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

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

Daniel L. Gardner

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The Cash-to-Cash Cycle

The cash-to-cash cycle is similar to the operating cycle, with one major addition. Whereas the operating cycle measures the number of days necessary to convert inventory to cash, the cash-to-cash cycle determines the number of days that transpire between paying suppliers for goods and collecting on sales from customers. Implicit in this model is the use of the two aforementioned components of the operating cycle, as well as an additional tool known as days payable outstanding (DPO).

DPO determines the amount of time in days it takes a company to receive, process and pay its suppliers for goods and services provided. Numerically, the difference in days between when suppliers are paid and money is collected from customers is defined as the sum of DOI and DRO, minus DPO. The resulting figure is the cash-to-cash cycle, as shown in Figure 11.5.


Figure 11.5: Cash-to-Cash Cycle (From Robert S. Kaplan and David P. Norton, The Balanced Scorecard— Translating Strategy into Action, Harvard Business School Press, 1996, p. 58. With permission.)

Because DOI and DRO have already been discussed, attention is now directed to the additional variable in the cash-to-cash cycle, DPO. As shown graphically in Figure 11.6, the DPO calculation is expressed as:

Average accounts payable/(COGS/365)


Figure 11.6: Days Payable Outstanding

The consistency among the conceptual pillars of DOI, DRO and now DPO should be clear. The only difference between the goals of the first two metrics and DPO is a function of corporate culture and company policy. As was mentioned, the goal of DOI and DRO is to reduce the amount of days in each cycle. However, to do that in the case of DPO would imply that suppliers are being paid faster, a practice that conflicts with the payment policies of many improve" DPO is by increasing the numerator or reducing the denominator. The latter would imply a reduction in COGS, which in turn would be driven by the unattractive prospect of reducing sales. Conversely, if COGS were coming down as a result of savings achieved in raw materials or labor and not lost sales, it would be feasible to reduce the denominator. In lieu of that happening, the only way to improve the outcome is to increase the average accounts payable figure.

Accounts payable growth is viable to a certain extent if purchases of raw materials are increasing (again as a function of sales and production growth). However, if purchases are flat, the only way to improve the number is to extend payment to suppliers beyond reason, creating a slew of downstream consequences. If, conversely, the goal of an organization is to rationalize DPO, the exercise becomes a bit easier. Rationalization in this context does not imply a constant quest to reduce DPO but rather to have the amount in line with industry standards, supplier-specific agreements and, most importantly, COGS levels.


The relevance of the cash-to-cash cycle to supply chains lies in its emphasis on the time that transpires between the assumption of payables, acquisition of assets, generation of sales, invoicing of customers and collection of receivables. In a lean world, time is waste and cycle velocity speaks to a company's ability to perpetuate operations through the timely collection of receivables and payment of debt. Recognizing that the journey from raw materials to cash passes through myriad phases, supply chain practitioners would be wise to seek ways to eliminate wasted time in every facet of the transition process.

The analysis continues with a study of NikoTech's asset utilization and supply chain velocity.

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