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Cash-to-cash: the new supply chain management metric

M. Theodore Farris II and Paul D. Hutchison
University of North Texas, Denton, Texas, USA


Keywords Cash management, Cash flow, Supply-chain management, Measurement Received December 2001 Revised March 2002 Abstract Over recent years supply chain management has grown in importance because of the proliferation of improved information flows, outsourcing practices, strategic alliances and partnerships, and the reshaping of the organizational focus from functional silos toward integrated activities. Logistics and supply chain management emphasize achieving lowest total cost through synergistic interaction of all supply chain components. The cash-to-cash (C2C) metric is an important measure as it bridges across inbound material activities with suppliers, through manufacturing operations, and the outbound sales activities with customers. This paper first defines how to calculate C2C. It then overviews the importance of measuring C2C, using both accounting and supply chain management perspectives. Next, it identifies key leverage points that are necessary to manage C2C effectively. Finally, future research questions are developed that should prove useful in guiding the development of C2C as a usable metric.

International Journal of Physical Distribution & Logistics Management, Vol. 32 No. 4, 2002, pp. 288-298. # MCB UP Limited, 0960-0035 DOI 10.1108/09600030210430651

Overview of C2C concept Innovative business models driving the development of value-chain strategies have significantly benefited companies like Dell Computer Corporation and Cisco Systems by shrinking inventory costs and accelerating the cash-to-cash (C2C) cycle (Sheridan, 2000). Dell's February 1997 financial report cites 13 days of inventory supply, 37 days of sales in accounts receivable, and 54 days in accounts payable. After concentrating on value-chain strategies, Dell's August 2001 financial report cites four days of inventory supply, 32 days of sales in accounts receivable, and 66 days in accounts payable. The key metric driving their performance improvements, C2C or cash conversion cycle, is a composite metric. It has been described as ``the average days required to turn a dollar invested in raw material into a dollar collected from a customer'' (Stewart, 1995). Dell's cash management has resulted in a negative cash conversion cycle that has improved from four days in 1997 to 30 days in 2001. It is argued that with a negative C2C, the Dell model will generate cash, even if the company were to report no profit whatsoever (Gurley, 2001). Todd Ackerman, director of the Performance Management Group states, ``We find this metric of great value, and we emphasize it. I estimate that only one-third of the companies I encounter have any notion of it at all. The Chief Information Officer can use it to help create a dashboard, a series of metrics, that drives the organizational behavior required to optimize the business model'' (Slater, 2000). To use this metric effectively, users must understand what comprises the C2C metric. In addition, the user must be aware of the many leverage points available for improving performance.

Defining C2C Existing definitions of C2C are not always consistent. Table I summarizes the variation in the definition. Definitions can range from a general statement, such as ``C2C is a composite metric describing the average days required to turn a dollar invested in raw material into a dollar collected from a customer'' (Stewart, 1995) to the simple description that C2C reflects ``the length of time between cash payment for purchase of resalable goods and collection of accounts receivable generated by sale of these goods'' (Moss and Stine, 1993). A later definition uses the operating cycle as the primary criteria stating, ``the cash conversion cycle measures the number of days the firm's operating cycle requires costly financing to support it. You can think of the operating cycle as the number of days sales (are) invested in inventories and receivables'' (Gallinger, 1997). Several leading definitions are summarized in Table I. Pittiglio, Rabin, Todd and McGrath (PRTM)[1], as well as others, extend the definition as ``the number of days between paying for raw materials and getting paid for product, as calculated by inventory days of supply plus days of sales outstanding minus average payment period for material'' (Lancaster et al., 1998; Slater, 2000). Schilling describes C2C as ``the cash conversion cycle, which mirrors the operating cycle, measures the interval between the time cash expenditures are made to purchase inventory for use in the production process and the time that funds are received from the sale of the finished product. This time interval is measured in days and is equal to the net of the average age of the inventory plus the average collection period minus the average age of accounts payable'' (Schilling, 1996). This is the most commonly accepted definition currently found in the literature. Further extending the variables involved in the process, Soenen states ``the length of a firm's cash conversion cycle depends on the number of days' credit it gets from its suppliers, the length of the production process and the number of days finished products remain in inventory before they are sold, and
Source Stewart (1995) Moss and Stine (1993) Gallinger (1997) Definition A composite metric describing the average days required to turn a dollar invested in raw material into a dollar collected from a customer Days between accounts payable and accounts receivable The cash conversion cycle measures the number of days the firm's operating cycle requires costly financing to support it. You can think of the operating cycle as the number of days of sales invested in inventories and receivables Inventory days of supply + accounts receivable accounts payable



