Liquidity crisis can be structurally overcome through supply chain

Liquidity crisis can be structurally overcome through faster supply chain

Indian economy is facing an unprecedented slowdown due to liquidity crisis and slowdown in consumption. Most companies in auto and manufacturing sectors are holding very high inventory levels through the supply chain (as high as more than 90 days). The liquidity crisis will take a few months to get resolved through monetary easing and other government interventions. The only way to solve for this structurally is to release cash from the supply chains by building faster and more efficient supply chains.

In India a typical manufacturing company ends up spending 9-10% of the value of goods in warehousing, cost of inventory and capital, wastages, pilferages, obsolescence compared to 1-2% of value of goods in the developing world. This is a high number and not very well understood and managed in India. A significant cash gets blocked in the inventory (passing this accountability to dealers or suppliers does not mean the cash is not blocked) and with GST levied when the goods are dispatched (and not invoiced from the state depot) it creates additional 30-60 days of GST that gets blocked before the goods are finally invoiced.

Supply chain and logistics leaders can help their companies tide the liquidity crisis by helping release working capital and cash from the supply chain to meet the immediate cash requirements and also moving to healthier structural outcome of lower wastages, pilferages and obsolescence cost. Indian management and leadership prides itself in converting challenge into opportunities and current economic and financial environment presents one such opportunity where senior leadership of companies can go to a significantly lower working capital through the supply chain (including suppliers and dealers) and create this as a source of competitive advantage for the long term.

Set big and bold goals for releasing cash in the supply chain

We are seeing companies taking several bold steps to reduce the cash and capital requirement in the value chain. The first step is to take a big goal and rally everyone in the organization around this goal including the suppliers and channel partners. Some examples of big goals taken by companies in recent times –

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  • A paints company has taken a goal to reduce cash requirement by 80% of the current levels through restructuring of supply chain network
  • An auto company wants to reduce cash and inventory requirement by 10% of the value of goods sold in a year
  • A component manufacturer has moved to pull based supply chain and moved to negative working capital (as the market fell in the last 6 months, this company has gained market share and continues to grow)
  • FMCG company has set a goal to move from 30+ days of inventory to less than 15 days
  • An electrical component manufacturer has moved to 7 days of through cycle inventory

At the minimum, there is 50% of inventory (and related GST cost) which companies can reduce in the current scenario and should certainly aspire towards capturing this value.

Deep dive and plan well

Once the top down goal and aspiration is set for the organization, it is important to look at the details and plan well.

  • Segment your products into fast moving (runners), slow moving and made to order. It is possible that this classification is old and needs to get renewed in the current market context and product portfolio
  • Measure the best lead times of manufacturing, transportation and variances in each of these available. Again, the lead times of both manufacturing and transportation have been falling in the recent years and it is good to refresh with the current means and variances
  • Basis the above and service level requirement of your customers, plan for the inventory levels for each SKU (do not be generic and high level) in each geography. Even with 6 sigma fill rates you'd realize that you are holding way too much inventory for runners (fast moving goods)
  • Do the same for inbound supply chain. Publish the new inventory norms for finished goods, WIP and raw materials
  • Basis the new norms, run the simulation on historical demand data to see customer service levels and fill rates. Even if in some cases it is lower than your expectation, measure the cost of this vs. the extra inventory in the entire system the company holds and have a healthy debate on this in the senior leadership group

Most Indian companies operate with fear of missing sales and customer service and push significantly more inventory in the ecosystem with any data/science behind it. It not only increases the cost of servicing because of all the inventory and related waste but also increases the chance of missing out on critical orders because there is analytics behind inventory planning. Needless to say, that the push behaviour leads to month end spikes, high cost of transportation, returns and channel push backs on inventory pile ups.

Restructure and cut down waste in supply chain

As the new inventory numbers are estimated, execute with conviction and relentless to move to the lower inventory scenarios

  • Move to faster modes and reduce your current transportation times by 50%
  • Cut down warehouses and depots where not required. More the warehouse space, more the inventory and more will be the pilferages and wastages and eventual write offs
  • Go against conventional methods through data – e.g. full truck load is not always best mode of transportation if your holding time of inventory increases by x number of days. It might be better for you to ship through express part truck load mode for lower cash and inventory in the supply chain and it will balance out more than the extra transportation cost of LTL vs FTL
  • Use tracking systems to track all goods movement, warehouses and ask for high quality performance from your transportation and warehouse suppliers to reduce the mean TAT's and increase reliability

As the new government tries to fix the economy in the next 6-9 months, we can fix our supply chains to make them more resilient, efficient and release cash to help our CFO and management tide the liquidity crisis.