Cash Conversion Cycle Inventory Management
Paul Trudgian Ltd | Supply Chain & Logistics Consultancy No Comments

An interesting piece of supply chain news has come in from the Dutch industry, and we can apply lessons from it to our own supply chains. The study by M3 Consultancy looked at the differences in performance and working capital of various different Dutch manufacturing companies. One thing stood out: inventory management was the dominant difference between good and poor performance.

More specifically, the supply chain was found to be responsible for over half of the discrepancy between cash conversion cycle leaders and those not performing well.

The Study

This benchmark study looked at the cash conversion cycle (CCC) of almost 200 different manufacturing companies specifically in the Netherlands. CCC is often used to grasp understanding of how long it’s taking between getting the raw materials, and when they collect payment for the finished item.

What the benchmark study showed is that there are enormous differences in the CCC between different companies. When the study drilled deeper in to the data, it was discovered that the vast majority of differences are driven by inventory levels.

What Do the Results Mean?

Fundamentally, the results show that the problem isn’t in accounting. It’s in inventory management. Marco Heimensem of M3 Consultancy states: “The results show that most CFOs have mastered the financial side of the equation – credits and debt management. But managing their inventory remains a challenge, they struggle with the complexity.”

We can learn from this, therefore, that there is a huge amount to be gained from improved inventory optimisation. This would greatly improve working capital.

How Do You Do This?

Optimising inventory is incredibly hard – we all know that. This is because your final inventory is tied in completely with customer demand forecasts, as well as your quality targets. If you simply reduce your inventory level, this can have a detrimental impact on your customer service levels. This is further compounded by the focus of sales teams to, of course, simply push sales of the goods without really paying heed to the impact elsewhere, notably on the inventory and the working capital. Then we also know it’s beneficial to, where possible, buy in bulk at considerably lower prices. But this impacts storage, logistics, and waste situations. Cash can get “locked in” to these areas.

The same then happens at the output level. Manufacturers and production managers push to deliver larger batches for economies of scale reasons. However, this also locks in the cash in high inventory levels.

Inventory Management Optimisation

All this means that solving the CCC conundrum involves an intricate process of inventory optimisation. There are a large number of factors to consider, but notably inventory management needs to be considered at every stage of the supply chain process. It’s careful and considered work, balancing many unknowns and conflicting needs.

If you need help with your inventory optimisation in order to improve you cash conversion cycle, we’ve got the experts to help. Call our team on +44 (0) 121 517 008.

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