash is spent in a business is by managing how costs are applied to the general ledger. The objectives are:

• To standardize the method in which expenses are identified and applied

• Establish business rules around expenses

• Achieve visibility and the ability to manage all expenses

Completing this process provides the ability to consistently identify how cash flows throughout the business. Additionally, it assists with lowering costs by standardizing processes to insure strong financial controls and process audits are established for all expenses.

Total Acquisition Cost

After completing the General Ledger clean up, Total Acquisition Cost can begin to be established:

Total Acquisition Cost (TAC) is a tool used to evaluate the total cost that a company recognizes on its General Ledger for the purchase of an asset that is ultimately delivered to a customer. The objective is to identify and eliminate all non-value added activities in the supply chain.

Inventory Carrying Cost

The cost of carrying inventory is what a business incurs over a period of time to hold and store its inventory. There are four main components to inventory carrying cost: capital cost, storage space cost, inventory service cost, and inventory risk cost. It is described as a percentage of the inventory value which includes taxes, employee costs, depreciation, and the cost of insurance.

TOTAL ACQUISITION COST

TAC = ORDERING COST + MATERIAL COST + PACKAGING COST+

INBOUND FREIGHT + WAREHOUSING + MATERIAL HANDLING +

CUSTOMS & DUTIES + OBSOLESCENCE/DAMAGE/SHRINKAGE

+ INSURANCE



Most companies do not compute inventory carrying cost. The value is usually estimated to range between 15-40%, but my experience puts it at 25%. Averages15 for the components are estimated to be:

Inventory reductions are typically not driven by the idea of optimizing a company’s inventory. Rather, it’s a reaction to a cash shortfall. Understanding inventory carrying costs does not necessarily lead to inventory reductions. However, understanding the cost drivers of storing and handling materials is essential to mapping out areas of greatest cash and cycle time reduction.

THE “INVENTORY CONSPIRACY”

In January, 2012, I participated with the chairman of my company in a conversation on the improper use of working capital with regards to inventory. Through this dialogue, he coined the term, “The Inventory Conspiracy.” As operating managers we were challenged to change the approach we took to managing inventory. The chart above describes the problem.

As a result of this interaction we agreed to:

• Drive the process from a business strategy deployment with ownership by the general manager.

• Identify all critical value streams (key products or product families) and perform a baseline analysis of end-to-end cycle time for each of these critical streams.

• Integrate cycle time results into Sales, Inventory & Operations Planning (SIOP), with gains linked to inventory, delivery and quality improvements.

In order to complete this agreement, establishing standardized financial practices was critical to our success. Without building this foundation, it was an impossible quest. However, by using this as a starting point the goals were then within reach.

FAILURE MODEPROBLEM

THE INVENTORY CONSPIRACY

• Sales Says “Customer Service Requires More Inventory”

• Manufacturing Says “Lower Costs Requires More Production”

• Finance Says “Need to Deliver Earnings” (Earnings Tend To Trump Inventory Focus)

CONCLUSION – No One Really Committed to Lower Inventory Balances

BUSINESS CONSPIRES TO BUILD INVENTORY

• Traditional Approaches Translate To Lower Customer Service As Inventory Goes Down

• Manufacturing Guys Don’t “Own” The Problem Because Most Inventory Is In Finished Goods

• Multifunctional Problems Need Multifunctional Solutions

CONCLUSION – Inventory Reduction Must Be Tied to Enhancing Customer Service

MOST EFFORTS FAILED BECAUSE:


Cost of Money 4%

Taxes 3%

Insurance 2%

Warehouse 3%

Materials Handling 3%

Inventory Control 3%

Obsolescence 4%

Damage & Shrinkage 3%

Total 25%


SALES, INVENTORY & OPERATIONS PLANNING (SIOP):

A CONTINUAL PROCESS

The ideal business model maintains no unnecessary inventory, responds to changes in the marketplace, and supplies the required products in a timely manner. This is especially pertinent when implementing a cash to cash program. However, in most businesses:

• Manufacturing complains that sales overstates demand forecasts, doesn’t sell the product and then the supply chain gets blamed for too much inventory, or

• The sales team then complains that manufacturing can’t deliver on its production commitments and therefore hurts sales, which creates:

• Unplanned demand “spikes” used to meet financial targets, coupled with a constant struggle for new product launches that strains the sales and operations teams.

SIOP, or Sales Inventory & Operations Planning, is the single process that brings a business together to create a forward looking, 12-to-18-month plan that aligns functions, makes decisions on how to optimize resources and how to achieve the goals of the business. It must be standardized and the corporate culture must be fully engaged and provided with world-class tools. To quote Dave Cote, Honeywell’s chairman and CEO back in 2009,

The SIOP process (shown in the above figure) does not set strategies for channels, customers, products, or supply. However it does identify trends in delivery, product revenue, inventory and reliability. Furthermore, from a tactical perspective, SIOP doesn’t manage the day-to-day execution of a sales plan, customer order fulfillment, production scheduling or sourcing, but it allows a business the ability to understand its revenue vs. plan, schedule attainment and inventory levels.

DEMANDPLANNING

INVENTORYPLANNING

SUPPLYPLANNING

FINANCIALPLANNING


SIOP

“...To achieve improvements in working capital, robust SIOP processes are critical. Reducing working capital, while still meeting our customers’ needs, will force us to improve our operating practices and will make us a better company. We need everyone to be engaged in these efforts….”


SIOP is based on the People, Process, Tools methodology; many companies buy into the idea but fail to drive the process throughout the culture. Therefore, companies spend time, money and manpower without gaining value from their investment. Success comes from strong leadership, education of the participants and a desire to drive these key elements:

• A process that produces one single number to run the business

• A comprehensive set of forward-looking plans matched with a financial summary

• Reviews of alternatives and their impact on objectives

• Decision-making to improve the business outlook

SIOP also requires an engaged leadership and business team that utilizes standard processes and world class tools to help manage through the upturns and downturns of a business cycle, or swings in the economic environment. SIOP is a forward looking, continual monthly loop used to anticipate and act on the changing business outlook by:

• Reviewing the product portfolio, understanding lifecycles and implications

• Planning future demand, considering risks and opportunities

• Developing supply response and the ability to react to changes

• Reconciling all plans with a financial assessment of risk

• Creating a forum for executive review and agreement on team decisions

This is where everyone “puts skin in the game,” reflecting on the current environment and gaining common understanding across business lines. Executed properly, a business can manage good times as well as bad with a consensus built from all parties.

