Before Galileo’s death nearly 400 years ago, Conventional Wisdom held that the earth—and not the sun—was the center of the universe. More recently, Conventional Wisdom held that smoking, drinking, stress, and diet caused peptic ulcers. Then, two Australian scientists, Robin Warren and Barry J. Marshall, showed that bacteria caused ulcers. Meanwhile, The Wisdom of Crowds, a book by James Surowiecki, contends that the collective conclusions by groups of individuals are often better than those made by any single member of the group. Well, maybe; maybe not. Remember that Galileo’s belief that the sun was the center of the universe was ultimately proved correct. Maybe conventional wisdom isn’t always right.
The same can be said of supply chain management. Since it was first introduced in 1982, supply chain management
has experienced a series of transformations. Initially seen as a better way of reducing costs and leveraging resources, it has gone from being a function (purchasing, for example) to being a cross-functional, strategic
capability. More importantly, it is now transforming from an art—something that is learned only through trial, error, and experience—to a science. A hallmark of science is the continuous testing of commonly held beliefs.
These beliefs often take the form of conventional wisdom—or CW—a body of ideas generally accepted as the truth by people or experts in a given field. Indeed, conventional wisdom can be anchored in truth, but these ideas often reflect an incomplete or incorrect understanding. In examining these examples of conventional wisdom, we not only dispel those that
are myths, but we also develop a better understanding of what is taking place—an understanding that often leads to improvements and sometimes even breakthrough discoveries.
Conventional Wisdom: Negative working capital is good because your suppliers fund your needs and growth
Negative working capital occurs when a firm’s current liabilities exceed its current assets. Traditionally viewed as an indicator of an unhealthy financial state, some firms have figured out that, if managed currently, negative capital can be healthy and good for the firm. This occurs when the rm funds its operations by paying its suppliers slowly (say net
90 days or net 160 days), while getting payment from its customers relatively quickly. For some financial writers such a practice is attractive. By getting paid as quickly as possible, and by taking a little longer than average in paying vendors, these companies are seen as being more adept at raising cash. Their customers and suppliers are effectively financing
their operations at a zero percent interest rate. Companies such as Digital Globe, Sirius XM
radio, Comcast, and Verizon have successfully employed this strategy.