In traditional business arrangement, benefits relate 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 firms to rapidly sell merchandise and still qualify for prompt payment discounts. To illustrate, terms of sale offering a 2 percent discount net 10-day payment (2% net 10) means that prompt payment discount is earned if the invoice is $1000, a payment made within 10 day 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 responsive systems, cash to cash conversion benefits can be shared by managing inventory velocity across the supply chain. This ability to manage inventory velocity from origin to final destination has the potential to achieve greater overall efficiencies then are attainable by a single firm. Coordinated operation 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 whit dead net pricing.
Dead net pricing means that all discounts and allowanced are factored in the selling price. Thus, incentives for timely payment are replaced performance commitments at a specified net price. Invoice payment, based on negotiated net price, is completed upon verification of physical receipt. Such payment is typically in the form of Electronic Funds Transfer (EFT), thereby streamlining both the flow of physical goods and cash among supply chain partners. Managing supply chain logistics as a continuous synchronized process also serves to reduce dwell time.
Dwell Time Minimization
Traditional distribution arrangements typically involve independent business units loosely linked together on a transaction-to-transaction basis. Such traditional business operations are driven by a series of independent transactions buffered by inventory. In contrast, a supply chain has the potential to function as a synchronized series of interdependent business units.
At the heart of supply chain operating leverage is the willingness to transfer inventory on an as-needed basis, taking advantage of as much collaboration and information as possible. Such collaboration and information can be focused on maintaining the continued flow and velocity of inventory moving throughout the supply chain. The potential of such synchronization is a key benefit of supply chain connectivity.
A significant measure of supply chain productivity is dwell time. Dwell time is the ratio of time that an asset sits idle to the time required to satisfy its designated supply chain mission. For example, dwell time would be the ratio of the time a unit of inventory is in storage compared to the time that it is moving or otherwise contributing to achieving sales or operational objectives.
To reduce dwell time, firms collaborating in a supply chain need to be willing to eliminate duplicate and non-value-added work. For example, if three different firms perform identical processes as a product flows along a supply chain, dwell times will accumulate. Designating a specific firm to perform and be accountable for the value-added work can serve to reduce overall dwell.
Likewise, timely arrival and continuous inventory flow between supply chain partners reduces dwell. When a product flows from a supplier through a retailer’s cross-dock sortation process without coming to rest or being diverted to warehouse storage, overall dwell time is minimized. A collateral benefit of reducing dwell time and the associated logistics cost is the ability to reduce investment in inventory and related assets.
Cash Spin
A popular term for describing the potential benefits of reducing assets across a supply chain is cash spin, sometime referred to as free cash spin. The concept is to reduce overall assets committed to supply chain performance. Thus, a dollar of inventory or the investment in a warehouse, if eliminated by a reengineered supply chain, spins cash for redeployment. Such free capital can be reinvested in projects that might otherwise have been considered too risky.
Naturally, cash spin opportunity is not unique to the supply chain. The potential to spin cash applies to all areas of a firm. What makes the potential of supply chain cash spin so attractive is the opportunity to collaborate between firms.
The benefits flowing from fast cash-to-cash conversion, reduced dwell time, and cash spin combine to increase the financial attractiveness of effective collaboration. Another major force driving expansion of supply chain management is the growing involvement of most firms in international operation.
Globalization
A conservative estimate is that as much as 90 percent of global demand is not fully satisfied by local supply. Current demand coupled with a world population projected to increase by an average of over 200,000 persons per day for the next decade equates to increase market opportunity. The range of product/service growth potential varies greatly between industrialized and emerging economies. In industrialized sectors of the global economy, opportunities focus on upscale consumer products. These more advanced economies offer substantial for the sale of products combined with value-added services. While it is true that consumers in developing nations enjoy relatively less purchasing power than those in their industrialized counterparts, demand in such economies for basic products and necessities is huge. Consumers in developing nations are more interested in quality of basic life than in fashion or technology. For example, the growing populations of India and China offer huge market opportunities for basic products like food, clothing, and consumer durables such as refrigerators, washing machines, and automobiles. Firms with aggressive growth goals cannot neglect the commercialization of the global marketplace.
In addition to sales potential, involvement in global business is being driven by significant opportunities to increase operating efficiency. Such operational efficiencies are attainable in at least three areas. First, the global marketplace offers significant labor advantages can be gained by locating manufacturing and distribution facilities in developing nations. Third, favorable tax laws can make the performance of value-adding operations in specific countries highly attractive.
The decision to engage in global operations to achieve market growth and enjoy operational efficiency follows a natural path of business expansion. Typically, firms enter the global marketplace by conducting import and export operations. Such import and export transactions constitute a significant portion of global international business. The second stage of internationalization involves a firm’s establishment of local presence in foreign nations and trading areas. Such presence can range from franchise and licensing of local businesses to the establishment of manufacturing and distribution facilities. The important