The costs associated with supply chains are skyrocketing globally. Many of us have likely been contemplating how to best utilise working capital, bearing in mind that in times of market pressure and uncertainty, cash is key. It’s probable that your balance sheet looks vastly different compared to the pre-COVID era, whether that’s due to overall business efficiency, departmental productivity, or product performance.
In the realm of supply chain management, there’s great opportunity for cost reduction and working capital liberation. However, in these times, the risks are more concealed and pervasive in every decision. Trimming costs in an inappropriate area could leave you with insufficient capacity or supply. Excessive investment in irrelevant business activities or units might drain your company of its working capital by binding it to (part) products that won’t sell at the right margin. To put it bluntly, it’s like the eroding of a stone by incessant raindrops—a standard impasse.
Yet, this doesn’t infer that you can’t augment your chances of withstanding the downpour. Here are 10 questions we ask our clients to measure the effectiveness of their working capital investments:
- Do you maintain clear oversight of your current working capital invested in (parts and finished goods) inventory and what the cost of capital associated entails?
- Can you predict how this investment in stock will evolve during the next year?
- Do you consistently measure your current working capital investment against previous results? In your systems, are inventory values routinely portrayed in relation to cost of goods sold, selling price, and unit numbers?
- Do you have a clear perspective of how product innovation affects (parts) inventory? Is the risk tied to expired or outdated stock regularly measured and reported?
- Are key procurement and inventory choices shaped by the return on capital employed?
- Does your supply chain team receive regular monthly updates about the working capital status?
- When making important inventory decisions, how do you consider the company’s cash flow situation?
- Do you adhere to a strong service level strategy to focus investment on primary products? Are these criteria reviewed regularly?
- Do you possess the necessary resources to gather, report and act on all pertinent data?
- Additionally, do you have a mechanism in place to discuss and resolve issues related to working capital?