Optimising Working Capital through Supply Chain and Inventory Management

For CFOs across industries such as retail, manufacturing, healthcare, and FMCG, optimising working capital is a key priority. Effective supply chain and inventory management play a crucial role in achieving this objective. By reducing excess inventory, implementing just-in-time practices, and leveraging supply chain visibility, businesses can free up cash, reduce holding costs, and improve overall operational efficiency.

In this article, we will explore how CFOs in Australia and New Zealand can optimise working capital through strategic supply chain and inventory management. We will discuss key strategies for improving working capital, the role of supply chain visibility, and how Trace Consultants can help businesses achieve their working capital goals.

What is Working Capital and Why is it Important?

Working capital is a measure of a company's liquidity and operational efficiency. It represents the difference between current assets (such as inventory and receivables) and current liabilities (such as payables). Optimising working capital involves managing these assets and liabilities effectively to ensure that the company has enough cash to meet its short-term obligations while maximising operational efficiency.

Key Benefits of Working Capital Optimisation

1. Improved Cash Flow: Optimising working capital helps businesses free up cash that can be used for growth initiatives, debt repayment, or other strategic investments.
2. Reduced Holding Costs: By reducing excess inventory, businesses can lower the costs associated with storing and managing inventory.
3. Enhanced Financial Flexibility: Improved working capital provides businesses with greater financial flexibility, allowing them to respond quickly to changes in market conditions or unexpected opportunities.
4. Lower Borrowing Costs: Optimising working capital reduces the need for short-term borrowing, leading to lower interest expenses and improved profitability.

Key Strategies for Optimising Working Capital

1. Inventory Optimisation

Inventory is often one of the largest components of working capital, making it a key focus for optimisation. By reducing excess inventory, businesses can free up cash, reduce holding costs, and improve overall supply chain efficiency.

Techniques for Inventory Optimisation

• Demand Forecasting: Accurate demand forecasting is essential for maintaining optimal inventory levels. By using data-driven forecasting techniques, businesses can better predict customer demand and avoid overstocking or stockouts.
• Just-in-Time (JIT) Inventory: JIT inventory management involves receiving goods only when they are needed for production or sale. This helps reduce excess inventory and minimises holding costs.
• ABC Analysis: ABC analysis categorises inventory into A, B, and C items based on their value and demand frequency. By focusing on high-value (A) items, businesses can prioritise inventory management efforts and reduce working capital tied up in lower-value items.
• Safety Stock Optimisation: Safety stock is essential for managing supply chain variability, but excessive safety stock can tie up working capital. By optimising safety stock levels, businesses can strike the right balance between service levels and working capital efficiency.

2. Supply Chain Visibility and Collaboration

Supply chain visibility is critical for optimising working capital. By gaining real-time insights into inventory levels, supplier performance, and customer demand, businesses can make more informed decisions and improve overall supply chain efficiency.

Techniques for Enhancing Supply Chain Visibility

• Real-Time Tracking: Implementing technologies such as IoT and RFID can provide real-time tracking of inventory across the supply chain, helping businesses monitor inventory levels and avoid overstocking.
• Supplier Collaboration: Collaborating closely with suppliers helps ensure that inventory levels are aligned with production schedules and customer demand. By sharing data and forecasts with suppliers, businesses can reduce lead times and minimise excess inventory.
• Integrated Supply Chain Systems: Using integrated supply chain management systems provides end-to-end visibility into supply chain activities, helping businesses optimise inventory levels, reduce lead times, and improve working capital efficiency.

3. Optimising Accounts Payable and Receivable

Working capital optimisation also involves managing accounts payable and receivable effectively. By optimising payment terms with suppliers and improving cash collection from customers, businesses can improve their cash flow and working capital position.

Techniques for Optimising Accounts Payable and Receivable

• Negotiating Payment Terms: Negotiating longer payment terms with suppliers can help improve cash flow by reducing the immediate cash outflow. However, it is important to balance payment terms with supplier relationships to ensure continuity of supply.
• Early Payment Discounts: Taking advantage of early payment discounts offered by suppliers can lead to cost savings and improve working capital efficiency.
• Improving Cash Collection: Implementing efficient invoicing and payment processes helps reduce the time it takes to collect payments from customers, improving cash flow and reducing days sales outstanding (DSO).

4. Just-in-Time (JIT) Practices

Just-in-Time (JIT) inventory management is a powerful strategy for reducing working capital tied up in inventory. By aligning inventory levels with actual demand, businesses can minimise excess stock, reduce holding costs, and improve overall efficiency.

Benefits of JIT Practices

• Reduced Inventory Levels: JIT practices help businesses maintain minimal inventory levels, freeing up cash that would otherwise be tied up in excess stock.
• Lower Holding Costs: By reducing the amount of inventory held, businesses can lower storage and handling costs, leading to improved working capital efficiency.
• Improved Supply Chain Flexibility: JIT practices enable businesses to respond more quickly to changes in customer demand, reducing the risk of obsolescence and ensuring that inventory levels are always aligned with market needs.

