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Three
of the fundamentals that drive operational strategy are:
Speed, Cost, and Quality. Sometimes though, it helps to
consider these “fundamentals” in a larger, more holistic
sense. To do that means looking at the cash-to-cash cycle in
an expanded way, to include the entire supply chain. This has
become increasingly important as competition takes on a global
perspective.
The Cash-to-Cash cycle is the time from
when a company receives raw materials to when they receive
payment for the finished product that used those raw
materials. Obviously, the shorter the time, the faster the
inventory turns, and the lower the carrying costs, working
capital, etc. A short cash-to-cash cycle is a good thing, a
new name for the old “time is money” theme.
The
length of time it takes to create cash has huge implications
for business survival. We believe Cash-to-Cash is a key metric
to determine the effectiveness of a company’s business
model’s ability to compete. It is especially important as
globalization increases.
“Globalization” describes
the extent to which markets can be served from anywhere in the
world. Lately, globalization has received a lot of attention
for its impact on domestic competitiveness as more businesses
outsource from lower cost countries such as China and India.
As the caliber of skills increases in these countries, even
higher-value activity will be outsourced.
During the
last three months, the Tech industry has held several
symposiums/conferences/panel discussions regarding
competitiveness, especially from a global perspective. In
October, Andy Grove, Intel’s Chairman, stated the U.S.
software industry is following in the footsteps of the U.S.
steel industry, losing nearly half the market share in the
chip industry to foreign producers. He predicts a similar fate
for other sectors as well.
More recently, Craig
Barrett, CEO of Intel, said that the addition of 300 million
educated Chinese and Indians who can effectively do any job
that is currently being done in the U.S. has changed the
global landscape forever. Brian Halla, Chairman and CEO of
National Semiconductor, amplified this during a panel
discussion sponsored by the San Jose Mercury News in
Silicon Valley by stating that China graduates more electrical
engineers in a year than all the other universities in the
world combined. Jim Morgan, Chairman of Applied Materials,
added that it isn’t the U.S. versus China. It’s Silicon
Valley versus Austin, versus Shenzhen, versus Bangalore. The
ability for a region, or a company, to be competitive depends
on its ability to hone its competitive skills.
A
December 3, 2003 article in Peoples Daily, China’s
largest newspaper, described the increase of the steel
producing and fabricating capacity in China as having a huge
downward impact on global steel prices. It is sobering news
when coupled with a March 2002 in Steel News report
that 31 steel companies in the U.S. have declared bankruptcy
since 1997 with 17 of those having been shut down
completely.
This brings us back to Supply Chain
Cash-to-Cash Cycles. As cost and quality fundamentals are no
longer unique to American production capability, the one
fundamental left is speed. Being physically close to the
world’s largest (as measured by dollars) market has its
advantages. However, leveraging the proximity with
speed-to-market has to come from increased flexibility not
increased inventory. Measuring just your cash-to-cash cycle
isn’t enough. Measuring cash-to-cash all the way from when
your raw material suppliers receive inventory to your
customers’ receipt of payment is a more realistic measure of
how flexible, and therefore how competitive, your supply chain
is in an ever increasing global economy.
For a homework
assignment, determine what your supply chain cash-to-cash
cycle is currently. The results may surprise you. Time is
money, and survival. How close to 30 days or less is your
supply chain’s cash-to-cash?
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