Lancaster et al. (1998), MDM (2000), Schilling (1996), Soenen (1993)

Table I. Definitions of cash-to-cash



finally, the average collection period from the company's customers'' (Soenen, 1993). Cash-to-cash can be depicted graphically as in Figures 1 and 2. Figure 1 shows a positive C2C cycle for retailer J.C. Penney and a negative C2C cycle for Dell, both in 2000. In a negative C2C situation, accounts receivable are paid by the customer before the firm must pay its accounts payable. This situation increases firm liquidity and provides use of ``other people's money.'' Figure 2 compares Dell's C2C cycle in 1997 with the cycle in 2001. The 2001 numbers reflect aggressive efforts to improve the metric. Table II reflects the results of the PRTM study summarizing the C2C performance of more than 320 technology-based companies. The study shows that best-in-class manufacturers typically have a 75 percent advantage in their C2C cycle time compared with the median in the industry. Between 1996 and 1997 a typical company reduced C2C cycle time by 8 percent. C2C cycle time for best-in-class companies is less than 30 days, while median performer's C2C cycle times can be up to 100 days (MDM, 2000).

Figure 1. J.C. Penney's positive cash-to-cash vs. Dell's negative cash-to-cash 2000

Figure 2. Dell's cash-to-cash 1997 versus 2001

Best-in-class Computers and electronics Consumer packaged goods Defense and industrial Pharmaceuticals and chemicals Telecommunications 25 45 17 25 46

Median 106 88 70 59 127


Note: Published with permission from management consultants PRTM (, the parent company of The Performance Measurement Group, LLC, for non-commercial, one time use only Source: MDM (2000)

Table II. 1997 cash-to-cash cycle time (days)

Importance of measuring C2C The C2C metric holds importance from accounting and supply chain management perspectives. For accounting purposes, the metric can be used to help measure liquidity and organizational valuation. For supply chain management activities, it serves as a measurement bridging the processes into and out of the firm. Accounting perspective measures of liquidity and value In accounting, the measurement of liquidity assesses the firm's ability to cover obligations with cash flows (Gallinger, 1997; Lancaster et al., 1998). Corporate liquidity can be examined from two distinct dimensions: static or dynamic views. The static view is based on balance sheet data at a given point in time. This usually involves using traditional ratios such as the current ratio (current assets/current liabilities) and quick ratio (current assets inventories/current liabilities) to assess the firm's ability to meet obligations through the liquidation of assets. While this approach is commonly used to measure corporate liquidity, many authors suggest that the static nature of these financial ratios deter their ability to measure liquidity adequately (Soenen, 1993; Emery, 1984). Other studies suggest that a second approach a dynamic view ought to be utilized to capture ongoing liquidity from the firm's operations (Hager, 1976; Kamath, 1989; Richards and Laughlin, 1980; Emery, 1984). As a dynamic measure of the time it takes a firm to go from cash outflow to cash inflow, the C2C cycle was first introduced by Gitman (1974) and further refined by Gitman and Sachdeva (1982). Other researchers have also used the cash conversion cycle to measure liquidity in empirical studies of corporate performance (Lancaster and Stevens, 1996). By reflecting the net time interval between actual cash expenditures for the purchase of productive resources and the ultimate collection of receipts from product sales, the C2C cycle provides a valid alternative for measuring corporate liquidity and depicting a company's average liquidity position. Further, firms can use the cash conversion cycle to evaluate changes in circulating capital and thereby assist in the monitoring and control of its