5. Leveraging Technology for Working Capital Optimisation

Technology plays a crucial role in optimising working capital by providing real-time data, automating processes, and improving decision-making. CFOs can leverage digital tools to enhance inventory management, supply chain visibility, and cash flow management.

Key Technologies for Working Capital Optimisation

• Inventory Management Systems (IMS): IMS solutions provide real-time visibility into inventory levels, helping businesses optimise stock levels and reduce holding costs.
• Enterprise Resource Planning (ERP) Systems: ERP systems integrate data from different parts of the business, providing a comprehensive view of working capital and enabling better decision-making.
• Demand Planning Software: Demand planning software uses data analytics to predict customer demand accurately, helping businesses maintain optimal inventory levels and avoid excess stock.
• Supply Chain Analytics: Supply chain analytics tools provide insights into supplier performance, lead times, and inventory turnover, helping businesses optimise their supply chain and improve working capital efficiency.

Case Study: Working Capital Optimisation for a New Zealand FMCG Company

A New Zealand-based FMCG company faced challenges related to high inventory levels and cash flow constraints. The company decided to implement a working capital optimisation initiative to improve cash flow, reduce holding costs, and enhance overall supply chain efficiency.

Approach

• Inventory Optimisation: The company used demand planning software to improve the accuracy of its demand forecasts, reducing excess inventory and improving stock turnover.
• Supplier Collaboration: The company collaborated closely with its key suppliers to align inventory levels with production schedules and reduce lead times.
• Just-in-Time Practices: The company implemented JIT practices to minimise inventory levels and reduce holding costs, particularly for high-value and slow-moving items.
• Technology Integration: The company integrated its ERP and inventory management systems to provide real-time visibility into inventory levels and optimise stock management.

Results

• Improved Cash Flow: The company achieved a 20% improvement in cash flow by reducing excess inventory and optimising payment terms with suppliers.
• Reduced Holding Costs: Inventory optimisation and JIT practices led to a 15% reduction in holding costs, freeing up capital for other business initiatives.
• Enhanced Supply Chain Efficiency: Improved supply chain visibility and supplier collaboration helped reduce lead times, improve service levels, and enhance overall supply chain efficiency.

Challenges in Optimising Working Capital

1. Data Availability and Accuracy

Data is critical for working capital optimisation, from demand forecasting to supplier performance monitoring. However, many organisations struggle with data availability and accuracy. Ensuring that data is accurate, up-to-date, and accessible is crucial for making informed decisions and optimising working capital.

2. Balancing Inventory Levels with Service Levels

While reducing inventory levels is important for optimising working capital, it should not come at the expense of service levels. Businesses must balance inventory optimisation with maintaining or improving customer service to ensure that they can meet customer demand without stockouts.

3. Supplier Engagement

Optimising working capital often requires close collaboration with suppliers to align inventory levels, reduce lead times, and optimise payment terms. Engaging suppliers and gaining their commitment can be challenging, particularly if suppliers are not willing to adjust their processes or timelines.

4. Resistance to Change

Implementing working capital optimisation initiatives often requires changes to existing processes, systems, and behaviours. Resistance to change from employees or stakeholders can be a significant challenge. Effective change management, including communication, training, and incentives, is essential for overcoming resistance and ensuring the successful implementation of working capital optimisation initiatives.

Optimising working capital through effective supply chain and inventory management is essential for CFOs in Australia and New Zealand looking to improve cash flow, reduce costs, and enhance operational efficiency. By adopting strategies such as inventory optimisation, just-in-time practices, supply chain visibility, and leveraging digital tools, businesses can achieve significant improvements in working capital efficiency.

Whether it's reducing excess inventory, improving supply chain collaboration, or leveraging technology for real-time visibility, working capital optimisation enables businesses to free up cash, reduce holding costs, and improve financial flexibility. Despite the challenges, the benefits of working capital optimisation make it a worthwhile investment for businesses looking to improve their bottom line and achieve supply chain excellence.

Ready to optimise your working capital and enhance supply chain efficiency? Trace Consultants is here to help you navigate the complexities of working capital management and develop a tailored solution that meets your unique business needs.

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How carefully chosen demand planning and inventory optimisation system parameters and targets, can significantly bolster both profitability and customer satisfaction.

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In the intricate maze of supply chain and logistics, navigating the realms of demand planning and inventory optimisation can often feel overwhelming. Yet, a strategic approach, informed by carefully chosen system parameters and targets, can significantly bolster both profitability and customer satisfaction.