PORTFOLIO REVIEW

INVENTORY /DEMAND REVIEW

Statistical forecast based on historical demand

Addition of marketing intelligence from commercial team

Review forecast performance

Review safety stock levels &Inventory Policy

Review key inactive, obsolete and surplus issues

Review New Product Introductions (NPI) status and plans

Review of last time buy and obsolescence items

SKU/ family rationalization

Inactive and Surplus inventory review

WEEK 2

2

SUPPLY REVIEW

Review rough cut capacity plans by resource and flag issues

Review inventory projections based on supply plan

Gain commitment from the factories and suppliers to the demand plan

Review key supplier performance and expectations

WEEK 3

3

SIOP RECONCILIATION

Translate SIOP plans into $ and compare with annual plan for gaps

Solve or escalate issues

Generate summary for Executive review

WEEK 3

4

EXECUTIVE SIOP MEETING

Overall Business Review

Solutions Review

Confirmation of alignment to annual and strategic plans

WEEK 4

5WEEK 1

1

SIOP: A CONSISTENT CYCLE OF EVENTS



Portfolio and Product Review

Product portfolio management aims to understand any and all changes to product offerings. The inputs are the product development pipeline, SKU (stock keeping unit) rationalization and positioning with a constant examination of the marketing channel strategy and the end-of-life for any product. Outputs are a volume and dollar-based plan for any and all portfolio changes. To effectively manage a company’s portfolio, the focus should be on two areas, with planning different for each phase:

• Beginning of life

• End of life

Product Rationalization

As a part of the portfolio management process, an effective way for a business to manage at the right level of complexity is through production rationalization. This enables the company to:

• Optimize the portfolio for top line growth and bottom line profit

• Identify the lines of business that are trending towards non-profitability

• Identify competing lines that can create channel conflicts

• Identify exit strategies that target cost control and customer disruption

The handling of inactive, obsolete and surplus inventories has a direct impact on cash to cash and requires aggressive actions to reduce, eliminate and prevent inventories from needlessly growing. Standard definitions for managing these types of inventories are:

• Inactive—no use in last 12 months and no demand in next 12 months

• Obsolete—Items that are no longer in the product catalogue or any BOM (bill of materials)

• Surplus—Inventory in excess of previous 24 months of sales

TIME

Maturity

Growth Decline

Launch Deletion

RE

VE

NU

E

SIOP CLASSIFICATION

PRODUCT LIFECYCLE MANAGEMENT


NPI/PHASE INSKU RATIONALIZATION/

PHASE OUT


Activities designed to reduce or prevent these products from growing can include the development of action plans and timelines to sell or dispose of material as well as developing how to predict slow moving inventory with what will be excess in the next 3, 6, 12 months.

New Product Introductions through the End of Life

Every additional product line increases complexity from the design through the delivery processes. Product portfolios with their complexity will have an impact on cash as well as P&L performance. Consequently, managing the portfolio of products—including the beginning of life, product rationalization and end of life—has a profound impact on cash and operating expense. When evaluating which product to make, a business needs to evaluate certain factors for cost, sales and margin. Listed below are some of the costs related to delivering a product to the marketplace.

SIOP and NPINPI (new product introduction) is a vital element of the SIOP Process. Demand planners need a view of all upcoming product introductions, including timing, volumes, probability of projects happening, assumptions to be understood and documented, opportunities and risks. Any changes should be recorded for incorporation into the demand review (schedule, volumes, risks, etc.). Creating demand profiles to support product launches, as well as an understanding of launch and growth strategies is important to managing to cash and operating expenses.

End of Life

Most companies create and maintain their product lines, but very few know how to manage the end of an SKU. Few understand the financial ramifications on both the profit and loss sheet and on lost working capital by not managing end of life processes well. Simply put, not performing these tasks leads to a proliferation of unneeded SKUs as well as increases in inactive, surplus and obsolete inventories.

Manufacturing Costs:

• Changeovers

• Schedule changes

• Component part management

• Tooling

• Maintenance

• Work in process inventory management

Logistics Costs:

• Warehousing and facility costs

• Inventory management

• Freight

Procurement:

• Supply management

• Materials management

• Design Engineering

• Developing and maintaining specs

• Testing

Sales and Marketing Costs:

• Training

• Communications

• Close outs

Customer:

• Warehouse/storage changes

• Display changes


Two ways to identify products for end of life are:

• A combination of low sales and margins

• Determining if there are any strategic reasons for a product to stay

Managed properly, end of life assists a company in cleaning up its inventories. Conversely, failing to manage it can result in higher operating costs by holding inventory, as well as increased cash requirements.

Demand Planning

The demand plan is a realistic view of future sales based on known activities and trends. It’s used by sales and marketing units to focus or change the commercial direction of the business. It is also a formal request for the supply chain to have the relevant materials and schedule capacity for anticipated customer requirements. The demand plan is a financial commitment to manage top line revenue as well as bottom line margin.

Forecasting

I once attended a supply chain forum where the president of a well-known consumer electronics company exclaimed, “My sales force turned out to be the world’s worst forecasters, but the world’s best adjusters…” This was a great statement on the art of forecasting. The forecasting process provides an ongoing, sustainable 12-to-18-month forecast for the business that uses the collaboration of sales and product management knowledge based on historical actuals, as well as the future expectations of existing and new customers for existing and new product listings. The objective is to:

• Provide an accurate forecast of unconstrained demand by product listing quantity with 12-to-18 month visibility

• Overlay the forecast with market intelligence, trends and exceptions

• Deliver ongoing metrics of forecast accuracy by product listing

• Enable feedback to sales and business teams for improvement to forecast accuracy

A forecasting process that works best for one company probably will not work for another due to differing customer bases, products, data and people. Other important points to remember regarding forecasting is that a data warehouse is required to guarantee data integrity and the forecasting system must integrate “seamlessly” with other corporate systems.

Supply Planning

The supply planning process objective is to resolve any issues in the demand plan that prevent optimal operation of the supply side of the business. The inputs are the demand plan, previously demonstrated capacity, and supplier constraints with output being a rough cut capacity plan.

Key elements include:

• Reviewing the unconstrained demand plan

• Demonstrating performance abilities for factories, logistics and suppliers

• Developing a “rough cut” plan against raw materials, labor, machine hours and suppliers

• Creating “what if” scenarios

• Understanding assumptions for risks and opportunities

• Performing a gap analysis of the annual plan vs. the supply plan with recommendations to close any gaps


Suppliers are key to the SIOP process because they have direct impact on delivery, inventory and cost. Suppliers’ performance should be included in the monthly SIOP process with an understanding of constraints and volumes. This should generate visibility of supplier requirements through the planning horizon. Suppliers should assess the changing requirements as well as review whether they are within the structure of the existing service agreement. Additionally, supplier input should be used as feedback to overall planning with the impact/risk to the factory supply plan and alternatives of any risks or constraints included. Finally, by including supplier input into SIOP it sets the stage for planning contract negotiations including:

• Service agreements that define service levels and lead times

• Capacity commitments and ability to respond

• Performance measures and goals

The goal of supply planning is to provide the data that allows the business to make long range, data-driven decisions to optimize future inventory plans, capacity adjustments, and changes in customer lead-times based on forecasted unconstrained demand. It is a coordinated effort between planning, manufacturing, sourcing, suppliers and logistics to develop the manufacturing and replenishment strategies to provide the highest availability at the lowest inventory and cost: what is needed, when, where and how.

Reconciliation

Reconciliation is the act of balancing supply and demand. It is the prioritization of serving certain market segments, geographies or customers when capacity is constrained or product isn’t available to satisfy demand. The reconciliation process manages the gaps and translates the plan into dollars to compare with the annual plan for exceptions. It is through reconciliation that problems are solved or escalate to the leadership level.

Executive

The objective of the executive SIOP process is to review the performance of the business and to resolve all outstanding issues as well as the alignment of the functions, with assigned action items to meet any variances.

Finally, cycle time reductions directly impact SIOP performance. As data becomes more accurate and lead times better defined inventory can be reduced and the improved service levels communicated to a customer.