components. Since it is important to invest available resources to yield the greatest economic benefit, a proper mix must be achieved between the amount of resources deployed to working capital and the amount deployed to capital investments. Therefore, a company's optimum liquidity position, the minimum level of liquidity necessary to support a given level of business activity, must be identified and regularly assessed (Schilling, 1996). The optimum liquidity position for a firm is an on-going trade-off between financial decisions to shorten the C2C cycle (which decreases minimum liquidity required) and operational decisions (which can lengthen the cash conversion cycle and therefore, increase minimum liquidity required). To determine minimum liquidity, a useful starting point would be the calculation of cash turnover, which entails a measure of the number of times cash cycles during the year for a firm. Cash turnover can be calculated by dividing the number of days in the year by the cash conversion cycle. Then, taking the cash turnover and dividing it into the annual cash expenditures can obtain the minimum liquidity required. Obviously, a direct relationship exists between the length of the C2C cycle and the minimum liquidity required. If the cash conversion cycle lengthens, the minimum liquidity required increases. Conversely, if the cash conversion cycle shortens, the minimum liquidity required decreases (Schilling, 1996). Also, the longer the C2C cycle, the greater the need for a company to obtain external financing (Soenen, 1993; Moss and Stine, 1993). While an analysis of the cash conversion cycle hardly resolves the problem of finding financing, it does cast the issue in a new operational light which should permit management to deal with it more effectively (Skomorowsky, 1988). Firm valuation is also closely related to the C2C cycle. A shorter cash conversion cycle results in a higher present value of net cash flows generated by the assets and therefore, a higher firm value. Moreover, a shorter cash conversion cycle implying that fewer days' cash is tied up in working capital not offset by ``free'' financing in the form of deferred payments results in more liquidity for the firm (Soenen, 1993). Supply chain management perspective Over recent years, supply chain management has grown in importance by reshaping the organizational focus from functional silos toward integrated activities. Logistics and supply chain management focus on achieving lowest total cost through synergistic interaction of all supply chain components. The C2C metric is an important measure as it bridges across inbound material activities with suppliers, through manufacturing operations, and the outbound logistics and sales activities with customers. Supply chain management offers opportunities for improvements throughout the business process. James Morehouse, a vice-president of consulting firm A.T. Kearney in Chicago, reports that the total cycle time for corn flakes is close to a year and that cycle times in the pharmaceutical industry average 465 days. Morehouse argues that if supply chain

management and re-engineering improvements encompassed everything from initial supplier to final customer fulfillment, total cycle time could be cut to 30 days (Bradley, 1998). Supply chain management is being heralded as a value driver is because it has such a wide-ranging effect on business success or failure. William C. Copacino, managing partner of Accenture's strategic services practice, suggests that, ``in most industries, the supply chain has such an influence on critical variables-on customer service, on asset productivity, and on the cost base. That is why it is crucial that companies carefully align their supply chain structure with their business strategy and processes'' (Bradley, 1998). PRTM's third annual supply chain performance benchmarking study generated a comprehensive set of fact-based performance measures that could be used to describe accurately a world-class supply chain of plan, source, make, and deliver activities. The aim of this study was to help companies capture a broad supply chain process perspective by quantifying performance improvement opportunities across the entire supply chain. The initial studies established supply chain measures that had never previously existed, such as C2C cycle time and supply chain response time, but which have become increasingly adopted as standard performance measures (Stewart, 1995). Companies with best-in-class supply chain management practices outperform their average-performing competitors with 10 percent to 30 percent higher ontime delivery performance, 40 percent to 65 percent shorter C2C cycle time and 50 percent to 80 percent less inventory. The savings potential of a highly effective supply chain can translate into 3 percent to 6 percent of a company's revenue (Helming, 1998). The opportunities for on-going supply chain management improvement are virtually endless. Clearly, C2C can play an important role in measuring these improvements. David A. Detmers, vice-president of value-chain practice for Avicon, cites C2C as one of the key metrics for gauging the speed of change. Detmers suggests the 1999 average of 75 days for the typical cash conversion cycle could be improved to ten days through the use of e-commerce (Saccomano, 1999). Overall, the C2C metric is a useful measure from both an accounting and a supply chain management perspective. Our attention now focuses on the process by which C2C may be managed. Leverage points to manage C2C Managing the C2C cycle involves an effort that must have both a crossfunctional approach within the firm and a collaborative approach throughout the supply chain, between the firm, its customers, and tier 1 and tier 2 suppliers. Management within the firm There are three primary leverage points to manage the C2C metric within the firm:




