You are on page 1of 24

Cash-to-cash (C2C) cycle

The duration between the purchase of a firm's inventory and the collection of accounts receivable
for the sale of that inventory. (Duration measured in days). Usually a company acquires
inventory on credit, which results in accounts payable. The company will then sell the inventory
on credit, which results in accounts receivable. Cash is therefore not involved until the company
pays the accounts payable and collects accounts receivable. So the cash conversion cycle
measures the time between outlay of cash and the cash recovery
C2C = – weeks payable (1/APT)
+ weeks in inventory (1/INVT)
+ weeks receivable (1/ART)
Drivers of Supply Chain Performance
The major drivers of Supply chain performance consists of three logistical drivers & three cross-
functional drivers.
Logistical drivers:
• Facilities
• Inventory
• Transportation
Cross-functional drivers:
• Information
• Sourcing
• Pricing
Company’s supply chain achieve the balance between responsiveness & efficiency that best
meets the needs of the company competitive strategy

A Framework for Structuring Drivers

Drivers of Supply Chain
Logistical drivers:
1. Role in the supply chain
1. The “where” of the supply chain
2. Manufacturing or storage (warehouses)
2. Role in the competitive strategy
1. Economies of scale (efficiency priority)
2. Larger number of smaller facilities (responsiveness priority)
Components of facilities decisions
3. Role
1. Flexible, dedicated, or a combination of the two
2. Product focus or a functional focus
4. Location
1. Where a company will locate its facilities
2. Centralize/decentralize, macroeconomic factors, quality of workers, cost
of workers and facility, availability of infrastructure, proximity to
customers, location of other facilities, tax effects
5. Capacity
1. A facility’s capacity to perform its intended function or functions
2. Excess capacity – responsive, costly
3. Little excess capacity – more efficient, less responsive
3. Overall trade-off: Responsiveness versus efficiency
1. Cost of the number, location, capacity, and type of facilities (efficiency) and the
level of responsiveness
2. Increasing the number of facilities increases facility and inventory costs but
decreases transportation costs and reduces response time
3. Increasing the flexibility or capacity of a facility increases facility costs but
decreases inventory costs and response time
Facility are the actual physical locations in the supply chain network where product are stored,
assembled or fabricated. The two major types of facilities are:
• Production sites(factories)
• Storage sites(warehouses)
Factories can be built to accommodate one of two approaches to manufacturing:
4. Product Focus: A factory that takes a product focus performs the range of different
operations required to make a given product line from fabrication of different product
parts to assembly of these parts.
5. Functional focus: A functional focus approach concentrates on performing just a few
operations such as only making a select group of parts or doing only assembly

• Role in the Supply Chain
– Mismatch between supply and demand
– Satisfy demand
– Exploit economies of scale
– Impacts assets, costs, responsiveness, material flow time
• Role in Competitive Strategy
– Form, location, and quantity of inventory allow a supply chain to range from
being very low cost to very responsive
– Objective is to have right form, location, and quantity of inventory that provides
the right level of responsiveness at the lowest possible cost
Components of Inventory Decisions
• Cycle inventory
– Average amount of inventory used to satisfy demand between shipments
– Function of lot size decisions
• Safety inventory
– Inventory held in case demand exceeds expectations
– Costs of carrying too much inventory versus cost of losing sales
• Seasonal inventory
– Inventory built up to counter predictable variability in demand
– Cost of carrying additional inventory versus cost of flexible production
• Level of product availability
– The fraction of demand that is served on time from product held in inventory
– Tradeoff Inventory-related metrics
– Cash-to-cash cycle time
– Average inventory
– Inventory turns
– Products with more than a specified number of days of inventory
– Average replenishment batch size
– between customer service and cost
– Average safety inventory
– Seasonal inventory
– Fill rate
– Fraction of time out of stock
– Obsolete inventory
• Overall trade-off: Responsiveness versus efficiency
– Increasing inventory generally makes the supply chain more responsive
– A higher level of inventory facilitates a reduction in production and transportation
costs because of improved economies of scale
– Inventory holding costs increase

