Dollars and sense

by Michael Feaver

FROM THE MM&D JULY/AUGUST 2011 PRINT EDITION: So, what’s a dollar worth to you these days as a business leader or owner? It’s no stretch to say it’s worth less than it once was. Today, businesses must be more and more creative when it comes to where, when and how they source their products and services in order to successfully manage the costs of running a business.

In fact, over the last five to 10 years, many Canadian firms have had to shift business models in reaction to fluctuating conditions. Those conditions include:

  • transportation challenges
  • changing consumer demand
  • margin retention
  • regulatory changes
  • border issues
  • political instability
  • tax and duties
  • higher input costs like fuel and labour
  • the impact of natural disasters.

A number of these conditions have had a negative effect on the cost of operating supply chains, either as a direct expense or as poor customer experiences. With so many variables, it becomes increasingly difficult to determine what approach businesses should consider in managing the costs of their supply chain.

Driving costs out of the system through productivity enhancements and cost management has been key for companies to maintaining a competitive position in both domestic and global markets. That said, you also have to consider customer satisfaction. Choices you make to better manage your supply chain and maximize your cash flow may have an impact on the customer experience you deliver. The lowest cost solution may not always provide customers the experience they’re looking for. Careful consideration of these choices can give you a competitive advantage and has the potential to improve the three key drivers of financial performance—growth, profitability and capital utilization.

Let’s look at a few techniques that can help you mitigate those variables and make the most of your supply chain.

Improve your cash conversion cycle

Instead of simply managing inventory, supply chain professionals increasingly are finding their way into the boardroom as active participants in business planning and strategy sessions. This coordinated effort should include discussions about accounts receivables, accounts payables, procurement and sales. This should be a company-wide focus to ensure that, as a team, you are finding the right recipe for your business.

Comb through your business practices

Are you taking all the supplier discounts that you can? Can you find an alternative supplier that may not be low cost but is more conveniently located for delivery to your customers? Do you need to hold so much inventory? How strong is your accounts receivables collection process? Can you be more diligent or offer incentives for timely payment? Can you extend your payment terms with your suppliers and if so, under what terms? Changing the mix of your accounts receivable, accounts payable and inventory can fundamentally change the volume and financing costs of your cash flow.

To enhance the value of your assets to the business, you can also explore financing options, such as asset-based lending and selective invoice discounting. Again, it’s worth considering potential effect on customers and suppliers of such decisions, including any risks they might introduce.

Assess your risk management

How do you assess the various types of risk in your supply chain today? Do you have a regular process you follow?

In light of global events over the last three years, businesses are investing more time in conducting due diligence and risk assessments of their supply chains, particularly with regard to supplier and financial risk. Take, for example, the recent earthquake and tsunami in Japan. North American car manufacturers had to stop their production lines as key components for vehicles were not available. In such situations, having a secondary but higher-cost alternative supplier could help ensure your customers receive their product while maintaining a consistent level of customer satisfaction.

Avoid missed opportunities

Some businesses put themselves at a disadvantage because they look to eliminate risk rather than mitigating or managing it. There are benefits to minimizing landed-cost risk under different scenarios, with a goal of having the highest customer satisfaction—even if it’s not at the lowest cost.

There are a number of financial tools and strategies to assist in managing various forms of risk, such as foreign exchange contracts, letters of credit, interest rate hedging, receivables insurance, and selective invoice discounting, just to name a few. They each have different features and goals, but when used appropriately can be very effective in providing more certainty and can fuel the growth of your business into new markets. Talk to your banker about how he or she can help you navigate these options. Identifying the critical areas of risk in your supply chain is the first step toward finding ways to manage them.

Managing your costs will always be important as you make tradeoffs for quality, convenience and reliability. While business models and challenges will continue to evolve and are factors beyond your control, companies with the strongest and most efficient supply chain will come out on top. Consider your choices and seek opportunities to manage your costs more effectively.

Michael Feaver is national manager, supply chain at RBC Royal Bank.