(1) extend average accounts payable; (2) shorten production cycle to reduce inventory days of supply; (3) reduce average accounts receivable. As previously noted, by managing changes to all three leverage points, Dell Computer Corporation reduced its C2C by 26 days from four days in 1997 to 30 days in 2001. Accounts payable were extended 12 days, from 54 to 66 days; manufacturing cycle times and days of inventory held were shortened by nine days, from 13 to four days, and accounts receivable were reduced by five days, from 37 to 32 days. (1) Extend average accounts payable One approach to improving the C2C metric is to extend the average accounts payable associated with inventory and therefore, obtain interest-free financing. There are many ways to accomplish this. Some suggestions will be briefly presented. A firm could utilize electronic payment for raw materials, inventory, wages, and expenses and pay at the last possible minute or date. Another suggestion would be to make partial rather than full payments to vendors. Reduction of the frequency of employee payroll payments from weekly to monthly and vendor payments to a few times a month is another idea. To extend bank float time, a novel approach would be to use banks in distant locations. Likewise, another suggestion would be to require vendors to send invoices to post office boxes at limited service post office locations. An additional idea would be to extend payments by utilizing interest-free credit cards or lines of credit. Another thought would be to reduce full payments to vendors by taking purchase discounts for paying invoices early. Finally, sales commissions could be delayed until accounts receivables are paid rather than at point of sale (Walz, 1999). The goal of all these suggestions is to control and limit dispersement of cash until the last possible moment. (2) Shorten production cycle to reduce inventory days of supply Inventory is a barometer of manufacturing efficiency. Inventory can be classified into two primary categories: optimum inventory and overage inventory. Optimum inventory may be defined as ``the exact amount of inventory required to support immediate production needs.'' Overage inventory may be defined as ``additional inventory beyond that required to support immediate production requirements'' (Farris, 1996). Overage can be broken down further into ``good'' overage, excess inventories held for strategic reasons such as anticipation of a materials price increase, and ``bad'' overage, excess inventory burdening the system. Basic inventory management should reduce ``bad'' overage first. A company should first work on overage inventory, implementing manufacturing and inventory strategies such as Just-In-Time (JIT) delivery, and real-time inventory tracking. Then collaborative planning, forecasting, and