Inventory Reduction

CRITICAL SIOPELEMENTS

CYCLE TIME IMPROVEMENTS

ENABLESCost Reduction

Better Cash Flow

Fast NPI Processess

Resources Optimization

Forecast DependencyReduction

Flexibility to MeetDemand Variations

Delivery PerformanceIncrease



CUSTOMER CARE

The Order Management Process

Customer care is the process that begins when a customer first inquires about a product and continues through the time the product is delivered. Order management strategies are driven by how a business wants to present itself in the marketplace and is the company’s main contact point for customers. Some of customer care’s responsibilities are:

• Developing customer requirements

• Determining how orders are defined

• Quoting pricing and lead times

• Providing technical support

• Managing return goods

• Working with “checkout abandonment” in the process

The information that flows from customers follows a completely different path than the product’s physical flow. It is common for a company to mature with layers of systems that feed each other back-and-forth. Often these systems are batch-driven and can take up to a week to transfer information. In these cases, inventory is required to protect the goods that have been reserved in the queue.

Creating a Customer Order

Order management does not mean just simply taking a customer order. Rather, it works to manage the customer relationship by:

• Defining back order, partial order, and allocation/reservation policies

• Insuring lead times in the system and/or catalogs are correct

• Keeping both customer and product masters accurate, in a timely manner

• Protecting the business by making sure “denied party screening” is completed

• Defining geographical coverage with no currency games allowed

• Managing the return goods process including customer debits and credits

• Delivering performance metrics

Furthermore, with the advent of B2B (business to business) and B2C (business to consumer) web-enabled activities, customer care can also be required to manage shopping carts and their abandonment, updating websites with current stocking levels, as well as providing order confirmations and tracking.

The customer care and/or order management processes can have a profound impact on the management of working capital by ensuring the data administered is in sync with the rest of the organization. A single voice to the customer is necessary: this is where it starts.


Technologies

Employing an Enterprise Resource Planning (ERP) system is supposed to be a way for a company to reduce cost, improve its processes and be more responsive to customers. Sadly though, it has been my experience that most of these have either failed, been forced to hit the reset button and/or lost valuable data due to the simple fact that few people understand how processes interact with each other.

I was once instructed by a very wise man at Toyota that you put a computer in a bad operation and you get a worse operation quicker. I have lived by these words for the past thirty years. For every action we think we know, there are 99 others that we have failed to understand properly. Businesses should own their processes from beginning to end.

Unfortunately, these powerful new systems are rolled out without a true understanding of processes, with tentacles that reach deeply throughout the company. Often old inferior processes are simply adapted or translated into a new system without regard to how they will operate in the fresh environment. Equally as bad is to implement a standard “vanilla” package (whatever that means) without understanding how the operations are run. Both result in the same miserable outcome for all: massive overtime, exploding inventories, past due deliveries, thus missed financial results.

HUMANRESOURCE

MANAGMENT

DISTRIBUTION DRP

CUSTOMER CARE& SALES

PURCHASING

MANUFACTURING

FINANCIALMANAGEMENT

ENGINEERING

TRANSPORTATION

SIOP &PRODUCTION

PLANNING

FULLY INTEGRATED SYSTEMS



What is MRP?

A Materials Resource Planning (MRP) system is software that assists in doing the calculations needed to plan manufacturing based on inputs from a forecast that includes:

• Inventory control

• Production planning

• Management information system

• Manufacturing control system

MRP has evolved to group demand by calculating from need date and integrating business planning and operations. Used properly, it plans production so that the right materials are at the right place at the right time. Ideally, MRP should:

• Reduce inventory levels and component shortages

• Increase shipping performance and customer service

• Simplify and provide accurate scheduling

• Improve productivity while reducing scrap and rework

• Decrease purchasing costs and lead times

• Enhance production scheduling and reduce manufacturing costs while producing higher quality

Data Integrity is the Key to MRP System Accuracy

Accuracy is essential for accurate routings and to maintain accurate standards in the following areas:

MRP does not foresee events—it only provides calculations from the data it is fed. It can be a classic case of “garbage in/garbage out” if not implemented and maintained properly.

Inventory Records

• On hand

• Open purchase orders

• Work in progress

Bills of Materials

• Data

• Structure

Item Master

• Part numbers

• Source—make/buy

• Lead times

• Order quantities

• Ordering rules


In addition, because multiple people maintain data streams, MRP can quickly get out of sync unless planners stay vigilant about maintenance. While Bill of Materials (BOM) are generally maintained well, variations in inventory record accuracy, lead time adjustments, capacity changes, missed processes, NPI or supplier performance can produce profoundly different accuracy results. For instance:

The illustration above shows that if you are 98% accurate with your BOM, while not maintaining inventory and lead times properly, this will mean meeting only 75% of production schedules.

INVENTORY ACCURACY

BILL OF MATERIALS ACCURACY

ITEM MASTER ACCURACY

90%

98%

85%

ITEM ACCURACY

MASTER PRODUCTION SCHEDULE ACCURACY 75%

SYSTEM ACCURACY



Cycle Time/MRP Examples in Action

In the first example, the raw material purchases of a multi-national manufacturer from a German supplier with a global customer had inaccurate lead times loaded into MRP.

In the second example, when the system was installed no one actually understood how long the manufacturing process took. The system was loaded with dummy data, therefore the information that flowed out was erroneous. This meant deliveries missed, inventory exploding and missed financial results for the year.

Regardless of their function or position, nobody should promise customers due dates that are impossible to achieve or not agreed to by the factory. This raises inventory levels, misses deliveries and negatively affects financial performance.

CYCLE TIME FOR A GERMAN SUPPLIER TO MEXICO

Customer with a 180 day lead time does not receive order on time—WHY?

No supply in the distribution center—WHY?

Factory could not make it—WHY?

Raw material shortages—WHY?

German suppliers have long lead—WHY?

Suppliers are unsure of when/what to make due to lack of forecast or trigger

RESULT Material arrives late/order missed© 2016 Jay Fortenberry


Cycle Time Order to Delivery

>210 Days

2 DAYS

165 DAYS

Order for Raw

Material Place by

Plant

Maximum Supplier

LeadTime

?DAYS

Plant Dock toAssembly

to Ship

5DAYS

Maximum Logistics

Lead Time Plant to DC

3DAYS

DC ServiceClass 3

5DAYS

ArrivalCustomer

30DAYS

Maximum Logistics

Lead Time Europe

to Plant Air Shipment

CYCLE TIME FROM MEXICO

? No one knew manufactoring leads times


BUSINESS CONTINUITY

Business interruptions can take many forms: natural disasters such as the earthquake and ensuing tsunami in Fukushima, Japan; labor stoppages similar to the occurrences on U.S. West Coast docks; a health crisis where segments of a population are required to be quarantined; or social unrest and wars. These types of events are growing in numbers as well as increasing in severity. In an ideal world, incident response is the execution of a well thought out, focused and rehearsed plan that engages all of the team that will manage the future crisis.

Resiliency is the capacity to recover quickly from difficulties; a toughness. It is also the ability of an object to spring back into shape; or elasticity. Regardless of the type of business interruption, the fundamental role of a manager in business continuity is to protect the brand and company by resuming “normal” operations as quickly as possible with a minimum of disruptions to the company.

