Cash Conversion Cycle - Ideas

[Prabhu]

Hi Friends,

Hope Supply Chain Professionals have their own strategy and good experience in reducing Cash Conversion Cycle. Please share your ideas, examples, best practices (Dell, Toyota etc.), tactics and view points here.

M.Prabhu

[Prabhu]

Hi,
Expecting without giving anything may lead to this silence.

A small scale company in India doing their service business (lead time of 15 days) by following this strategy to reduce their receivable days; Customers are awarded with the benefit of 3% discount if they are ready to pay fully for their service in advance i.e. during the ordering time.
A small cracker and matchstick manufacturing unit used to plan their production based on daily distribution of its own - 60% and others - 40% (number of outbound trucks from 3 major companies – their competitors), procuring their entire needed raw materials on daily basis and similarly their dispatches. This campaign helps them to reduce their inventory days.

A huge example – Dell strategy: Dell has a negative 50 days cash conversion cycle, which means that their sales are converted in to cash 50 days before the sale. In facet, it facilitates them to do their business by not spending their money.

-Prabhu

[srinivas.d]

Hi Prabhu,

I am also currently working on a similar project for a Pharma company. Don't have any concrete ideas as yet. But we are working on tracking the entire chain for some Orders, identify pain areas and then generate ideas...

May be we can keep this thread active to share our findings, ideas etc...

Srini

[Prabhu]

Hi Srini,

I heard that cash to cash cycle in asset intensive (long term) sector is quite long and also giants in this Pharma-industry (Pfizer, Novartis, Ranbaxy etc.) are having more than 300 days C2C?! I’m not sure about this data.Tracking some orders means you are doing VSM. Focusing on value stream mapping will really facilitate to minimize the cash cycle up to certain scope. Go a head with informative chat.

-Prabhu

[srinivas.d]

Pharma industry can be broadly categorized into Innovator, Generics and CRAMs (contract mfg). For Generics (my org. is into this business), the avg CCC time comes to around 80-100 days (based on my calculations from the Financial statements).

Yes, I am planning to do VSM but as of now just doing a data collection part. Will take another week or two to come out with some analysis.

Will keep u posted!

Srini

[Prabhu]

Linking payables and receivables – some processing units are getting benefits with this approach, why not retail?

Assumption: A processing unit purchase material from its supplier based on order (demand), add value to that material and sell it to customers through agent as a product.

Average number of materials received from supplier / month = 30

Cost of a material (per piece) = 100 $
(Therefore, payable per month = 30*100$ = 3000$ i.e. 3000$ for every 30 incoming materials or 1500$ for every 15 materials)

Cost of processing (per piece) = 10 $

Profit (per piece) = 10$

Selling price = 100$ + 10$ + 10$ = 120$
Number of products to be sold to meet the payable = 3000$ / 120$ = 25

Payable cycle: For the deliver of every 30 materials, our unit will pay. I.e. Supplier will receive payment from unit for the quantity of 30 outbound materials.

Fixing receivable cycle: For the receipt of every 25 products, out unit will receive. I.e. Agent has to pay to the unit for the quantity of every 25 inbound materials.

With the anticipation of learning,
-Prabhu

[srinivas.d]

As I understand, this will sync the payables batch amt with receivables batch amount and so my working capital is 0.

The above mentioned can be used for simple business case. But, I think in most cases there will be lot of complexity, specially on the payables side, like the problem I am currently facing:

There can be multiple RMs, each Ordered on a different date and having different payment terms. In such a case, the challenge is to arrive at one date and amount that can encapsulate the value of all RMs.

On the receivables side, it is easier as there will be one end product.

Please let me know, if you have any ideas for the problem I mentioned on the payables side.

Srini

[srinivas.d]

oh ya, also the problem of batch size will also come while employin such a method. We might have to check the economic batch size that will reduce my transportation costs etc.

Srini

[Prabhu]

Yes. It is not easy to realize this approach in a manufacturing industry, even in a bulk continuous process industry. Seeing as, I have suggested it only for single product processing industry and retail industry.

Have you read the “Inventory cycle counting – Article” a Zip file posted by Moderator SJ. It may give you some ideas to minimize the inventory days, which effectively helps to minimize the CCC days.

-Prabhu

[Prabhu]

Flexible design always give a chance to redesign.

It is uncomplicated to deal the economic order quantity application with this method. First, we need to fix EOQ or Economic batch size at one end and considering that quantity as one of the factor to fix the other end or Split the outcome based on some target (May be EOQ). But again it suits only for few RMs and FGs.

-Prabhu