It’s About the Cash!
--
by Christopher I Davis, Principal @GoBlock USA
For those of voting age in the 1990s, the title of this article may seem familiar. For those who were not, a quick history lesson — it comes from a campaign slogan used by Bill Clinton in the 1992 Presidential Election:
“It’s the Economy Stupid!”
And that slogan resonated well enough with Americans to elect Mr. Clinton to office.
It resonated because it was hitting on the simple truth that the health of the American pocketbook mattered — above all else. Whatever other metrics may be trending positive (crime, education, international relations), the economic health of the individual was king.
Now, in the year 2022, and thirty years later, that slogan still matters and applies to Corporate America — and to the SUPPLY CHAIN. Cash is King, and Corporate America and its supply chains will soon be prioritizing cash above all other metrics.
A little more history… over the past ten years, supply chains have prioritized two metrics:
- Customer Fill Rates (get the right order to the right customer, and right away)
- Marginal Costs (reduce the operating expense per order to drive higher quarterly profit)
These are great metrics, of course. No one can argue that.
They worked well in the 2010s when America enjoyed low inflation and the lowest interest rates in 50 years. As a result, the “opportunity cost” of holding inventory was also low. So, supply chains loaded up their warehouses with inventory to meet Metric #1 (Customer Fill Rates). As a bonus, the added inventory did not affect #2 (Marginal Costs). In fact, high inventory levels can cover up the negative effects of inefficient operations, so high inventories helped with Marginal Costs as well.
To hold all that inventory, lots of warehouses were built and lots of cash went into automating those warehouses.
Everyone was winning!
Now we are in 2022. Today, supply chains are over-bloated with inventories, and arguably for many reasons — like COVID bullwhips. For some further background on how we got here, read the article by Yossi Sheffi at MIT providing some good context for the current state of our inventories.
Last week Nike announced it is discounting its inventory ahead of the holidays, and reactions like this are happening at other companies as well. The profit bottom line is now being affected by inventories. And as inventory is cleared at a discount, or written off as unsold, the stakeholders will notice. And they will require a change.
Once inventories are cleared, it will be hard for supply chains to revert back to buffering inventory. For sure, they will still need to deliver on #1 and #2, but now they will have a #3: Preserve Cash. That is because the world is currently an uncertain place, and cash is no longer free (interest rates are the highest since 2008).
Preserving Cash will have a number of effects on our supply chains beyond just reduced inventories — including the reduced capital investment in warehouses, supply chain automation, and other long-term improvements. One of the futures we see at GoBlock USA is the rise in predictive software to include cash planning metrics (such as cash-to-cash cycle, and inventory holding costs) in supply chain planning.
As an example, ThroughPut.ai is developing software to balance supply chain planning with Free Cash Flow (FCF).
Throughput’s CEO Ali Raza describes the product as AI software that leverages a company’s existing data to quickly visualize the real state of material flow and free cash flow.
In our conversation with Ali about how he sees supply chains reacting to the changing global economy, he says:
“Supply chains should be focused on robustness instead of resiliency. The time to implement resiliency and risk management solutions was at the beginning of the pandemic. At this stage, it is best to reorient supply chains to enable profitable operations and build cash reserves for the next opportunity to capture market share and growth opportunities.”
This focus on cash preservation will first affect companies and their supply chains. But, inevitably, it will affect the individual consumers and the level of service they expect versus what they actually receive.
(in a future blog, we will talk about supply chains adapting to changing customer expectations)
GoBlock USA and Takle is an implementation firm for supply chain projects and the IT supporting those projects. We represent smaller and growing companies to work as their Advocate and represent their best interests to the industry. We collaborate with solution providers to successfully meet our clients’ business case, and bring the solution from concept into reality