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‍1. The Art and Science of Demand Planning

At its core, Demand Planning isn't merely crunching numbers; it’s about foresight - predicting market dynamics and customer inclinations. Take a toy manufacturer as an example: By foreseeing a surge in demand during the festive Christmas season, they can upscale production in advance, avoiding potential stock-outs.

Key Considerations:

• Forecast Period: A seasonal product, like swimwear, demands varying forecast rhythms – monthly during summer peaks and quarterly during quieter times.
• Forecast Method: Stable demand products might fit the moving average model. In contrast, unpredictable items, with their ebbs and flows, may better align with exponential smoothing.

Demand Planning isn't just a matter of numbers but requires an intricate understanding of market dynamics, technological shifts, consumer sentiment, and geopolitical contexts. For example, Apple’s iPhone release strategies reflect more than just product readiness; they encapsulate global market sentiment, competition, and technological evolutions.

Deep Dives:

• Macro Trends Analysis: Understanding the rise of green consumerism can determine the trajectories of companies producing sustainable vs. non-sustainable products.
• Cannibalization Rates: For brands with diverse product line-ups, predicting how a new product might impact the sales of existing ones becomes crucial.
• Predictive Analytics & Demand Sensing: Companies, akin to Netflix, harness algorithms that leverage historical data to anticipate future demand, allowing swift adjustments to market shifts.

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2. Inventory Optimisation: Striking the Right Balance

Visualise a bustling local bakery. Overstocking risks waste due to perishable items, while understocking might mean turning away customers craving their favourite pastry.

Setting the Scales:

• Service Level Targets: A high-end watch store, with its luxury clientele, might target a 98% service level. Yet, a local grocery might be content with 90%, factoring in the occasional stock-out of non-essentials.
• Stock Turnover Rate: Fashion-forward boutiques, keen to refresh their summer offerings, will seek high turnover rates during the season.

Global brands like Tesla don't only count inventory. They're strategising around geopolitics, tariffs, regional promotions, and technological advancements.

Sharper Focus:

• Multi-Echelon Inventory Systems & JIT: While multi-echelon systems holistically consider inventory at all locations, JIT methodologies aim to perfect timing, reducing lead times and holding costs.
• ABC/XYZ Analysis & Service-Differentiated Approach: High-value yet unpredictable items might require different handling from steady, low-demand products. Similarly, life-saving drugs demand near-perfect availability, unlike seasonal items.

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3. Tailoring System Parameters for Demand Planning

The umbrella, a seemingly simple product, exemplifies the nuances of planning. Even in predominantly dry spells, retailers will maintain a modest stock – because who can truly predict a sudden downpour?

Advanced Adjustments:

• Safety Stock Levels: Predicting the unpredictable, like the occasional rain during a dry spell, necessitates having safety stocks.
• Lead Time: Compare a remote artisan crafting handmade goods to a local book distributor. The former's unique offerings will inherently come with elongated lead times.

From anticipating viewer preferences, like Netflix, to real-time adjustments using IoT, modern challenges demand modern solutions.

Innovative Leaps:

• Segmentation & IoT in Inventory: Segmenting products based on demand variability can lead to custom strategies, while IoT-enabled smart shelves in retail can streamline stock management.
• Machine Learning Models & Economic Order Quantity (EOQ): Machine learning refines forecasts by learning from past data patterns, and EOQ identifies the ideal order quantity for minimum costs.

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4. Setting Precise Targets in Inventory Optimisation

From the crisp freshness of a salad to the timelessness of literature, different businesses have varied inventory rhythms.

Critical Calibrations:

• Order Cycle Time: A bistro priding itself on freshness will likely have daily sourcing cycles. Conversely, a serene bookstore might restock on a more leisurely weekly or monthly cadence.
• Minimum Order Quantity (MOQ): The boutique charm of custom furniture might come with a stipulation of at least 10 pieces, while a bulk fabric dealer could easily set their sights on a 500-meter MOQ.

The meteoric rise of companies like Tesla isn't solely due to product innovation but also stems from mastering demand prediction and inventory flow through advanced AI.

Innovative Leaps:

• IoT (Internet of Things) in Inventory: Smart shelves in retail can notify when stock is low, integrating seamlessly with reorder systems.
• Machine Learning Models: These continually refine forecasting accuracy by learning from past errors and adapting to new data patterns.

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5. Embracing Technology: The Modern Alchemist’s Stone

Amazon, the retail behemoth, isn’t just thriving on scale but also on technological acumen. Their inventory precision, powered by avant-garde AI, predicts and adjusts to the fluctuating tides of global demand.

Tech Advantages:

• Dynamic Reorder Points: Smart AI systems, noting a meteoric rise in rain boot searches, might proactively recalibrate stock levels, anticipating real-world demand spikes.
• Alert Mechanisms: Stay ahead of the curve with instant notifications. Whether it's a celebrity endorsement or a viral trend, being in-the-know means being prepared.

