Page 21 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes Self Assessment

Fill in the blanks:
10. …………………… sets the platform for supply chain execution if the supply chain members
understand the process crosses their company and extends beyond the company.

11. Supplier performance, or the lack of, can create havoc on revenue, inventory and
…………………….
12. It is critical to align …………………… with demand planning.

1.5 Financial Sophistication

Few managers question the benefits of applying the time-based strategies to supply chain
operations. However, a valid question is, How fast is fast enough? Speed simply for the sake of
being fast has little, if any, enduring value. The answer concerning how much speed is desirable
is found in the financial impact. The process of creating value dictates that faster, more flexible,
and more precise ways of servicing customers are justified as long as they can be provided at
competitive prices. A third force driving competitive supply chain strategy is the ability to
manage in a timelier manner to achieve financially attractive working arrangements.
The financial benefits of timely response are straightforward. Fast delivery translates to less
inventory and reduced need for distribution facilities. Faster to customers means less working
capital is required to support supply chain operations. Three aspects of financial sophistication
are cash-to-cash conversion, dwell time minimization, and cash spin.

1.5.1 Cash-to-Cash Conversion

The time required to convert raw material or inventory purchases into sales revenue is referred
to as cash-to-cash conversion. Cash conversion is generally related to inventory turn: The higher
the inventory turn, the quicker the cash conversion. A goal of supply chain design is to reduce
and control order receipt-to-delivery time in an effort to accelerate inventory turns.

In traditional business arrangements, benefits related to cash-to-cash conversion have typically
been enjoyed at the expense of business partners. Given typical purchase discounts and invoicing
practices, it is operationally possible for arms to rapidly sell merchandise and still qualify for
prompt payment discounts.

Example: Terms of sale offering a 2 percent discount net 10-day payment (2% no 10)
means that a prompt payment discount is earned if the invoice is paid within 10 days from time
of delivery. Thus, if the invoice is $1000, a payment made within 10 days will earn a $20 discount.
If the firm sells the product for cash before the invoice payment date, it, in effect, enjoys free
inventory and may even earn interest by investing cash while awaiting the payment date.
In response-based systems, cash-to-cash conversion benefits can be shared by managing inventory
transfer velocity across the supply chain. This ability to manage inventory velocity from origin
to final destination has the potential to achieve greater efficiencies than attainable by a single
firm. Coordinated operations may require that a designated firm in the supply chain serve as
the principal inventory stocking location.
Such practice means that risk and benefits related to inventory need to be shared by participating
firms. To facilitate such arrangements, supply chain members often replace the discounts with
dead net pricing. Dead net pricing means that all discounts and allowances are factored in the
selling price. Thus, incentives for timely payment are replaced by specific performance

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