Physical and Financial Supply Chains Merging

The financial and physical sides of supply chain management are drawing closer together as supply chains are focusing on improving by reducing inventory, shortening days of sales outstanding, and increasing days of payables outstanding. "Working Capital Optimization," a study conducted by Aberdeen Group and TradeBeam showed 84% of respondents currently plan to reduce inventories and another 8% have future plans for inventory reduction. The study also indicated 63% are shortening days of sales outstanding and 45% are increasing days of payables outstanding. Future plans include 20% shortening days of sales outstanding and 26% lengthening days of payables outstanding.

Just over one third of respondents (35%) said they were moving inventory off their books and a further 23% had plans to do so.

Among the best-in-class companies, the average cash conversion cycle was 11 days. Industry average (the middle 46% of the survey) had a cash conversion cycle of 54 days. Nearly all of the best-in-class companies had improved their cash conversion cycle in the past two years. Just over half of the middle group had improved cash conversion, with a further 45% saying the cash conversion cycle had remained the same.

Inventory financing is also undergoing changes. One third of respondents in the best-in-class category said they were financing more of their raw material inventory through third parties. For the middle group, the figure was 24%.

For work in process inventory, 31% of best-in-class companies used third party financing and 14% of the middle group did also.

Finished good inventories showed up as 29% of best-in-class companies using third party financing and 19% of the middle group.

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