returns , defects , and avoidable costs like demurrage . Some behavioural motivators like driver bonus and rewards based on cost effective delivery of goods helps in instilling a culture for continuous improvement . The process may include monitoring of driver behaviour while en-route , fuel consumptions and savings , accidents and breakdown and preservation of cargo parameters .
While optimising supply chain through inventory related initiatives , it is critical to include the broad view of all types of inventories . Besides raw materials ( which in most cases form and hold more resources ), we have work-in-progress , spares and finished goods . The case of work-in-progress refers to inventory held in the process of manufacturing at any one time . By design then , this type of inventory depends on the processes that raw materials must undergo before conversion into finished products . To optimise the level of work-inprogress , critically , the manufacturing entity must go back to the basics , and address key questions . These include ; why must the manufacturing process take place , are all processes necessary , can intermediary products be sold for further processing elsewhere , is the manufacturing location right , is the technology deployed the appropriate one , is the labour used necessary and is the process anchored on customer needs and what control and regulatory compliance should the organisation deliver . These concerns lead to manufacturing models like just-in-time , lean manufacturing , toll manufacturing , kaizen , six sigma and other inventory optimisation initiatives . All of these should be aligned to the overall company strategy and should never lose sight of the customer to drive exceptional customer experience .
The other critical component of operating working capital that is of interest in optimising supply chain is trade accounts receivables , also referred to as trade debtors . Debtors arise from selling on credit . This is the demand side of the supply chain , that also requires optimisations . Selling teams must make sales and hit their numbers . However , selling on credit has its benefits and downfalls . While credit can be used to grow the business , too much credit out there would strangle the lifeline of the business , cash and liquidity keeps the business going .
Account receivables optimisation unlocks operating cash for businesses . This cash derived from optimisation can be re invested , to drive the multiplier effect which is a key pillar for growth and returns to the investors . The health of companies is heavily dependent on cash balances achieved . Too much of it isn ’ t great , too little of it , is disastrous . It is great and very exciting to hit the right balance . Just like in inventory optimisation , there are many initiatives that can be pursued to ensure that debtors are well managed to deliver right levels of cash . Most initiatives focus on early collection of the debts and options for having securities that can be liquidated in the event of distress . Some securities like bank guarantees , cash deposits are used to secure the debts . However , the process of debtor optimisation starts with the onboarding process of customers . Credit analysis and structured acceptance criteria goes a long way in mitigating credit risk . Companies are encouraged to have watertight credit policies and credit control processes that assure effective collection and low credit risks .
Companies are also encouraged to pursue financing of working capital through having favourable accounts payables ( creditors ) contracts . This helps to defer cash outflows as much as possible , while still maintaining healthy business relationships with suppliers . In doing so , this should not be aggressive to undermine the essence of business partnering . Depending on the relationships held with suppliers , options like supplier financing can be pursued . Suppliers can liquidate their invoices through financiers and continue with delivery of the supply chain requirements . In managing supplier performance , key performance level agreements are necessary . These include parameters like payment-to-terms ( PTT ), order processing time , ledger reconciliation , delivery times , ethical sourcing compliance , health and safety and corresponding regulatory compliance . The costs of such optimisation initiatives should not disrupt business or eliminate the targeted supply chain optimisation goals . Again , this is a fine balancing act and always should be sustainable .
Overall , from an accounting point of view , working capital optimisation can be measured and benchmarked against matrix which can be customised to align to the respective organisations . The health of operating working capital is impacted by supply chain performance . The measures for this include debtor days , cash cover ratios , inventory turnover , liquidity ratios , supply cover , reorder levels , and buffer stocks . Qualitative measures around supplier performance also support optimisation processes and strategies .
The management of supply chain optimisation requires professional approach . The competencies necessary to deliver this can be developed in house or outsourced . The choice depends on the organisational capabilities . Supply chain managers are equipped to play this vital role of developing and executing supply optimisation interventions that are fully aligned to the organisation ’ s challenges . They align the supply chain strategy with overall business objectives . They continuously identify opportunities for improvement and realign interventions to achieve this . There are specialised organisations with knowledge and expertise too , whose sole focus is on supply chain optimisation . It is advisable to seek them out to understand what may be applicable to different organisations and situations . In supply optimisation , when in doubt , just don ’ t do it . It could cost more than the anticipated benefits . Do not optimise more than is necessary . Get the right balance . Once the optimisation strategies are in place , positivity and optimism may become part of ways of driving management of supply chains but qualified with objectivity .
CPA Michael Nzule is the Finance & Strategy Director of Mitchell Cotts Freight Kenya Limited , a leading total logistics services provider in Kenya . He holds an MBA in Accounting , with specialization in Marketing , and a Bachelors of Commerce ( Accounting Option Hons ) from the University of Nairobi . He is a member of the Institute of Certified Public Accountants of Kenya ( ICPAK ). Views expressed here-in are personal . You can commune with him via mail at : Mikemaithyanz @ gmail . com