6. The Importance of Periodic Reviews and Course Correction

The global pandemic serves as a poignant reminder. Businesses across the spectrum found themselves revisiting and often overhauling their demand and inventory strategies, accentuating the imperative of regular check-ins and agile adaptability.

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In the dynamic world of supply chain management, mastery lies at the intersection of strategic planning, technological prowess, and adaptable foresight. Embracing these tenets ensures businesses remain robust, efficient, and perpetually in tune with market harmonics.

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At trace., our supply chain team can help your business navigate the complexities of advanced planning systems. We understand that in today's fast-paced business environment, selecting the right planning system isn't just about keeping track of inventories but about holistically integrating every element of your supply chain to foster agility, responsiveness, and profitability. By leveraging our deep industry insights and analytical capabilities, we meticulously evaluate your unique business needs, processes, and challenges. We then juxtapose these findings against the capabilities of leading advanced planning systems in the market. The outcome? A tailored recommendation that ensures your chosen system is not just technically advanced, but also intricately aligned with your strategic objectives, ensuring a seamless fit and transformative results. With trace. by your side, you're not just investing in a tool, but a future-ready solution primed for growth and excellence.

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Contact us today, trace. your supply chain consulting partner.

Supply Chain Planning in FMCG: Optimising Service & Efficiency for Competitive Advantage

Fast-moving consumer goods (FMCG) companies operate in a highly competitive market with demanding customers, fluctuating demand, and supply chain complexities. Therefore, supply chain planning plays a crucial role in the success of FMCG companies. In this article, we will explore the various strategies and technologies that FMCG companies can use to optimise their supply chain planning process and gain a competitive advantage.

Demand Planning and Forecasting

The first step in supply chain planning is demand planning and forecasting. This involves understanding the customer demand and predicting future demand patterns. Advanced Planning Systems (APS) and Enterprise Resource Planning (ERP) systems are useful tools in this regard. They use data analysis, machine learning algorithms, and statistical models to provide accurate demand forecasts, which can help companies to plan their production, inventory, and logistics operations.

Scenario Planning

Scenario planning is a useful technique for predicting and mitigating risks in the supply chain. FMCG companies can use scenario planning to simulate various demand scenarios, such as changes in customer behavior, market trends, and economic conditions. This helps to identify potential supply chain disruptions and develop contingency plans to mitigate risks.

Inventory Optimisation

Inventory optimisation is another critical aspect of supply chain planning. FMCG companies need to maintain optimal inventory levels to balance demand and supply. Excess inventory can lead to high carrying costs, while low inventory levels can lead to stockouts, lost sales, and dissatisfied customers. Materials Requirements Planning (MRP) and service optimization are essential tools for inventory optimisation. MRP calculates the materials needed for production based on demand forecasts, while service optimisation ensures that the right products are available at the right time and place.

Sales and Operations Planning (S&OP)

Sales and Operations Planning (S&OP) is a cross-functional process that involves aligning the company's sales and operations plans with its financial goals. This process helps FMCG companies to make informed decisions regarding production, inventory, and logistics, based on the most up-to-date demand and supply data. S&OP involves collaboration between various departments, such as sales, marketing, finance, and operations, and can be a useful tool for optimising the entire supply chain.

Integrated Business Planning (IBP)

Integrated Business Planning (IBP) is a more comprehensive approach to supply chain planning, which involves aligning the entire business strategy with the supply chain strategy. IBP involves not only the sales and operations planning process but also other functions such as marketing, product development, and finance. By aligning the entire business strategy, IBP can help FMCG companies to optimise their supply chain, reduce costs, and improve customer satisfaction.

Cost Optimisation

Cost optimisation is a critical aspect of supply chain planning. FMCG companies need to optimise their supply chain costs, including receiving costs, carrying costs, and working capital. Slow-moving and obsolete (SLOB) inventory can lead to high carrying costs and impact working capital. Therefore, FMCG companies need to optimize their inventory levels and reduce SLOB inventory. They can also reduce costs by optimizing their logistics operations, such as transportation, warehousing, and distribution. Optimising costs can help FMCG companies to improve their COGS efficiency, increase profitability, and gain a competitive advantage.

Supply chain planning is a critical process for FMCG companies.

By optimising their supply chain planning process, FMCG companies can improve their demand forecasting, inventory management, logistics operations, and cost efficiency. Advanced Planning Systems (APS), Enterprise Resource Planning (ERP) systems, scenario planning, inventory optimisation, sales and operations planning (S&OP), Integrated Business Planning (IBP), and cost optimisation are essential tools for optimising the supply chain. By implementing these strategies, FMCG companies can gain a competitive advantage, improve customer satisfaction, and increase profitability.

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‍Contact us today, trace. your supply chain consulting partner.

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