Where do best-in-class companies focus their cash-creation efforts? Inventory Reduction. Where do laggards focus their efforts? Speeding up receivables (Days Sales Outstanding - DSO) and slowing payables (Days Payable Outstanding - DPO). Now we are not saying that best-in-class does not pay attention to DSO or DPO; they do, but not as their primary strategy.
The Aberdeen 2010 Working Capital Optimization report illustrates that the laggards place 27% more focus on increasing payable days than best-in-class, and 22% more effort on receivable days. But the best-in-class focus on Inventory Reduction 55% more than the laggards. Why? From our real-world experience and research, we see that the best-in-class companies have already gained from reworking payables and receivables—discovering inventory reduction to carry much more impact—and efforts to extend payable days can negatively affect inventory-reducing supply-chain efforts.
Best-in-class organizations understand that an integrated approach that optimizes the whole is the solution. Laggard companies that follow simplistic rules of thumb, that maximize the performance of components in the organization, tend to have flabby supply chains. The CEO of a small wholesale distributor said, “We are ordering more to reduce turns. Saving is in the reduced handling and freight costs. Larger buys also have better costs as our vendors love our larger POs.” This simplistic focus on costs is an indicator of a laggard company.