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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Days of Receivables: A Closer Look


As pointed out during the initial discussion on days receivable outstanding (DRO), simple mathematics implies that NikoTech''''''''s performance can be enhanced by reducing the numerator in the equation, increasing the denominator or, ideally, through a combination of the two. As first illustrated in the discussion on COGS dynamics, in order for DRO to come down, net sales would have to be growing at a faster pace than receivables. In another possible scenario, NikoTech can improve this figure by increasing sales while maintaining (or reducing) the receivables figure. If revenues do not increase, this ratio can still be improved by reducing the receivables number based on the same amount of sales.


A return to NikoTech''''''''s year-to-year DRO shows that the number of days needed to bill and collect on a receivable increased from 72 to 97 in Y2. Stated differently, it took the company an additional 25 days (35% longer) to generate cash from receivables in Y2 than it did in Y1. In other words, utilizing the receivables to sales ratio, the figures portray a situation where for every dollar in net sales in Y1, NikoTech had 20 cents in receivables on the street at any given time. In Y2, the company had 26 cents in receivables for every dollar in sales, a difference of 6 cents.


Similar to NikoTech''''''''s original (but untenable) explanation of the growth in COGS being tied to sales, it could be said that the growth in receivables was a natural result of increasing revenues. Also, it is important to note that NikoTech is a small player in the electronics manufacturing services industry and that six customers account for 70% of its sales. Given this limitation, the payment terms NikoTech offers to customers are a decisive factor in the closing of business. Although both issues may have contributed to a growing accounts receivable figure in Y2, the fact that receivables outgrew net sales at a rate of 58% versus 18% should cause concern. Table 12.4 illustrates the growth trend of both areas.






Table 12.4: Year-to-Year Net Sales Versus Accounts Receivable






Continued audits conducted by headquarters on each of the billing entities at the factories brought many issues to light. Using a deployment process map, NikoTech management was able to identify the connection points between all of the departments involved in the accounts receivable process. By then, it was no surprise that many of the downstream problems that the team uncovered actually began farther upstream in the operating areas. In several specific cases, for example, the orders that were rejected in the DOI analysis were proven to be the cause of mischief in accounts receivable. As if the customs delays and returned orders were not enough, clients that actually received partial orders were sent invoices for the entire sale. Predictably, the customers were not paying these invoices, but the problem only surfaced when payment dates arrived. The solution was to reissue invoices and begin the payment process all over again.


Another example of supply chain deficiencies that impacted the company''''''''s accounts receivable revolved around the synchronization of shipping lead time with the date that the receivables clock began to run. Although NikoTech Chapter 14 on the income statement. Given the number of problems NikoTech has had with returns and discounted invoices, suffice it to say at this time that R&A is an area rich in potential for bringing improvements to overall performance.


Hopefully, these examples have highlighted not only the need to manage inventories and receivables but that the health of these items depends directly on operating tactics that encompass landed costs, inventory management and lead time rationalization. The relationship between productivity, asset utilization and tactical execution is manifestly clear when employing the operating cycle and, as such, should be included in any portfolio of supply chain measurement tools.


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