When a business continuity plan is implemented, vital resources such as cash, people and facilities are being diverted in unusual ways to insure the long term viability of operations. Therefore, it is much easier to have these discussions, prior to the emotion of a developing or ongoing disaster when a business is in the thick of protecting itself.

The subject is vast and entails literally every aspect of a company. For many, the only experience with managing in this environment comes as an exercise of survival when a disaster strikes. Others have had to learn the practice from repeated incidents over time.

The initial steps for building a business continuity process is to do a self-assessment starting with examining the company’s tolerance for risk through its People, Processes, Tools:

• What defines a crisis that would trigger the formation of a response team?

• Who would be on this team?

• How does the team communicate and to whom do they report the details of their activities?

• If a disaster occurred would a company be resilient and keep going, or limit its losses via insurance and/or just pick up and move?

• Finally, are the systems agile and scalable to support changes in operations, or is the business back in manual mode?

From here, a basic framework can be created for managing under crisis.

Disaster Preparedness

There is nothing worse than trying to quickly find contact information for team members and suppliers during a crisis. A dynamic contact document must be updated regularly; it is necessary to create it at the outset of a business continuity process. Call logs should be kept, with meeting minutes and status checks sent after all meetings, so that information is understood and shared by all participants. There are no secrets—everyone is in the crisis together. All activities are updated and distributed at least once per day.

Two types of communication are provided as a business continuity plan is administered:

• Technical experts and practitioners managing the process

• Leadership updates

Leadership

All too often companies do not have the time or resources to foresee the impact that an disruption may have on their business. Rather they wait until an event or disturbance occurs, and then reactively manage the resulting situation. This lack of preparation can turn what might be a small disruption into a full-fledged crisis.


A business may have the processes and tools to manage through a crisis, but if the leadership team is not actively engaged and/or is constantly second-guessing the frontline managers’ ability to execute the plan, then all could be lost rapidly.

The fundamental role of the business leader is to support the team by providing time, money and manpower. More importantly, the leader’s job is also to provide the cover for the team to remedy the crisis. Specifically, this would be to:

• Distribute accurate information as quickly as possible

• Respond to incorrect information in a timely manner

• Trigger appropriate processes to keep employees, the public and shareholders informed on an ongoing basis

Finally, a leader must have previously built the trust within the organization to be able to make these tough decisions in a timely manner for the mere survivability of the business.

Supply Chain Security

With advancements in globalization, supply chain security has become a vital element of doing business. One incident of transporting illegal substances, smuggling, or aiding a terrorist organization can have a devastating impact on the P&L as well as on cash and working capital. Failure to adhere to minimum standards can lead to fines, penalties and/or longer lead times due to suspension of the company’s ability to transport goods.

The benefits of operating a compliant supply chain security program are:

• Maintaining good corporate citizenship by reducing risk in the supply chain

• Providing a safe and secure environment for employees, suppliers and customers

• Reducing cycle time and operating costs by operating a lean supply chain with proper business controls

A secure supply chain is the visible demonstration of the commitment to employ processes that emphasize a safe and secure environment for its employees, customers, products, facilities and the communities they serve. Furthermore, it is a routine way of doing business that enhances the commitment to regulatory compliance, meets customer’s delivery requirements and exceeds productivity goals. These fundamental principles are linked by using lean processes that are supported by the leadership team, employees and supply chain partners.

SERVICE PROVIDER RESPONSIBILITIES

SHIPPER RESPONSIBILITIES

Suppliers

Sales Logistics

HR

Plant Operations

Receiving Dock

Corporate Security

Sourcing

Customer Returns

Drayage

CustomerBroker

TerminalOperations

Drop ShipDestination

Transporter Warehouse

Corporate Security

Trade Compliance

Technologies

ORIGIN TRANSPORT DESTINATION

GREATESTRISK



Cybersecurity

Cybersecurity is the process of protecting the confidentiality, integrity and availability of a business’ IT assets (systems, data, networks). Conversely, compliance is often the minimum a company does to meet regulatory requirements or an industry standard. Compliance involves checklists, whereas security involves a detailed discussion with the company about its tolerance for risk. In compliance, both the regulators and businesses are slow to acknowledge new threats as well as slow to implement change. On the other hand, cybersecurity requirements move quickly at the pace of the market, threats and the risk profile of the business.

The resilience and preservation of a company’s ability to do business is crucial, because cyber threats are generally not a matter of if, but when. A resilience program’s objective is to:

• Maximize visibility

• Minimize impact

• Enable a quick recovery

• Continuously improve

Cybersecurity focuses on a company’s critical assets first and is then applied to the next most important resources. Elements of a cybersecurity program include:

• Network security

• Security architecture

• Data security

• Security awareness and training

• Cyber investigations

• Malicious content management

Many businesses elect to invest in security only after a significant event. The downside of this approach is that suppliers are acutely aware when a customer is in crisis, which most likely is then reflected in the pricing. Compounding the issue is that during a crisis third party professional services are often required to implement expensive new controls on aggressive timelines. Thus the best strategy is to have the process in place before a company’s weakness is evident.

As a rule of thumb, large corporations spend 3% of revenue on IT, with small businesses doubling that.16 Cybersecurity can be benchmarked as a percent of IT spend and will depend on several factors including the risk-tolerance of the company, and the maturity of the cybersecurity function. Cybersecurity can range from 2%-10% of the IT budget.17

Summarizing, the focus points when building and executing the process to manage a crisis are:

• Don’t wait until crisis hits to build a business continuity plan

• Respond in a timely manner—the longer you wait, the more damage can be done

• Establish a war room (physical or virtual)

• Encourage a mindset that this is now the team’s job. Everything else, if possible, should be moved to the side

• Don’t react: be quick, but also be fact-based and remember that nothing is off-the-record

• All communications should go through one channel with a spokesperson to represent the organization throughout the crisis process

• Express empathy and concern for the victims

• Never hide anything; all problems will eventually surface


Element 2: Cash to Cash, Cycle Time and Optimizing the Supply ChainMany companies lack the flexibility and agility to maintain liquidity through tough economic times. Quite often entrepreneurs focus on their core competencies of designing, marketing and selling their products. Sometimes they understand manufacturing, but fail to grasp the rest of the supply chain as the company grows.

To be sure, the dynamics of a supply chain are continually changing: suppliers are added, investments made in new plants, trade regulations grow, logistics costs increase and customers change. With the increase in international trade and cross-border legal requirements, the supply chain has become increasingly central to the management of cash.

Briefly put, the supply chain is the management of all functions related to the flow of materials, from the company’s suppliers to its customers, including purchasing, traffic, production control, manufacturing, inventory control, warehousing and shipping.

A major goal of a supply chain is to reduce the overall cycle time for all products and services. This is achieved by:

• Understanding and analyzing product groups

• Developing a standard approach to cycle time improvement

• Adapting and implementing to each specific supply chain or business

• Pursuing improvements based on effort and impact

• Developing a continuous improvement process that is linked to performance

The Japanese term Kaizen is defined as baby steps that add up to great big steps. By executing the following process, many baby steps will add up to giant steps for improving the cash to cash cycle as well as the overall health of the business. This is the magic bullet that everyone is always looking for.

