Time is inventory

April 1, 2005
Since 1986, 66% of the cash-to-cash improvements in all industry segments have come from reductions in days of inventory, says Dr. Ted Farris, associate

Since 1986, 66% of the cash-to-cash improvements in all industry segments have come from reductions in days of inventory, says Dr. Ted Farris, associate professor, University of North Texas. Cross-docking, which accelerates inventory flow by taking goods that have arrived at the receiving dock, shifting them to outbound orders and moving them "cross-dock" to shipping, helps reduce inventory on hand and, therefore, contributes to improvement in the cash-tocash cycle.

The cash-to-cash formula, says Farris, adds accounts receivable to inventory and then subtracts accounts payable. It looks like this:

accounts receivable + inventory - accounts payable = cash-to-cash

If cross-docking reduces the amount of inventory held within the company, days of inventory are reduced, says Farris. But if the company is merely shifting inventories intra-company to hold the goods somewhere else, there is no change in the cash-to-cash cycle. That inventory is still carrying an associated accounts payable tag — it hasn't shifted to a receivable because it hasn't been sold.

Intra-company flows can have a positive effect if cross-docking is done strategically. For example, a retailer such as Sears, Roebuck and Co. positions inventory in four regional warehouses so it can cross-dock and provide next-day service to customers. In this case, geographic postponement coupled with cross-docking eliminates the need to have product inventory at all locations, Farris explains.

If a seller typically bills customers on receipt of goods, cross-docking can have a positive effect on the cash-to-cash cycle of the seller because it gets the goods to the customer faster and starts the accounts receivable clock sooner.

Companies that bill at time of shipment vs. on customer receipt see no change in their cash-to-cash cycle as a result of cross-docking. The company billing on receipt can more closely approximate the billing and accounts receivable cycle of the company that bills at time of shipment because cross-dockingcan strip out days that had been consumed recording the receipt, moving the goods into storage in the warehouse, generating the pick order, retrieving the goods, labeling and preparing them for shipment, and loading and transporting them to the customer. Even if the mode and time in transit don't change, a couple of days can be saved moving the goods directly from the receiving dock to the shipping dock.

If your supplier bills at time of shipment, cross-docking will help you get product through the distribution center and out to your customer, starting your accounts receivable clock sooner (your accounts payable clock started when your supplier shipped the goods). From a supply chain perspective, says Farris, where the goal is to lower costs through the supply chain, the opportunity comes from reducing inventories or speeding up the accounts receivable clock and sharing cost savings.

There are one-time benefits to cross-docking that are often overlooked, says Farris. He offers an example assuming one day of inventory is equal to $1 million. He puts inventory carrying costs at 25%, which is lower than normal warehouse inventory carrying costs because it does not include the cost of obsolescence and storage associated with warehousing the inventory. An immediate, one-time benefit of the cross-dock operation is that by improving the flow, on-hand inventories are reduced by one day, freeing $1 million in cash.

"We no longer require the care for and feeding of the inventory," says Farris, pointing to carrying costs which he had pegged at 25%. That's an operating cost of $250,000 on that day's worth of inventory you removed through improved flows.

From an accounts receivable perspective, Farris looks at that same day's worth of inventory as $1 million. If the average weighted cost of capital is 12% and the company has borrowed to cover this float, removing a day of inventory reduces the company's debt by $1 million. The reduction in annual cost of funds is 12% of $1 million or $120,000 in annual savings.

Cross-docking exists informally in nearly every warehouse. Goods on backorder-are flagged and pulled from inbound shipments to fill the backorder. But to be effective and achieve savings (rather than simply creating chaos), cross-docking needs to be a formal process.

Those critical goods being identified on inbound shipments must still be received and charged out to a customer order; otherwise, inventory records, receivables and payables will fall into disarray. Automatic identification and electronic data interchange (EDI) are critical technologies for successful cross-docking, according to Jim Tompkins of supply chain consulting firm Tompkins Associates.

An early step, according to Tompkins, is a successful warehouse information systems strategy that ensures the quality of the information and provides for zero information lead time. Tompkins puts the warehouse management system (WMS) at the center of successful cross-docking.

EDI provides accurate and timely exchange between trading partners — including critical visibility on inbound shipments. Automatic identification serves a similar purpose on internal information transactions.

Tompkins describes the functional anatomy of cross-docking:

  • Notification by the supplier of the shipping time, date, carrier, SKUs and quantity for each order.
  • Notification by the carrier of the arrival date and time for each shipment.
  • Receipt of order detail from the customer.
  • Notify outbound carrier of the pick-up time, load description, destination and delivery date and time.
  • Notify customer of shipment detail, carrier and arrival date and time.
  • Select a dock location for trucks involved in receiving and shipping.
  • Schedule labor and handling equipment.
  • Record and reconcile receipts and notification of receiving variances.
  • Create labels and route and track cases and pallets from receiving to dispatch. Through all of this, performance measures should be collected on carriers and warehouse operations.

While Tompkins stresses the need for close coordination among supply chain partners, he is quick to point out that "tactical management of cross-docking is the least considered but most important part of implementing cross-docking."

A cross-docking operation requires a high level of tactical execution to work. This translates into more work for the line supervisor, and Tompkins recommends evaluating the supervisory workload to determine whether additional resources are needed.


Sears, Roebuck and Co.

Tompkins Inc.

University of North Texas

Weber Distribution

Latest from Global Supply Chain

25560070 © Yuliia Brykova | Dreamstime.com
Supply Chain Stability Improving
#64128824@Igor Groshev|Dreamstime
Preparing for Longer Conflict in the Red Sea: