Sourcing and Procurement
Cash and the COVID-19
It is almost a year and we are still struggling with the aftermaths of COVID-19 outbreak. Despite the recovery measures and business continuity plans in place, some organizations and categories continue grappling to keep up with unforeseen demand, think supermarkets, pharmacies and gun stores in the USA as panic-buying sets in again during the unchartered territory driven by COVID-19.
For many more, demand is rapidly falling away and boards and management teams continue to take immediate action to protect their organizations through a significant period of uncertainty. We have seen Qantas announce the standing down of two-thirds of its workforce on March 19, 2020. Others will be cancelling orders on their suppliers, postponing projects, looking at all opportunities to reduce costs. As cash dries up they are passing further pain onto their supply base by delaying payments for goods and services – all in order to survive.
Forward thinking enterprises are looking beyond this epidemic to understand what they can learn from the experience and how they can set up their supply chains to support growth and profitability with increasing global volatility and uncertainty.
Cash is always important and in businesses where revenue is dropping, there is an immediate need to explore other avenues to free up cash to pay for staff as well as suppliers.
An early mentor of mine walking through his distribution center pointed to racks full of finished goods pallets and suggested I imagine them as pallets full of $100 notes effectively making the point that working capital tied up in inventory was real cash. This is cash that could be better used elsewhere in the business and that we should be looking to invest in the people, processes and technology to ensure we had enough inventory to look after our customers but not carry excess.
We have been working with our clients for more than 20 years on inventory optimization, S&OP and IBP processes with great success, but still there are too many examples of out of stock, excess stock and stock write offs with inaccurate forecasting being the typical culprit.
Last year we were introduced to Demand Driven methodology which has taken Europe by storm and is rapidly growing through the Americas producing outstanding results across multiple industries. In Australia, we have successfully rolled out our first implementation-transformation program.
Demand Driven is the evolution of end-to-end supply chain planning and execution.
Where traditional models push inventory through the supply chain based on forecasts that are invariably wrong, Demand Driven pulls inventory from strategic buffers based on real orders. Your supply chain is no longer reliant on an accurate forecast to have the right amount of inventory to meet sales.
One of our technology partners has completed over 50 demand driven implementations over recent years, typically delivering more than 30% inventory reductions, 10% increase in availability and a 20% lead time reduction from organizations that already have sound forecast based planning processes in place.
In these challenging times, it is still possible to free up cash from working capital in the short term to relieve the immediate pressure and transform supply chain planning in your business to support profitable growth once the current turbulence subsides. Some measures could be:
Relooking at variable costs:
A lot of cash can be saved by revisiting different costs outflow areas such as reducing contract labour to allocate work to permanent workforce, encouraging employees to avail leave balance, tightening of discretionary spend like on entertainment and recreational activities.
Organizing inventory management:
While stock scarcity is often dreaded by companies, however, stocking up inventory also means stocking up of cash on the shelves. Amidst, creating a balance between the inventory level and supply chain is critical for businesses. Therefore, companies are required to identify measures and immediate opportunities to bring down their inventory level and enhance cash flow.
Prioritizing cash-to-cash conservation:
In order to turn the crisis into advantage, it is crucial to shift the focus from profit and loss to savings and cost cutting. This simply demands a coordination between payables, receivables and inventory levels. Amidst, while inventory levels are often taken care of they tend to over shadow the receivables area. However, in these uncertain times, ensuring a rigor on collection process by focusing on customer-specific payment can yield more cash.
Managing cash flow has become more important than ever. In the light of the current times, it is important to look into the cash flow requirements by thorough assessments of potential risks and plans for mitigation and actions accordingly.
