Working capital refers to the amount of money and assets that are required to run your day-to-day operations. It can refer to cash, accounts receivable, inventories, transportation fleets, warehousing infrastructure…
Working capital is important because it is a common measure of a company’s overall health. On the financial side, faster invoicing is one way to free up working capital. Specifically looking at supply chain activities, underutilized assets mean inefficiency and poor return on investment. In any case, it comes down to reducing your working capital cycle – the amount of time it takes to convert liabilities or liabilities into cash.
Unfortunately, working capital often suffers from a lack of awareness or attention as it may not be as transparent as other performance indicators.
Any company strives to lower supply chain costs. However, changing the way assets are used, requires a profound understanding of your current service environment. It is key to tailor your operations to strike the right balance between service and cost.
Customer service drives inventory and fleet deployment. Some businesses require frequent, low-volume deliveries and a high service level. This means inventory has to be held close to the customer, hence the need for more warehouses. And more warehouses equal more inventory.
Other businesses, like retailers, rather focus on a consistent, reliable and low-cost supply chain. This requires a constant optimization of supply chain assets. The Square Root Law of inventory states that if the number of stock locations are reduced, the amount of safety stock inventory required in the network also reduces. As an example, a reduction from ten warehouses to five reduces the safety stock by 29%.
Supply chain dynamics is about managing service needs and costs, and therefore carefully balancing service, inventory, warehousing, distribution network and transport activities.
People often think transport is centered around getting good rates from carriers. However, it is more complex than that. It is paramount to ensure that the asset is right for the task and utilisation is maximised, in both hours throughout the shift and hours throughout the day. Long waiting times at pick-up or delivery and trucks driving around empty, are in fact eating up your working capital.
Then comes the discussion about owning or outsourcing the transport fleet. Having the right fleet size and mix in the first place is critical, but fleet needs may change over time. When capacity requirements of the fleet vary, outsourcing transport activities can provide the perfect solution: why not let others make that capital investment?
Optimizing working capital in supply chain activities certainly deserves more attention. Implementing and exploiting appropriate performance metrics are certainly the first step towards realizing this goal. An end-to-end Transportation Management System is an excellent source to capture relevant data.