Inventory encompasses all the raw materials, work in process, and finished goods within a
supply chain. Changing inventory policies can dramatically alter the supply chain’s efficiency &
There are three basic decisions to make regarding the creation and holding of inventory:
1. Cycle I nventory: This is the amount of inventory needed to satisfy demand for the
product in the period between purchases of the product.
2. Safety I nventory: inventory that is held as a buffer against uncertainty. If demand
forecasting could be done with perfect accuracy, then the only inventory that would be
needed would be cycle inventory.
3. Seasonal I nventory: This is inventory that is built up in anticipation of predictable
increases in demand that occur at certain times of the year.
• Role in the Supply Chain
– Moves the product between stages in the supply chain
– Impact on responsiveness and efficiency
– Faster transportation allows greater responsiveness but lower efficiency
– Also affects inventory and facilities
• Role in the Competitive Strategy
– Allows a firm to adjust the location of its facilities and inventory to find the right
balance between responsiveness and efficiency
Components of Transportation Decisions
– Design of transportation network
• Modes, locations, and routes
• Direct or with intermediate consolidation points
• One or multiple supply or demand points in a single run
– Choice of transportation mode
• Air, truck, rail, sea, and pipeline
• Information goods via the Internet
• Different speed, size of shipments, cost of shipping, and flexibility
– Transportation-related metrics
• Average inbound transportation cost
• Average income shipment size
• Average inbound transportation cost per shipment
• Average outbound transportation cost
• Average outbound shipment size
• Average outbound transportation cost per shipment
• Fraction transported by mode
• Overall trade-off: Responsiveness versus efficiency
– The cost of transporting a given product (efficiency) and the speed with which
that product is transported (responsiveness)
– Using fast modes of transport raises responsiveness and transportation cost but
lowers the inventory holding cost
Transportation entails moving inventory from point to point in the supply chain. Transportation
can take the form of many combinations of modes & routes, each with its own performance
characteristics. There are six basic modes of transport that a company can choose from:
• Ship which is very cost efficient but also the slowest mode of transport. It is limited to
use between locations that are situated nest to navigable waterways & facilities such as
harbor & canals.
• Rails which is also very cost efficient but can be slow. This mode is also restricted to use
between locations that are served by rail lines.
• Pipelines can be very efficient but are restricted to commodities that are liquid or gases
such as water, oil & natural gas.
• Trucks are a relatively quick & very flexible mode of transport. Trucks can go almost
anywhere. The cost of this mode is prone to fluctuations though, as the cost of fuel
fluctuates and the condition of road varies.
• Airplanes are a very fast mode of transport and are very responsive. This mode is also
very expensive mode & is somewhat limited by the availability of appropriate airport
• Electronic transport is the fastest mode of transport and it is very flexible & cost efficient.
However , it can be only be used for movement of certain types of products such as
electric energy, data, & products composed of data such as music, pictures & text.
Cross-functional drivers:

