August 2007 | Commentary | Supply Chain Technology

Complex Technology Optimizes Basic Concepts

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As supply chains continue to increase in scope and complexity, the technology powering those supply chains likewise becomes more complex, specific, and compartmentalized.

Some companies, however, are realizing that in the quest for ultimate technology sophistication, they may be overlooking some very basic business concepts.

Take working capital, for instance. A business can boast cutting-edge technologies, an amazing product, and state-of-the-art distribution capabilities, but if its working capital is not in order, it is unlikely to succeed for long.

This may sound like Business 101, but as a recent Aberdeen Group report shows, many companies using advanced technology go back to basics and determine how to optimize working capital. Indeed, two-thirds of survey participants place a "high priority" on working capital optimization.

"The shortage of working capital to support our business expansion is the main reason our company has increased its focus on working capital. We are evaluating different ways of reducing net working capital including inventory optimization, reverse auctions, and lead-time reduction possibilities," says one respondent to the study, Working Capital Optimization, which surveyed 400 companies.

Physical meets Financial

Though supply chain activities have a huge impact on working capital, supply chain and finance matters have traditionally been managed separately, a philosophy that is detrimental to maximizing cash flow. This has begun to change.

"An evolution is occurring in terms of companies wanting to merge their physical supply chain and their financial supply chain to boost working capital optimization. This idea is not mainstream yet, but best-in-class companies are focused on bridging a collaborative approach between the two," says Nari Viswanathan, Aberdeen's research director, supply chain management, and co-author of the report.

Why this current focus on such a seemingly basic business idea?

Many factors are spurring this emphasis on supply chain finance: pressure from financial executives to improve key working capital metrics (cited by 66 percent of respondents); a need to meet customer service requirements through better inventory management (30 percent); and the sense that current inventory management strategies are too risky (29 percent).

Not surprisingly, companies doing the best job managing working capital are more likely to be using inventory optimization and collaboration, supply chain visibility, and cash management tools, the report shows. Many companies, however, are still struggling to adapt to current technology systems.

Most enterprise resource planning tools, for instance, don't offer the advanced capabilities necessary to manage multiple levels in the supply chain so companies can perform inventory optimization with an eye toward maximizing cash flow.

Beyond Traditional Solutions

"Traditional solutions do not offer a good way of representing a company's working capital. Companies need technologies that can show imports in terms of volumes or cash flow," says Viswanathan.

For many, the solution is a bolt-on approach, adding niche technologies that help them better view inventory levels and strategically determine how much inventory to hold, for how long, and where in the supply chain it should sit.

Merely reducing inventory to take cost off the balance sheet is not sufficient, says Viswanathan, because that can negatively impact customer service levels.

Technology providers such as SmartOps, Optiant, i2, and Logic Tools have developed multi-echelon inventory optimization solutions that offer the ability to calculate safety stock inventory to ensure companies have the right amount of inventory at the right place. Adopting these types of capabilities is often a first step on the road to working capital optimization.

Traditional advanced planning and scheduling tools - offered by vendors including Logility, Manhattan Associates, and JDA - are also a good choice. These solutions are not strictly multi-echelon, but they also offer good capabilities for computing safety stocks, explains Viswanathan.

Supply chain analytics tools are also useful for combating working capital inefficiencies. Survey respondent Akzo Nobel, for example, uses a customized reporting tool from technology firm Supply Chain Consultants, Wilmington, Del., to help it identify obsolete or aged inventory.

The chemical company then makes an effort to move this inventory off the balance sheet by either selling or remanufacturing the goods so they again hold market value. Using this approach, the company has improved working capital flow substantially.

Strategies such as Akzo Nobel's are usually the result of a cross-functional team working together, analyzing how best to optimize working capital. And, as with all technology projects, getting buy-in from the finance side is key.

"One common characteristic among companies that have been successful implementing these types of technologies is that the CFO is well engaged in the project," Viswanathan adds.

While it is not realistic to assume that every company can convince its CFO to invest in supply chain technologies aimed at improving working capital, companies can take baby steps toward that goal.

And technology is not always the holy grail, Viswanathan admits.

"Working capital optimization is process-focused. Because so many touchpoints exist in the supply chain, companies need a cross-functional approach and they need to prepare to handle change management challenges," he says.

Three Areas to Watch

Companies seeking to use technology to improve working capital should carefully examine and incrementally improve upon three areas, Viswanathan advises:

Inventory optimization: Best practices include using inventory optimization tools, inventory visibility and collaboration technology, and multi-echelon inventory optimization.

Supply chain finance: Third-party inventory financing, working capital/cash management tools, supply chain network design tools, and platform upgrades are all helpful.

Cross-functional metrics and management: Take a cue from best-in-class companies, and measure and manage working capital via a cross-functional approach.

"It won't catch on overnight, but working capital optimization is the next step toward creating a more holistic picture of how to optimize cash flow and bring the disparate parts of the supply chain together," says Viswanathan.

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