Turn, turn, turn

Cost-cutting has collaborative supply chains streamlining asset management to maximize working capital

THESE DAYS, companies trying to maximize shareholder returns must do more than cut costs. The impact of sell-side efficiency and collaborative supply-chain integration is just as important -- if not more so -- to the bottom line.

Continuing last week's supply-chain theme, I want to draw attention to one of the most important aspects of supply-chain efficiency: asset turnover. Poor inventory turnover can lead to either an overabundance of stock (which means increased overhead, mounting expenses, and the risk of spoilage) or shortages (resulting in lost sales and idle manufacturing and warehousing capacity).

Interestingly enough, the investment required to improve the supply chain and maximize turn rates is within reason for most CFOs, even in these financially unstable times.

As an example, let's imagine a company with an asset turnover ratio of 2-to-1. Remembering that asset turnover is the cost of the goods sold divided by the value of the inventory on hand, we'll assume our company has costs of $6 billion in goods sold and $3 billion in inventory. If this company can crank out just one additional asset turn and increase the ratio from two turns to three, it can reduce the value of its inventory on hand from $3 billion to $2 billion, freeing up $1 billion of working capital.

In theory, that's not a bad return on investment. But in reality, improving visibility across your supply chain takes some effort. There is more to it than simply e-enabling paper-based processes or integrating disparate in-house systems. More fundamentally, your company must also break down the barriers between its systems and those of its suppliers and partners to enable the kind of visibility necessary for long-term, collaborative forecasting.

For most companies, adapting supply-chain strategies means completely re-engineering their procurement and inventory management processes. Key suppliers must be identified and brought on board. In many cases, outsourcing to a private e-marketplace provider may be the most cost-effective (and least disruptive) deployment option.

Remember, too, that an automated system isn't a "set-it-and-forget-it" solution. If anything, these systems demand even closer supervision so that your staff can learn to identify exception-handling processes and impose safeguards for detecting potentially costly automation errors.

In the end, by improving supply-chain visibility your suppliers will be better able to anticipate and meet your replenishment requirements, thereby reducing out-of-stock and overstock conditions. At the same time, you'll improve the accuracy of your customer consumption forecasts.

Considering the impact of sound asset management, what's stalling your efforts to improve supply-chain efficiency?

Write to me at james_borck@infoworld.com and let me know.