Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance نسخه متنی

Accounts Payable Turnover

Shifting balance sheet focus for a moment to the section on liabilities, the accounts payable turnover calculation is also an important part of the financial toolbox. With COGS as the numerator and average accounts payable as the denominator, this calculation tells the analyst how many times the payables cycle is completed in a given period. If taken as the opposite of the accounts receivable process, accounts payable is the normal time it takes a company to receive, process and pay its suppliers' bills. When lined up against the days payable outstanding (DPO) calculation, this tool becomes especially helpful in letting management know exactly how many times a year the payment cycle is completed. As such, these measurements not only quantify how well a company is complying with payment terms, but also indicate how efficient the overall process is. Given the open-book nature of lean supplier relationships, accounts payable turnover and DPO support a strategic partnership through constant monitoring of payment compliance.

As suspected, NikoTech's accounts payable turnover is quite low, and the DPO calculations for both years are a leading indicator of that outcome. Again, whether a company seeks to have a high or low accounts payable turnover is a question of policy and ability to pay. In today's collaborative environment, however, the intentional abuse of supplier goodwill to the short-term benefit of the balance sheet is not advisable.

Because NikoTech's DPO numbers were stable from Y1 to Y2, the accounts payable turnover figure has not shifted much either. Consistent with previous measurement techniques, Table 13.9 shows that NikoTech's accounts payable turnover and DPO for Y1 were 3.47 and 105, respectively. In other words, it took the company 105 days to receive, process and honor payables with its suppliers.

Table 13.9: Days Payable Outstanding Versus Payables Turnover

The figure remained relatively stable in Y2, with the company turning over payables 3.44 times per year or about every 106 days. Identical to the conclusion reached during the DPO analysis, the problem with NikoTech's payables does not lie in any year-to-year changes. Rather, the challenge is to drive down payables and improve supplier relationships, an endeavor that will stabilize landed costs and lead times for raw materials into the factories.

One final comment on the importance of accounts payable management in an international environment: The NikoTech case illustrates that stretching payables with suppliers can cause a groundswell that swamps the entire supply chain. Forced to do business on a cash basis with some suppliers and juggle purchases among the rest, NikoTech's entire raw materials program was destabilized. Six Sigma tools helped to uncover the egregious damage done by NikoTech's payment policies. Continued use of sigma tools in the design of new processes, as well as adherence to the principles of lean supplier management, will serve to eradicate most if not all of the pain accounts payable has caused the company. The end result will be a vast improvement in productivity, velocity and, most importantly, net income.