THE CASH-TO-CASH CYCLE IN THE SUPPLY CHAIN

1. Industry Sector 3. Order Confirmation 7. Order Receipt

6. Transportation

5. Pick, Pack & Ship

CustomerPayment

Agreement On Customer Terms Policies & Procedures


THE CASH-TO-CASH CYCLE IN THE SUPPLY CHAIN

1. Industry Sector

3. Order Confirmation

7. Order Receipt

6. Transportation

5. Pick, Pack & Ship

2. Order Review & Commitment

2. Order Review & Commitment

4. Planning, Production and Distribution4. Planning, Production and Distribution

CustomerPayment

Agreement On Customer Terms Policies & Procedures



Cycle Time

Cycle time is the end-to-end total time from when a customer creates demand until a product is delivered and cash collected. This includes all information and material flows as well as any processing and queuing time. Managing cycle time improvements drives business performance in a number of key areas:

Contrary to a popular myth, inventory is located through the entire business, not just in a manufacturing or a distribution center. By managing cycle time, a business brings together all of its processes from customer service to delivery in order to direct how its cash is consumed.

The first step in managing cycle time is to locate the value stream of the process. Value streams are where value is added to a product or service. Process mapping assists in seeing where and how processes are completed as well as how money is spent. Reducing cycle time is not always easy: however by developing value stream maps, a company can understand the fundamental ways in which it operates.

GROWTH

WORKINGCAPITAL

PROFITABILITY

CUSTOMERSERVICE

PRODUCTIVITY

INVENTORY

Improving responsiveness to customer demand yields

increased market share

Lowering inventories produces a better utilization of cash

Eliminating non-value added activities reduces cost, which

leads to improved margins

MANAGING CYCLE TIME



Supply Chain Design: An Approach for Improving Cycle Time

Optimizing supply chain design is about positioning resources in ways that enhance profitability cash and working capital while producing tangible shareholder value. Customer, supplier and manufacturing strategies as well as world events all play into how well a company responds to changes in the marketplace. As shown below, supply chains are complex and messy. A customer can be a supplier, plants feed each other and return goods are often required to travel back to their origin.

The ability to only deliver what is needed, when it is needed and in the quality and quantity needed is a competitive advantage to any business that can solve this equation. This is accomplished by utilizing basic tools:

• Pull systems: produce only what’s needed

• Continuous flows: create an orderly flow to eliminate any delays or stagnation between processes

• Takt time: the lead time spent to produce a product to meet total market demand

• Cycle time: The lead time it takes from the start until the end of a process when a product is produced

Leveled flows, plus a well-planned production schedule, creates the ability for leveled production.

FACTORIES

CUSTOMERS

SUPPLIERS

SUPPLY CHAIN


Factory to Customer

Customer to Factory

Supplier to Factory


COMPANY A: CASE STUDY

The following case study is based on the analysis of two flows for a privately-owned 30-year old Canadian nutraceutical manufacturing and distribution business with $500 million in annual revenue. I’ll call it Company A. Its supply chain grew around rapid product growth and thus became quite complex.

One of the studies looks at raw material flows inbound for the company’s manufacturing division, and the second on the outbound flow to customers in Australia. Both examples illustrate how supply chains naturally evolve over time from their original design. Without a team focused on managing this, cycle times increase, which adds inventory and reduces available cash to the business.

Raw Material Flows into Manufacturing

Background:

Glucosamine is used in over 250 finished goods. Company A’s glucosamine finished goods inventory totaled $9 million. A one week reduction in lead time was worth $497,000, and total lead time varied from 110 days to 162 days, with an average of 127 days. By using the bill of materials and sales history the total demand for glucosamine was determined to have a very stable demand pattern with low variability.

Other facts to note were:

• Glucosamine originates from Qingdao, China

• In 2015, 23 PO’s were issued totaling 460,000kg for $5.2 million

• One week of glucosamine raw material was worth $100,000

• A 20-foot shipping container from Qingdao carries 18,000kg

• MRP made changes on 15 of 23 purchase orders

• With all of the push out/pull in changes done by MRP, only one day was gained

• Service levels for finished goods were well below the company’s 95% on-time performance standard

• Quality control testing for glucosamine was done on Wednesdays

Other Observations:

• Incoterms with the supplier were CIF Vancouver, therefore the supplier controlled the routes and shipping schedules

• Actual supplier lead times ranged from 40 to 92 days with an average of 65.5 days

• A 16-day vessel sailing from Qingdao to Vancouver was available but seldom used

• Because quality control tested glucosamine on Wednesdays, if a container arrived on Monday it could schedule accordingly and eliminate seven days of queue time

• Enhanced logistics and quality scheduling could decrease cycle time by two to three weeks, which could improve service levels and the cash to cash performance


Corrective Actions & Next Steps:

• Ship one 20’ cargo container every other week

• Move shipments to the 16-day transit vessel

• Standardize optimal quality testing day based on container availability in Vancouver

• Right-size glucosamine inventory by reducing $300,000 based on new cycle times

Daily MRP Run Prompts

Purchase

GLUCOSAMINE CYCLE TIME

Supplier

Ocean

QC Testing

THE FLOW IMPROVEMENTS

CYCLE TIME—CURRENT VS. FUTURE STATE (DAYS)

Data Transfer Interval

Supplier Replenishment Time

Inbound Logistics

Quality

Total Working Capital Reduction

4

30

30

14

78

4

30

16

7

57

0

0

14

7

21

$0

$0

$199,444

$99,722

$299,166

PROCESS CURRENT FUTURE DIFFERENCEWORKING

CAPITAL SAVINGS

PO Placement


Released to Factory


Finished Goods Flow from Canada to Australia

Background:

Company A’s order fulfillment for its Australian customers ranged between four to six months. All products were forecast, however, the process was continually second-guessed by personnel in export sales, planning, manufacturing and company leadership. In 2015, the inventories in the system became out of balance due to personnel changes, thus extensive expediting was required to fill customer backorders.

Other facts to note were:

• One day of working capital was valued at $12,500

• Chief variance between Canadian and Australian products was that Australian health regulations require a redundant quality control check of raw material at the time of dispensing

• Neither active nor passive temperature controls are used in the shipping process, therefore, spoilage and damage occurs during the transport process

• When the product is expedited, air cargo is used to correct slow response times

• Ocean lead times = 30; days/air = 5 days

• New products for this customer were difficult to schedule and produce on time, largely due to a lack of coordination with the NPI process

AUSTRALIAN CUSTOMER-FACING SUPPLY CHAIN

THE FLOW IMPROVEMENTS

CYCLE TIME—CURRENT VS. FUTURE STATE (DAYS) & DOLLAR SAVINGS

Order Processing

Supplier Replenishment

Inbound Logistics

Quality

Manufacturing

Distribution

Outbound Logistics

Total Time

4

30

30

14

70

3

30

195

4

30

16

7

42

3

3

112

0

0

14

7

28

0

27

83

$0

$0

$175,000

$87,500

$350,000

$0

$337,500

$1,037,500

PROCESS CURRENT FUTURE DIFFERENCEWORKING

CAPITAL SAVINGS


Daily MRP Run Purchase& Scheduling

Supplier

OceanQC Testing QA Testing

Shipped from FG W/H

Manufacturing

Port

Ocean

Air

PortSydney

WarehouseCustomer


As a result, the recommended implementation plan for the company’s Australian supply chain was to:

• Move active Australian SKU’s from forecast to master production scheduling (MPS) process in order to smooth out procurement, factory scheduling and manufacturing process times

• Transfer into the MPS process for NPI, after six months of production

• Ship finished goods direct to Sydney every eight days

• Reduce inventory levels to match 140 day/$1.75 million working capital for cycle time decreases

• Investigate the effects of in-transit active vs. passive temperature controls to determine if there are value-added benefits to customers

Summary of Case Study

In both cases, Company A failed to closely manage the monthly forecasting process, data accuracy, new product introductions (NPI) and lead times. As a result, there was a large variability for suppliers and the customers. Also, freight and logistics processes were not being managed, so costs were exceptionally high as a percent of revenue.

