Improving Cash Conversion with Smarter Supply Chain Logistics
Operational efficiency and financial health go hand in hand. Strategic logistics decisions, coupled with scenario modelling and collaboration, enable CFOs and supply chain teams to minimise cash conversion cycle leaks and drive profitability.
While the cash conversion cycle may be an important measure of balance sheet health that is keenly monitored by Finance leaders, it receives less attention in most Supply Chain departments. However, the reality is that operational considerations make a material contribution to the efficiency of the cash conversion cycle and should be taken into account during upstream (supplier) and downstream (customer) negotiations.
When Finance leaders turn to Supply Chain to look for opportunities to plug cash conversion cycle leaks, inventory optimisation tends to get most of the spotlight. After all, the linkages between stock levels and cash flow are clear – if excess stock is sitting in a warehouse somewhere, it’s not flowing out the bottom of your cash conversion funnel as a sale (not to mention the fact that it’s costing you money to store).
Less attention usually goes to logistics optimisation as a factor in the cash conversion cycle; yet it can make a crucial contribution to shortening cycle times, reducing costs and enhancing overall cash flow efficiency.
To casual observers outside the Supply Chain department – and that sometimes includes those in the Finance space – logistics optimisation may seem to be a relatively straightforward affair involving managing shipments or coordinating deliveries (‘trucks and sheds’, if you’re taking the simplified view).
However, the reality of logistics optimisation is far more complex. There are a myriad of choices and considerations around modes of moving your goods, storing them and assembling them. Far from being a purely administrative task, it requires sophisticated and strategic oversight to balance cost control, efficiency and timing.
In particular, a strategic lens is required if a shorter cash conversion cycle is on the agenda. Let’s take a look at some examples now.
Inefficient transport and logistics
Starting with the very obvious, inefficient transport and logistics is highly undesirable for a number of reasons – operational efficiency, customer satisfaction, inventory management and ultimately, the cash conversion cycle. Whether upstream or downstream, if it takes longer than planned to move goods, then your cash conversion funnel is leaking and efficiency is compromised.
Of course, supply chains have been subjected to unavoidable transport disruptions from various unprecedented global events – and it’s almost guaranteed that we’ll see more disruptions in the future. The impact of logistical disruptions on the medium horizon (beyond two or three months) can be better anticipated and therefore managed with better visibility and connected data across the ecosystem via a mature integrated business planning (IBP) process. More immediate disruptions are better managed with extensive scenario modelling, where your team anticipates “what could possibly go wrong?” and then develops a playbook of pre-approved responses for each scenario.
Global events aside, it goes without saying that suppliers and freight providers (both upstream and downstream) who fail consistently to meet the agreed terms are not only bad for business, but also for your cash conversion cycle. Also bear in mind that logistics is a two way process: when you manage returns and exchanges from your own customers quickly, you reduce the time taken to resell or restock returned goods (and therefore shortening the cycle).
Location, location, location
For global supply chains, location has a role to play in logistics strategy and the health of the cash conversion cycle – specifically, where and when ownership of the goods passes from seller to receiver. It can range from ex-works (the buyer takes ownership and responsibility for the goods from the seller’s factory) through to delivery duty paid (the buyer takes ownership and responsibility at the end destination).
The obvious link with the cash conversion cycle is that the earlier ownership is transferred, the earlier the invoice is issued and the more beneficial it is for the seller – or so it would seem. However, things are rarely that straightforward.
As a customer, for example, you may have the option to either take ownership of the goods at the seller’s factory (ex-works) with longer payment terms, or at your end of the journey (delivery duty paid) with shorter payment terms.
Similarly, it may be beneficial to take ownership at a particular point on the journey – for example, if you own a facility where the goods can be consolidated to make up full containers before making the final leg.
Assembly strategy
Finally, your assembly strategy may have a material impact on your cash conversion cycle. Let’s say you’re in the auto business and you’re negotiating car imports for the next quarter. You’re seeing increased demand for red cars but you’re unsure whether that will continue. Your first option is to import a load of red cars from Japan, ready to sell, or import a load of unpainted cars and then customise them locally at the time of order.
While it costs more per unit to customise the cars locally, you are also mitigating the risk of having excess inventory on hand because people no longer want red cars – and thus, the risk of a leak in your cash conversion cycle. Add to this the fact that components and sub-assemblies are valued at cost during shipping (such as an unfinished car), while finished goods are valued at cost of goods sold, which includes the cost of the labour used to assemble the components and sub-assemblies. It could make sense to tolerate (where possible) some degree of local customisation and finishing to optimise cash flow.
The importance of collaboration
The common thread linking each of the above scenarios is that there are no right and wrong answers. It’s all about back-to-basics scenario modelling, with collaboration and negotiation between buyer and supplier to arrive at favourable outcomes.
Finally, when you’re rethinking aspects of your logistics strategy, bringing Finance into the conversation early will be critical. While the Finance team is unlikely to be interested in the tactical details, early awareness of any changes will ensure strategic alignment with key metrics such as the cash conversion cycle, and help anticipate the financial implications of inventory adjustments, supplier negotiations, or changes in payment terms.
Proactive collaboration will also support better decision-making around capital allocation, risk management and overall cost efficiency, ultimately driving a more resilient and agile supply chain.
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