• Role in the Supply Chain
– Improve the utilization of supply chain assets and the coordination of supply
chain flows to increase responsiveness and reduce cost
– Information is a key driver that can be used to provide higher responsiveness
while simultaneously improving efficiency
• Role in the Competitive Strategy
– Right information can help a supply chain better meet customer needs at lower
– Improves visibility of transactions and coordination of decisions across the supply
– Share the minimum amount of information required to achieve coordination
Components of Information Decisions
• Push versus Pull
– Different information requirements and uses
• Coordination and information sharing
– Supply chain coordination, all stages of a supply chain work toward the objective
of maximizing total supply chain profitability based on shared information
• Sales and operations planning (S&OP)
– The process of creating an overall supply plan (production and inventories) to
meet the anticipated level of demand (sales)
• Enabling technologies
– Electronic data interchange (EDI)
– The Internet
– Enterprise resource planning (ERP) systems
– Supply chain management (SCM) software
– Radio frequency identification (RFID)
• Information-related metrics
– Forecast horizon
– Frequency update
– Forecast error
– Seasonal factors
– Variance from plan
– Ratio of demand variability to order variability
• Overall trade-off: Complexity versus value
– Good information helps a firm improve both efficiency and responsiveness
– More information is not always better
– More information increases complexity and cost of both infrastructure and
analysis exponentially while marginal value diminishes
– Evaluate the minimum information required to accomplish the desired objectives
Information serves as the connection between various stages of a supply chain, allowing them to
coordinate & maximize total supply chain profitability. It is also crucial to the daily operations of
each stage in a supply chain for e.g. a production scheduling system.
Information is used for the following purpose in a supply chain:
1. Coordinating daily activities related to the functioning of other supply chain drivers:
facility, inventory & transportation.
2. Forecasting & planning to anticipate& meet future demands. Available information is
used to make tactical forecasts to guide the setting of monthly & quarterly production
schedules & time table
3. Enabling technologies: many technologies exist to share & analyze information in the
supply chain. Managers must decide which technologies to use & how to integrate these
technologies into their companies like internet, ERP, RFID.
• Role in the Supply Chain
– Set of business processes required to purchase goods and services
– Will tasks be performed by a source internal to the company or a third party
– Globalization creates many more sourcing options with both considerable
opportunity and potential risk
• Role in the Competitive Strategy
– Sourcing decisions are crucial because they affect the level of efficiency and
responsiveness in a supply chain
– Outsource to responsive third parties if it is too expensive to develop their own
– Keep responsive process in-house to maintain control
Components of Sourcing Decisions
• In-house or outsource
– Perform a task in-house or outsource it to a third party
• Supplier selection
– Number of suppliers, evaluation and selection criteria, direct negotiations or
• Procurement
– The supplier sends product in response to customer orders
• Sourcing-related metrics
– Days payable outstanding
– Average purchase price
– Range of purchase price
– Average purchase quantity
– Supply quality
– Supply lead time
– Fraction of on-time deliveries
– Supplier reliability
• Overall trade-off: Increase the supply chain surplus
– Increase the size of the total surplus to be shared across the supply chain
– Impact of sourcing on sales, service, production costs, inventory costs,
transportation costs, and information cost
– Outsource if it raises the supply chain surplus more than the firm can on its own
– Keep function in-house if the third party cannot increase the supply chain surplus
or if the outsourcing risk is significant
Sourcing is the set of business processes required to purchase goods & services. Managers must
first decide which tasks will be outsourced & those that will be performed within the firm.
Components of sourcing decisions
• In-House or outsource: The most significant sourcing decision for a firm is whether to
perform a task in-house or outsource it to a third party. This decision should be driven in
part by its impact on the total supply chain profitability.
• Supplier selection: It must be decided on the number of suppliers they will have for a
particular activity. The must then identify the criteria along which suppliers will be
evaluated & how they will be selected like through direct negotiations or resort to an
• Role in the Supply Chain
– Pricing determines the amount to charge customers for goods and services
– Affects the supply chain level of responsiveness required and the demand profile
the supply chain attempts to serve
– Pricing strategies can be used to match demand and supply
• Role in the Competitive Strategy
– Firms can utilize optimal pricing strategies to improve efficiency and
– Pricing strategies vary to meet different customer responsiveness requirements
Components of Pricing Decisions
• Pricing and economies of scale
– The provider of the activity must decide how to price it appropriately to reflect
these economies of scale
• Everyday low pricing versus high-low pricing
– Different pricing strategies lead to different demand profiles that the supply chain
must serve
• Fixed price versus menu pricing
– If marginal supply chain costs or the value to the customer vary significantly
along some attribute, it is often effective to have a pricing menu
• Pricing-related metrics
– Profit margin
– Days sales outstanding
– Incremental fixed cost per order
– Incremental variable cost per unit
– Average sale price
– Average order size
– Range of sale price
– Range of periodic sales
• Overall trade-off: Increase firm profits
– Understand of the cost structure of performing a supply chain activity and the
value this activity brings to the supply chain
– Strategy may support efficiency in the supply chain, lower supply chain costs,
defend market share, or steal market share
– Differential pricing may be used to attract customers with varying needs
– Strategy should help either increase revenues or shrink costs or preferably both
Pricing determines how much a firm will charge for goods & services that it makes available in
the supply chain. Pricing affects the behavior of the buyer of the good or services, thus affecting
supply chain performance, for example, if a transportation company varies its charges based on
the lead time provided by the customers, it’s very likely that customers who value efficiency will
order early & customers who value responsiveness will be willing to wait & order just before
they need a product transported. This directly affects the supply chain in terms of the level of
responsiveness required as well as the demand profile that the supply chain attempts to serve.
Pricing is also a lever that can be used to match supply & demand.
Components of Pricing Decisions:
• Fixed Price versus Menu pricing: A firm must decide whether it will charge a fixed price
for its supply chain activities or have a menu with prices that vary with some other
attribute, such as response time or location of delivery.
• Everyday low pricing versus High-Low pricing
Chapter No 4
Factors Influencing Distribution Network Design
• Distribution network performance evaluated along two dimensions
1. Customer needs that are met
2. Cost of meeting customer needs
• Evaluate the impact on customer service and cost for different distribution network
• Profitability of the delivery network determined by revenue from met customer needs and
network costs
• Elements of customer service influenced by network structure:
1. Response time
2. Product variety
3. Product availability
4. Customer experience
5. Order visibility
6. Return-ability
• Supply chain costs affected by network structure:
1. Inventories
2. Transportation
3. Facilities and handling
4. Information

