Why Laggards Focus on Receivable Days & Payable Days, and Best-In-Class Don't

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 companies create cross-functional teams to manage working capital, including finance, inventory management, customer service, and operations. They have integrated cash conversion into their performance metrics and reward performance to cash-conversion goals.
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• Best-in-class companies are 1.5 times as likely to have examined the end-to-end supply chain and are able to reduce safety stock through improvements to supply chain performance and visibility. They are twice as likely to be visible not only to the physical supply chain, but to the financial supply chain as well.
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• Best-in-class companies make the effort to segment the total supply-chain network and understand the end-to-end operations of the discrete major supply chains within the network. They work to optimize the performance of each chain, taking a balanced approach to cost, effort, and perfect order.
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• Best-in-class companies have made investments in systems and tools to gain visibility and control over their inventory flows. They are more likely to implement just-in-time inventory policies.
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• Best-in-class companies have already focused on receivables and are looking for ways to improve performance and accuracy in order to improve customer service. This focus on higher perfect orders has a direct correlation to improved DSO performance.

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.

• Do You Have Your Working Capital Tight, or Are You Just Tight on Working Capital?
• Costs Are Not Expenses
• Best-In-Class Companies Focus Cross-Functional Teams on Working Capital
• Assets: The Things and Stuff a Business Converts Into Revenue
• Funny Expenses: The Ones From Long Past Expenditures
• Revenue: What the Customer Pays You, Not What You Earn
• Some Basic Economics: It's Labor Costs, Not Materials
• Why Laggards Focus on Receivable Days and Payable Days and Best-In-Class Don't
• Working Capital: The Best Performers Focus on Two Metrics