2.4 Supply Chain Strategy Review

As discussed in earlier sections, the external environment and internal competencies of an organization are dynamic and ever-changing. This necessitates the need for supply chain strategies to be equally adaptable and responsive to these changes. To ensure that supply chain strategies remain aligned with the evolving business landscape, they must be regularly reviewed and updated. This process of review involves the use of strategic metrics that monitor the performance of the supply chain, signaling when changes are necessary and guiding what those changes should be.

Developing these strategic metrics requires a comprehensive understanding of the supply chain and its various components. It involves identifying key performance indicators that accurately reflect the efficiency and effectiveness of the supply chain. These metrics should be designed to capture both the current performance and the potential for future improvement.

Strategic metrics serve as a critical tool for supply chain professionals and top management. They provide insights into the operational efficiency of the supply chain, highlight areas of strength and weakness, and offer a roadmap for improvement. By regularly reviewing and updating these metrics, organizations can ensure that their supply chain strategies remain aligned with their overall business objectives and are well-positioned to respond to changes in the business environment.

2.4.1 Balanced Scorecard

Traditional systems of metrics often focus heavily on short-term financial performance, potentially overlooking other crucial aspects of an organization’s operations. They may fail to capture long-term value creation, neglect non-financial measures of performance, and ignore the importance of internal and external stakeholder perspectives. This can lead to a narrow and potentially misleading view of an organization’s performance.

The Balanced Scorecard is a strategic planning and management system that addresses these issues. It provides a balanced view of an organization’s performance by considering a wide range of factors. It ensures that financial metrics are complemented by measures of performance from three additional perspectives: customer/stakeholder, internal process, and organizational capacity. This balanced approach helps organizations to focus on both short-term and long-term objectives, financial and non-financial measures, internal and external performance perspectives, and improvement in outcomes and performance drivers.

The Balanced Scorecard examines an organization from four different perspectives:

• Financial (or Stewardship): This perspective focuses on the organization’s financial performance and the use of financial resources. Relevant supply chain metrics in this category could include cash conversion cycle, cost efficiency, return on investment, and economic value added.
• Customer/Stakeholder: This perspective views organizational performance from the perspective of the customer or key stakeholders the organization is designed to serve. Supply chain metrics relevant to this perspective could include on-time delivery rate, order accuracy, and customer satisfaction rate.
• Internal Process: This perspective views the quality and efficiency of an organization’s performance related to the product, services, or other key business processes. Relevant supply chain metrics could include process cycle time, inventory, defect rate, and order fulfillment speed.
• Organizational Capacity (or Learning & Growth): This perspective views human capital, infrastructure, technology, culture, and other capacities that are key to breakthrough performance. Relevant supply chain metrics could include employee training and development, system downtime, and capacity utilization.

Each of these perspectives helps to develop a comprehensive and balanced view of the organization’s performance, ensuring that all relevant factors are considered in the strategic planning process.

2.4.2 Cash to Cash Cycle Time

The Cash to Cash Cycle Time, also known as the Cash Conversion Cycle (CCC), is a critical metric in supply chain management. It measures the time (in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales. This metric takes into account how much time the company needs to sell its inventory, how much time it takes to collect receivables, and how much time it has to pay its bills. The CCC is one of several quantitative measures that help evaluate the efficiency of a company’s operations and management.

Days of Inventory Outstanding (DIO): Also known as days sales of inventory, represents how long it will take for the business to sell its inventory. A lower value of DIO is preferred, as it indicates that the company is making sales rapidly, implying better turnover for the business. The formula for DIO is:

DIO = (Average Inventory / Cost of Goods Sold) x 365

Where:

Average Inventory = 1/2 x (Beginning Inventory + Ending Inventory)

Days Sales Outstanding (DSO): It represents how long it takes to collect the cash generated from the sales. A lower value is preferred for DSO, which indicates that the company is able to collect capital in a short time, in turn enhancing its cash position. The formula for DSO is:

DSO = Average Accounts Receivable / Revenue Per Day

Where:

Average Accounts Receivable = 1/2 x (Beginning Accounts Receivable + Ending Accounts Receivable)

Days Payables Outstanding (DPO): This takes into account the amount of money that the company owes its current suppliers for the inventory and goods it purchased, and it represents the time span in which the company must pay off those obligations. A higher DPO value is preferred. By maximizing this number, the company holds onto cash longer, thus increasing its investment potential. The formula for DPO is:

DPO = Average Accounts Payable / Cost of Goods Sold Per Day

Where:

Average Accounts Payable = 1/2 x (Beginning Accounts Payable + Ending Accounts Payable)

The Cash Conversion Cycle (CCC) is then calculated as:

CCC = DIO + DSO – DPO

For example, if a company has a DIO of 45 days, DSO of 30 days, and DPO of 20 days, the CCC would be:

CCC = 45 (DIO) + 30 (DSO) – 20 (DPO) = 55 days

This means that it takes the company 55 days to convert its investments in inventory and other resources into cash flows from sales, after paying its bills. The company should aim to reduce this number to improve its cash flow and operational efficiency.

The goal for any organization is to minimize the Cash to Cash Cycle Time. A shorter cycle time means that the organization is able to convert its investments into cash more quickly, improving its liquidity and cash flow. This is particularly important in the context of supply chain management, where efficient inventory management and timely collection of receivables can significantly impact an organization’s financial performance.

In the era of e-commerce, the ability to reduce the Cash to Cash Cycle Time has become even more critical. With faster order fulfillment and delivery times, companies can reduce their DOI. Similarly, electronic invoicing and payment systems can help to reduce the DOS. By optimizing these aspects of their supply chain, e-commerce companies can achieve a shorter Cash to Cash Cycle Time, enhancing their financial performance and competitive advantage.