The key objectives were to:

• Identify current cycle time

• Reduce time through enhanced materials and logistics management

• Manage daily flows across all regions, suppliers and customers

• Create visibility of trade flows

• Ensure the ability to comply with changing trade regulation

• Increase flexibility by reducing touch points

The primary focus was on creating and maintaining the flexibility to absorb order fluctuations. In addition, a secondary focus was to take the “nervousness” out of the system by standardizing the way the material was ordered, received and shipped.

This was simply a back to basics campaign of management by walking around. From here value stream mapping (VSM) could be developed that illustrated where value was added versus where it was taken away. This enabled the ability to see where to go, how systems interacted with humans and the results of those exchanges. Building value stream maps also highlighted where each process started and where it stopped with all of the inputs and/or overlaps as well as where money was spent. VSM takes the emotion out of the conversation and so the focus is solely on the facts for developing the best flows for the company, their supplier and customers. Finally, VSM points to where waste is created as well as assist in determining how to eliminate it.

For raw materials, the process was slowed down, but eliminated the push out/pull in activities that sourcing routinely was executing from system prompts. This enabled a calming effect to the entire supply chain and allowed the team to focus on what was important and truly in need of intervention.

The process for finished goods was decreased by over 80 days. The products were taken off forecast and put directly into the master production schedule based on actual usage. Also, the pathways for introducing and managing new products were standardized, which improved quality and cost.


Final Thoughts on the Supply Chain Design

By walking through the supply chain from supplier to customer, we have been able to uncover where we add value and where it is lost. Furthermore, we have been able to analyze:

Additionally, taking the nervousness and uncertainty out of the supply chain, people were inspired and empowered to make further enhancements. Finally, inventory was reduced by making flows simple, clear and streamlined with no investment in expensive software packages or adding new people.

MANUFACTURING

Manufacturing lead time is the elapsed time throughout the manufacturing process. It begins when the raw material is dispensed and the manufacturing site receives the go-ahead to produce, and ends when finished goods are available for shipment. Manufacturing plays a key role in:

• Providing input for plant capacity on machine, labor, and suppliers

• Meeting schedule attainment and adherence

• Controlling quality through yield, scrap; including reworks, reclaims or sorting

• Managing cost per unit and units per hour output

• Supervising raw and WIP inventories including programs for their reduction

• Communication and escalation of issues

• Supplier performance

• Quality and productivity issues

The Complete Flow of the Supply Chain within Manufacturing

Creating an environment of simplified flows, material availability and schedule stability helps to build a credible process for customers and employees alike. Understanding the key elements of lead times, quality and costs allows a business to better grasp response times, takes the nervousness out of the system and help the business grow.

• Financing cost

• Operational cost

• Administrative cost

• Capital purchases

• Machine output/ maintenance

• Labor management

• Logistics and trade

• Lead/response times

• Material cost

• Pricing

• Supplier Relationships

• Metrics

• Understood the impact of existing constraints

• Quantified the gaps

• Modeled the trade-offs

• Executed


As a value stream map is developed, it should become readily apparent whether the flows are orderly or disorderly. Particular attention should be paid to where the process pauses and sleeps. In most cases, this is non-value added time and is typically greater than 50% and should become the primary target of the manufacturing leaders.

Workflows have to be balanced or the Takt time (the average time between the start of production of one unit and the start of production of the next unit) will increase to the time of the longest work station thereby creating sleep or idle time. These potential bottlenecks rule the throughput and inventory of the overall system, so schedules should be made with anticipated constraints in mind. Inputs required for properly balancing a line are:

• Takt time

• The number of stages required

• Variations with task

• Work station layout

Creating clean flows inside the four walls of a plant is the key to minimizing the overall cycle time, thereby minimizing working capital.

SUPPLY CHAIN WITHIN MANUFACTURING

1. Leveled production (Heijunka)

2. Pull system

3. Small lot flow

4. Flow is simple (limited branching or merging)

5. Flow follows fixed routes and sequence

6. Flow matches rhythm of entire system

1. Fluctuation in quantity and products

2. Push system

3. Large lot flow

4. Sorting and temporary storage occurs throughout process

5. Multiple complex flows

6. Flow ignores timing

ORDERLY FLOW DISORDERLY FLOW


Su

pp

lie

rs Receivingand

InspectionProduction

Inspectionand

Packaging

FinishedGoodsW/Hand

Shipping

RawMaterials,Parts, andIn-process

Warehousing

Cu

sto

me

rs

MATERIALS MANAGEMENT

PurchasingSupply

PlanningShipping &

TransportationWarehousing &

Inventory Controls

Physical Materials Flow Information Flow

THE COMPLETE FLOW OF THE SUPPLY CHAIN WITH MANUFACTURING



Materials and Production Management

There has been a long-standing debate between sourcing and materials management regarding the difference between buyer vs. planner responsibilities.

Material management is the coordinated effort between planning, sourcing, and suppliers to develop replenishment methods which provides for the highest availability at the lowest cost by addressing these questions:

• How much is needed?

• When is it needed?

• How is it to be triggered?

• And how will it come in?

The goal is to consistently deliver material by managing low inventories and is achieved by the use of standard definitions, work and tools. There are three types of manufacturing:

• Make to stock, which uses a Bill of Material (BOM) expressed in end-use part number/catalogue number terms

• Make to order, which is based on customer’s order. Product definitions are typically completed just prior to production

• Assemble to order, which specifies components via a planning BOM and utilizes inventory buffers, providing flexibility by hedging inventory

BUYERS’ VS. PLANNERS’ RESPONSIBILITIES

How many do we need?

When do we need it?

How do we need it to come in?

Who do we buy from?

What price do we pay?

How does the company do business?

BUYER PLANNER



Elements of MRP

Due to the complexity of most operations, businesses have turned to the use of a Materials Resource Planning (MRP) systems to assist in planning. MRP’s methodology is to:

• Explode the master production schedule

• Use BOM to identify parts needed

• Check availability of inventory

• Identify when work should start so that material is available when needed

• Generate work orders and purchase orders

• Repeat the process for other levels of BOM

MRP is a tool for understanding the timing of requirements for an item down to the component level. It applies to all levels of the BOM and uses existing inventories in order to reduce requirements. Finally, MRP is based on dependent demand and allows for the lead times for ordering, transit and manufacturing to be taken into account.

The benefits of MRP include:

• Realistic commitments, which provides for better customer service

• Controlled reduction of inventories, which reduces the use of working capital

• Improved responsiveness and flexibility through better forward planning

• Enhanced employee involvement through availability of information

• Stronger relationships with suppliers

• Integrated financial management

Material Replenishment Strategies

Inventory is created to compensate for the differences in timing between supply and demand. Some of the reasons for holding inventory are:

• Expected demand or cycle stock

• Demand variability or safety stock

• Capacity shortages or pre-build

• In transit inventory

• Purchase prices discounts

• Lot sizing

• Postponement strategies


As the diagram below shows, an effective inventory strategy includes minimizing costs and inventory, while maximizing customer service to create a desirable “sweet spot.”

