Chapter 12: NikoTech: The Operating and Cash-to-Cash Cycle - Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance نسخه متنی

Chapter 12: NikoTech: The Operating and Cash-to-Cash Cycle

Overview

As explained in the preceding chapter, the operating cycle measures the time that transpires while converting inventories and receivables to cash. For the company in question, this metric is important for a variety of reasons. As a manufacturer, NikoTech must constantly source raw materials and convert them to finished goods. With 350 suppliers feeding plants on four continents, the management of cumulative lead times from the issuance of purchase orders through production and on to finished goods distribution is vital. From a receivables perspective, the days that are consumed during the invoicing and collection process are of equal importance. When taken as an aggregate measure and combined with the aforementioned income statement metrics, the performance of these activities addresses the importance of managing current assets in a productive, timely and profitable fashion. Table 12.1 considers the performance of NikoTech's operating cycle for Y1 and Y2.

Table 12.1: NikoTech Operating Cycle Y1 and Y2

The operating cycles for both Y1 and Y2 are graphically represented in Figures 12.1 and 12.2. Beginning with Y1, the first question that comes to mind is whether or not it is necessary to consume the better part of nine months (249 days) to convert inventory and receivables to cash. Because the goal of the metric is to minimize the number of days in the operating cycle, the answer, of course, is no. Using 249 days as a baseline for improvement, a year-to-year shift to 291 days is even more disconcerting. What this comparison states is that NikoTech is already in trouble in Y1 at 249 days and that the situation has worsened in Y2 by an additional 42 days (a 17% increase).

Figure 12.1: Y1 Operating Cycle— 249 Days (Based on Robert S. Kaplan and David P. Norton, The Balanced Scorecard— Translating Strategy into Action, Harvard Business School Press, 1996, p. 58. With permission.)

Figure 12.2: Y2 Operating Cycle— 291 Days (Based on Robert S. Kaplan and David P. Norton, The Balanced Scorecard— Translating Strategy into Action, Harvard Business School Press, 1996, p. 58. With permission.)

Once the baseline and trend are established, it is the job of the management team to break down each component part, identifying drivers behind the expansion of the operating cycle. It is for this reason that supply chain managers must first understand the goal of performance metrics and, more importantly, be able to identify what really moves the numbers at an operating level.