replenishment (CPFR), synchronizing supply/demand planning, and crossdocking of materials at warehouse locations may be used to reduce optimum inventories and subsequently, the inventories variable of the C2C model. (3) Reduce average accounts receivable Expediting receivables collections is the other leverage point for improving the C2C metric. While the objective with accounts payable was to control and limit the expenditure of cash until the last possible moment, the goal with accounts receivable is to speed cash collection. The days-sales-outstanding term captures the ratio of accounts receivable to average-daily sales and thus provides a ``days'' measure of outstanding receivables (Stewart, 1995). The following actions may improve accounts receivable collection. To encourage faster payments, discount terms appear to be one of the most effective mechanisms to increase receivables collection (Boardman and Ricci, 1985). There is also evidence that companies with low days-sales-outstanding tend to follow up quickly on delinquent accounts (Stewart, 1995). Further, interest could be assessed on delinquent accounts and future orders for delinquent customers could require Cash On Delivery (COD) payments. Other approaches for expediting receivables include using lock boxes, where post office boxes are obtained in close proximity to customers, the boxes are serviced daily, and deposits made with banks to company accounts. Another idea is to require full payment at time of order or to require a large deposit. Acceptance of electronic payments from customers allowing for automatic deposit of payments would also expedite receivables. Additionally, customers could be provided with pre-addressed, stamped envelopes (Walz, 1999). Finally, factoring of accounts receivable to financial institutions could also be explored as a means of reducing collection time. Collaboration between firms Additional cycle reduction opportunities in supply chain management exist at the seams outside of the four walls of the firm where they interface with their customers, tier 1, and tier 2 suppliers. Highly collaborative finished-product manufacturers also report shorter order-to-shipment lead times than lesscollaborative firms (Sheridan, 2000). Dell exemplifies this phenomenon in that it quickly relays information about customer orders to its suppliers who, in turn, are committed to quick delivery (Sheridan, 2000). The net result has been improvement in its C2C cycle. Future research questions There are many research questions that should be addressed to assist the manager and enhance C2C management. Key research questions include identifying target C2C cycles based on specific characteristics of the product or business process, identifying the most critical leverage points when managing C2C, determining how and why C2C cycles change by industry, and refining the formula which measures C2C to provide a more accurate measure.





What should be your target C2C cycle? Historically studies have touted improvements in C2C by companies such as Dell. These improvements may be atypical and not appropriate for all business processes. Table III is indicative of the generalizations found for cash conversion performance. Future study should address realistic expectations of the C2C metric based on industry, type of business process, product value, and size of the company. Further, a typology of design for companies to utilize strategically when planning C2C goals should be developed. Where are the best management leverage points? Dell's C2C management from 1997 to 2001 improved cycle times from all three leverage points within the firm. Faced with a plethora of C2C management opportunities, future research should identify where the best management leverage points are for improving C2C cycles. How is C2C performance changing? Projecting improvements in supply chain management techniques, Helen Richardson proposed the potential of halving domestic shipment order-to-cash cycle (when order is delivered to when cash is received) in ten years (Richardson, 1994). As supply chain management techniques evolve, cash conversion performance should also improve. A historical, longitudinal study tracing how and where C2C has improved would be interesting. This would provide insights to the leverage points companies are most likely to use to improve C2C cycles. Is there a more precise method of calculating C2C? Gentry, Vaidyanathan and Lee propose using a weighted cash conversion cycle which is a two-part multiplicative measure consisting of the computation of a weighted operating cycle and a weighted payable effect that measures the number of weighted dollar-days that cash payments are deferred to suppliers (Gentry et al., 1990). Their work is useful because it focuses management attention on the amount of real resources committed to the total working capital process. In his work on inventory flow models, Farris (1996) addresses a similar issue with measuring inventories using weighted dollar-days. Future research should consider utilizing these approaches as a means to modify the method for calculating C2C cycles and develop a more accurate measure for C2C.
Best-in-class Computers and electricals Consumer packaged goods Defense and industrial Pharmaceuticals and chemicals Telecommunications 28.7 24.7 18.5 33.4 44.4 Median 75.1 66.6 67.6 91.2 100.2

Table III. Cash-to-cash cycle time (days)

Source: From the Performance Measurement Group (PMG), a subsidiary of PRTM. Based on a two-year benchmarking study of more than 110 participants. Slater (2000)

Conclusion The C2C metric is an important measure as it bridges across inbound material activities with suppliers, through manufacturing operations, and the outbound logistics and sales activities with customers. It is paramount for the manager to understand how the C2C metric is calculated and the importance of measuring C2C from both accounting and supply chain management perspectives. To manage the C2C metric effectively, the manager must focus on the key leverage points that were identified. Finally the future research questions offered should prove useful in guiding the development of C2C as a usable metric.
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