The cost of not holding inventory can be lost customers, production delays, uneconomical batch sizes and missing supplier volume discounts or price advantages. Therefore, the purpose of holding inventory is to maximize service and maintain manufacturing efficiency while minimizing the cost of delivering a product.

Inventory can be reduced by shrinking lead times for raw materials and finished goods as well as by reducing the uncertainty of demand with customers and/ or suppliers. Typical cost of carrying inventory are 20% to 25% with some of the components being:

• Cost of money

• Warehousing and handling

• Inventory losses

• Freight

• Administration

• Insurance

THE SWEETSPOT

MINIMIZEINVENTORY

MINIMIZEOPERATING

COSTS

MAXIMIZECUSTOMER

SERVICE



Inventory strategy clearly lays out a process to be used to achieve the targeted results and can be based on things such as the voice of the customer (VOC), economic conditions or market intelligence.

CYCLE STOCK

PREBUILD STOCK

MERCHANDISING STOCK

SAFETY STOCK

PIPELINESTOCK

Cycle stock is quantity kept on hand to satisfy the predicted demand

for the month.

Prebuild stock is additional inventory kept to compensate for future

capacity constraints. This may also be known as build ahead stock or

pre-season build inventory.

Merchandising (retail) stock is inventory kept on hand to satisfy

demands at retail locations.

Safety stock is additional inventory kept on hand to buffer against

the variability of demand and/or lead time.

Pipeline stock is in-transit inventory to distribution center.

TYPES OF INVENTORY


REPLENISHMENT SYSTEMS

PUSH SYSTEM

PULL SYSTEM

VMI

Consignment

PUSH REPLENISHMENT OF MATERIALS IS BASED ON ANTICIPATION OF FUTURE DEMAND

• Anticipates a forecast, firm order or production schedule

• When a projected inventory drops to a certain threshold, a recommended order is generated

• Common form of push is MRP or DRP

PULL REPLENISHMENT OF MATERIALS IS TRIGGERED BASED ON ACTUAL CONSUMPTION OF MATERIALS

• Manual or electronic signal is generated when on hand inventory falls below a defined threshold

• Common forms of pull replenishment are: Kanban, Min-Max, Reorder point

VENDOR MANAGED INVENTORY (VMI) AND CON-SIGNMENT IS THE REPLENISHMENT OF MATERIALS MANAGED BY A SUPPLIER

• VMI has the vendor making the decision to replenish

• Consignment inventory is a similar setup where the vendor manages inventory specifically available for the business usage

• Common forms of VMI are: In-plant store, 3PL store, or direct to floor



Element 3: Building a Productivity Machine

A CLIMATE FOR CONTINUOUS IMPROVEMENT

Building a productivity machine and improving cycle time isn’t difficult, but it does take time, energy and collaboration from the entire enterprise. Everyone within the organization needs to be fully engaged and in agreement. This starts in the boardroom and flows down through all People, Processes and Tools.

Assembling the Team

When building a Cycle Time Team, your best athletes must be on the field and enthusiastic. This should not be an assignment of dread: rather, it should be viewed as an opportunity to help build the company into a healthier and stronger business.

The CEO is unquestionably the spiritual team leader, but they also have very real obligations to investors, shareholders, and customers that require their time. This means that the team needs a strong person granted authority to wander through every nook and cranny of the company. This is typically the senior finance leader. They have the power and knowledge, as well as the ability to draw on the necessary financials to develop base lines and execute a scorecard for the process.

A cross-functional team of experts needs to be organized to examine customer care (or order management), sourcing, manufacturing and logistics. Health care, nutritional, or pharmaceutical industries will want to include product quality as a key team member.

The Cycle Time Team needs to be small and agile, with the ability to move quickly through divisions, processes and geography so that the bureaucracy has difficulty keeping up with their activities and progress. Assignments given to each function need to be completed on time, with any blockage—be it employee, supplier or constraint—identified and positively resolved. No victims are allowed— instead, celebrating success and having fun should be a constant. It is inspiring to watch the progress and see the results in the monthly financials.

Managing the Organization

As the team’s journey begins, the bureaucracy will wonder what the initiative is. Town hall meetings can be used to introduce and describe the journey the company has elected to take, and leadership should take pride in the new program and explain the way forward to the workforce. It needs to be stated that all supply chain practices are up for review, but that unless there is flagrant bad behavior, amnesty will be given for an initial period. This will disarm the bureaucracy’s concerns and allow the team to advance.

Organizational alignment is fundamental in rolling out this program. The team needs to understand the reporting relationships, who makes the decisions for what, and how those decisions are made: this is critical to identifying opportunities. Additionally, aligning goals, compensation and incentive plans streamlines the ability to get the process moving quickly, efficiently and in a high-quality manner.


Getting Going with Problem Solving

By grasping how core processes function, waste can be identified and removed. The Plan, Do, Check, Act process provides a strong framework that enables the study of problems without the resistance that often accompanies improvement processes.

Additional points to keep in mind are:

• Safety and quality are always preconditions

• Kaizen (or improvement) only comes from necessity

• The ideal condition is always pursued

• Genchi Genbetsu, Gemba or Go and See for yourself

• Find the root cause by using the 5 Why’s

• Concept follows actions

• Kaizen requires speed rather than perfection

• Do work Kaizen rather than machine Kaizen

Seeing a problem firsthand allows the team to identify situations requiring improvement and to create a problem statement that describes the Who, What, When, Where and Why of a problem. From there a team is gathered to:

• Analyze and brainstorm the potential cause of the problem

• Shape the potential cause by developing a Fishbone diagram

• Select the most likely cause of the problem

• Collect data and use Pareto charts to determine the cause

• Use the 5 Why’s to find the root cause of the problem

• Develop corrective action for each root cause

Plan

• Define the scope which includes the vision and case for change

• Prepare a baseline including a gap analysis and initial timeline

• Insure leadership support for project

• Insure alignment for metrics, rewards, and recognition

Do

• Lead a VSM exercise for the entire end-to-end process

• Launch improvement

• Drive standardized work with accountability

• Implement a management review process

Check

• Assess for results

• Refresh baseline

Act

• Develop corrective actions to address gaps


There are eight basic tools used for problem solving. They are:

• Cause and effect diagram—fishbone chart

• Flowchart or process flow diagram

• Pareto charts

• Run charts

• Histograms

• Scatter diagrams

• Control charts

• 5 Why’s: asking “Why” five times gets to the root cause of a problem

Value Stream Mapping the End-to-End Process

Value Stream Mapping (VSM) helps to understand the physical and communication flows in a supply chain. Determining where a process starts and stops is critical to building a proper Value Stream Map. It’s a simple linear process that incorporates information about the volumes and resources required to produce a product. Areas to be studied and understood include:

• Timing of information flows

• Supplier lead times

• Supplier cost structures—cost vs. time and inventory

• Manufacturing setup and execution times

• Choice and cost of logistics mode selection

Once needed improvements are identified they can be translated into action plans. A completed Value Stream Map tells the story of a series of activities and identifies waste and opportunities to improve the end-to-end process.

