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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