It is a well-recognised financial principle that carrying less inventory across the supply chain results in a significant reduction in the amount of working capital that is tied up in any business.
Equally well-recognised is the fact that running short of inventory can cost far more than a surplus; the challenge, therefore, is to reduce inventory while ensuring that supply is never disrupted.
This, says Andrew Connold, MD of business intelligence supplier Synergy Computing, presents an ideal opportunity for companies to capitalise on what he calls an “information sweet spot”.
“That sweet spot is a relatively small amount of information that, when used properly, can have a significantly positive effect on the business,” he says.
Modern businesses are driven by information, and supply chain efficiency is determined, to an enormous extent, by the availability and quality of information.
Because such an enormous amount of information is available, however, identifying – and acting upon – the right information becomes a challenge in itself.
One such information sweet spot exists within the realm of the purchasing department.
“Purchasing in a large company can have a significant impact on the business’s cashflow and need for working capital. Raw material or trading stock often represents the single largest cost and cash outflow item in a business.
“As such, effective management of the processes and the factors affecting purchasing can deliver an enormously positive benefit to any company – that of reducing the amount of cash locked up on the shelves and in the warehouses of the business,” says Connold.
Despite the potential for the purchasing department to have such a far-reaching impact on the business (in US oil company Chevron’s case, better management of procurement resulted in a half-billion dollar reduction in working capital), it’s not often that this potential translates into such an advantage.
Connold explains why: “Firstly, there is often a lack of visibility into the supply chain, in terms of how much inventory is on hand, where it is and how fast it is moving.
“Secondly, in fast-paced environments, negotiations with suppliers are a critical determinant of the price of delivered materials – and procurement managers who are not equipped with the right information are unable to effectively manage such negotiations.”
Without a clear and concise view of their inventory, purchasing managers cannot readily spot slow-moving, surplus or duplicate stock; and anticipating demand is a “gut feel” rather than an informed activity.
As a result, the purchaser tends to operate reactively, with oversupply a preferred state to the risk of running short.
In terms of suppliers, reliability becomes crucial in the lean supply chain, and it falls to the purchaser to identify and manage suppliers that can consistently deliver the goods on time and to the right specifications.
Getting purchasing right, like many other activities in the integrated supply chain, therefore depends on the availability of concise, current and accurate information – a sweet spot.
“By giving purchasing managers the ready ability to effectively manage inventory levels and negotiate with suppliers, companies can exploit perhaps the greatest opportunity available to them for freeing up cash,” says Connold.