• Manufacturing setup and execution times

• Choice and cost of logistics mode selection

By implementing a climate for continuous improvement, a company can determine its best path forward for making improvements.

Metrics

While there are no agreed upon cycle time metrics or definitions, most businesses follow the path of Quality, Costs and Delivery. Through the use of Value Stream Mapping one can readily see value vs. non-value added times. These inefficiencies wind their way through manufacturing, including queues, changeover/set-up times, materials management, quality, warehousing, and more. The old adage “What gets measured, gets done” certainly applies to managing cash to cash within the supply chain.


Cash Conversion Cycle or Cash to Cash Cycle Time

The cash conversion cycle is the length of time between when a business purchases inventory and the receipt of cash from accounts receivable, and represents the number of days that cash remains tied up within the operations of the business. A cash flow analysis using CCC illustrates how efficiently the company is managing its working capital.

Cash Conversion Cycle (CCC) = DIO + DSO - DPO 18

A short cycle allows a business to quickly acquire cash that can be used for additional purchases or debt repayment. The shorter the cash conversion cycle, the healthier a company generally is. Businesses can shorten the Cash Conversion Cycle by speeding up payments from customers and slowing down payments to suppliers. The Cash Conversion Cycle can even be negative if a company takes a strong market position and dictates terms to its suppliers.

Conclusion

REDUCING THE CASH TO CASH CYCLE =

IMPROVED CASH FLOW

As I’ve noted, industry experts and academics agree that understanding, optimizing and reducing your cash to cash cycle has a big reward: improved cash flow without an investment of expensive software, adding people and months of work.

A CFO I’d worked with to reduce his cash to cash cycle said it better than I could during our annual review of his metrics and processes. “We have cash flow! Money in the bank. I’m no longer waking up in the middle of the night concerned about making our payments. For the first time in a long time, I was able to accrue cash in order to pay our corporate taxes on time and I haven’t had to head back to the bank for loans.”

Cash—not earnings—reduces debt and a business without sufficient cash ultimately is bankrupt.

So why don’t more companies know what the cash to cash cycle is? Limited information and lack of internal expertise is a large part of the answer.

I’ve unpacked decades of battle-tested experience and knowledge in this white paper to change that.

Please note that for the practitioner, there are subjects I didn’t cover in detail in this whitepaper such as logistics, trade, quality, and sourcing or supplier development. I will cover these topics and more on my blog at www.jayfortenberry.com.

As one of the few experts in the world on the cash to cash cycle, and cycle time, I want to help as many companies as possible take control of this precious asset—cash—to transform their financial future and their long-term viability.

I hope this whitepaper opened your eyes. It’s time to act. If you need expert guidance to optimize your cash to cash cycle contact me at: [email protected].


Acknowledgments

The number of people I should properly thank is incredibly large and almost certain to mean there will be some omissions. For that I apologize in advance.

Instead, the people below helped me specifically and privately in many ways, or in ways they didn’t know over the years. I admire their knowledge, experience and invaluable contributions that helped to increase awareness of the importance of working capital and cash to cash.

First, enormous thanks to:

Dave Cote (Honeywell) for his boundless enthusiasm for reducing overall cycle time.

A big thank you to the passionate thinkers and researchers for their knowledge and insights:

Jacob Bierly – Bunge Asia

Donna Covington – Delaware State University (formerly at Lexmark)

Paul Dittmann – University of Tennessee

Lisa Ellram – Miami University (Ohio)

Ted Farris – North Texas State University

Brian Gibson – Auburn University

David Graham – Honeywell

Seock-Jim Hong – North Texas State University

Abby Mayer – DSC Logistics

Ray Mundy – University of Missouri, St. Louis

Manus Rungtusanatham – The Ohio State University

To my many colleagues over the years, thanks for your acumen, support, and shared goals:

Kevin Alexander - Toyota Material Handling North America

Anne Bruggink – Anne Bruggink Consulting LTD

Joe DeSarla – retired Honeywell

Hendrikje Genung – Honeywell

John Hellriegel – The Estée Lauder Companies Inc.

Karl Laskas – Dell

Rich Mason – Critical Infrastructure, LLC

Soussan Mobasser – Deloitte Consulting, Nederlands

Jeff Muradian – retired Honeywell, future Adjunct Professor University of Minnesota

Jeff Soholt – Honeywell

Kate Vitasek – Vested

Mark Ward – Caterpillar

Troy Weibler – Vice President, UBS (provider of financial data)


Endnotes

1 Matthew Frankel, “What Happens After Warren Buffett Leaves Berkshire Hathaway?” The Motley Fool, February 6, 2016. Available at http://www.fool.com/investing/general/2016/02/06/what-happens-after-warren-buffett-leaves-berkshire.aspx

2 Jay Goltz, “Top 10 Reasons Small Businesses Fail,” New York Times, January 5, 2011. Available at: http://boss.blogs.nytimes.com/2011/01/05/top-10-reasons-small-businesses-fail/

3 M. Theodore Farris II, Paul D. Hutchison, Ronald W. Hasty, “Using Cash-To-Cash To Benchmark Service Industry Performance,” The Journal of Applied Business Research, Spring 2005, Vol. 21, No. 2. (p114)

4 Dave Cote response to email questions5 Email from company executive response, August 20166 Buffett quote from AZ Quotes. Available at http://www.azquotes.com/quote/7094617 “2015 US Working Capital Survey,” The Hackett Group 27 Jul. 2016 Available at http://www.thehackettgroup.com/

research/2015/uswcsurvey/>8 Ryan Fernandes and Lisa M. Ellram, “Unlocking the Potential of Supply Chain Working Capital Finance.”

White Paper.9 Paul D. Hutchison, M. Theodore Farris II, and Gary M. Fleischman, “Supply Chain Cash-to-Cash: A Strategy for

the 21st Century,” Strategic Finance July 2009. Available at http://instructional1.calstatela.edu/khansen3/Bus%20512A/C2C%20cycle.pdf

10 Seock-Jin Hong, “Is Cash-to-Cash Cycle Appropriate to Measure Supply Chain Performance?” Springer International Publishing Switzerland 2015 http://www.springer.com/cda/content/document/cda_downloaddocument/9783319190051-c2.pdf?SGWID=0-0-45-1511490-p177384857

11 Jacob J. Bierley, Jr. “Cash-to-Cash Cycle - Vital Enterprises.” 2007. 2 Sep. 2016 Available at https://www.vitalentusa.com/learn/cash_to_cash.php

12 J.P. Morgan, “A New Digital Era for Trade.” (2015). https://www.jpmorgan.com/country/US/EN/insights/treasury-services/a-new-digital-era-for-trade

13 “Supply Chain Metrics That Matter: The Cash-to-Cash Cycle.” 2012. 23 Aug. 2016 <http://supplychaininsights.com/wp-content/uploads/2012/11/Supply_Chain_Metrics_That_Matter-The_Cash-to-Cash_Cycle-30_NOV _2012.pdf>

14 Ibid.15 Based on historical experience 16 Interview with Rich Mason, president and CSO, Critical Infrastructure, LLC, August 201617 Mason interview18 http://www.readyratios.com/reference/asset/cash_conversion_cycle.html


the fortenberry cash to cash series...marketing as well as financial management.” 9 companies that...

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