The cash to cash cycle

Increased supply chain length and complexity has had a significant, negative impact on working capital. Cash is tied up with in-transit inventories that are difficult to reduce due to the lengthy, global nature of today.

The cash to cash cycle is defined as the period of time between when a company spends a dollar on purchases from a supplier until it becomes a dollar of revenue from the customer. The shorter that timeframe, the better. By reducing its cash to cash cycle, a company firms up its balance sheet, improves its cash flow, and cuts its working capital requirements.

The chart above illustrates the value of cash to cash in major industries. 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. Even a small reduction in the cycle averages can be highly valuable when it comes to the cash flows needed to operate complex operations.

Actively managing the cash-to-cash cycle in the supply chain requires cutting across multiple functions and processes of a company. Just as in a relay race with passing the baton, flawless handoffs between functions determines if we win or lose this competition. Again, we often assume that having world class tools and processes will make us great, when in fact we’re actually failures at running the business efficiently. This comes from not truly understanding how the company operates from a People, Process and Tool perspective.

Running a global business

A couple year ago, I wrote about the conundrum of how a small business plans and effectively operates its supply chain? Many times entrepreneurs tend to be optimistic in some areas and too pessimistic in others. They can have brilliant ideas, but lack the ability to execute properly, which cost their business the vital resources of time, money and manpower.

Actively managing the cash-to-cash cycle in the supply chain requires cutting across multiple functions and processes of a company. Just as in a relay race with passing the baton, flawless handoffs between functions determines if we win or lose this competition. Again, we often assume that having world class tools and processes will make us great, when in fact we’re actually failures at running the business efficiently. This comes from not truly understanding how the company operates from a People, Process and Tool perspective.

Operating the supply chain

Most businesses simply don’t have the human resources or volume to operate like a multi-national although they are still manufacturing, crossing oceans and selling product in distant places to meet their customer’s needs. For many businesses, managing the supply chain can be cost prohibitive, however this does not diminish the critical need for the architecture to be designed correctly in order to insure they are legal and hit their quality, cost and delivery targets.

Controlling a supply chain comes down to the basics — a credible process for planning, customer service, supply planning and logistics and trade practices.

Typically, supply chains just happen — suppliers change, customers are added, new plants are built, labor cost rise, tariffs change and logistics are always doing something. Supply Chains respond to the marketplace and are often messy. Managed properly, the supply chain is an asset for reducing cash through cycle time; opening doors for growth, and creating productivity.

Conversely, the consequences of poor practices are a delay or seizure of goods in transit, operational disruption, loss of reputation and customers, fines and penalties, increase transit time and a potential for a loss of business. Seemingly simple requirements have a huge impact on the profit and loss if not executed flawlessly.

So how does a business go about planning and executing this complicated equation, without killing the spirit and flexibility that created the success to begin with? The answer is through the formula: People, Process, Tools


Jay Fortenberry is a cash to cash cycle expert, teacher, mentor and author. He is an instructor for the Master of Global Supply Chain Management program and leads the Supply Chain and Value Chain in Asia Field Study.



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