Desired Response Time and Number of Facilities

Inventory Costs and Number of Facilities

Transportation Costs and Number of Facilities

Facility Costs and Number of Facilities

Logistics Cost, Response Time, and Number of Facilities

Design Options for a Distribution Network (Supply Chain
• One of six designs may be used
1. Manufacturer storage with direct shipping
2. Manufacturer storage with direct shipping and in-transit merge
3. Distributor storage with carrier delivery
4. Distributor storage with last-mile delivery
5. Manufacturer/distributor storage with customer pickup
6. Retail storage with customer pickup

Manufacturer storage with direct shipping

Cost Factor Performance
Inventory Lower costs because of aggregation. Benefits of aggregation are
highest for low-demand, high-value items. Benefits are large if
product customization can be postponed at the manufacturer.
Transportation Higher transportation costs because of increased distance and
disaggregate shipping.
Facilities and handling Lower facility costs because of aggregation. Some saving on
handling costs if manufacturer can manage small shipments or ship
from production line.
Information Significant investment in information infrastructure to integrate
manufacturer and retailer.

Service Factor Performance
Response time Long response time of one to two weeks because of increased
distance and two stages for order processing. Response time may vary
by product, thus complicating receiving.
Product variety Easy to provide a high level of variety.
Product availability Easy to provide a high level of product availability because of
aggregation at manufacturer.
Customer experience Good in terms of home delivery but can suffer if order from several
manufacturers is sent as partial shipments.
Time to market Fast, with the product available as soon as the first unit is produced.
Order visibility More difficult but also more important from a customer service
Return-ability Expensive and difficult to implement.

Manufacturer storage with direct shipping and in-transit merge

Cost Factor Performance
Inventory Similar to drop-shipping.
Transportation Somewhat lower transportation costs than drop-shipping.
Facilities and handling Handling costs higher than drop-shipping at carrier; receiving costs
lower at customer.
Information Investment is somewhat higher than for drop-shipping.

Service Factor Performance
Response time Similar to drop-shipping; may be marginally higher.
Product variety Similar to drop-shipping.
Product availability Similar to drop-shipping.
Customer experience Better than drop-shipping because only a single delivery has to be
Time to market Similar to drop-shipping.
Order visibility Similar to drop-shipping.
Return-ability Similar to drop-shipping.

Distributor storage with carrier delivery

Cost Factor Performance
Inventory Higher than manufacturer storage. Difference is not large for faster
moving items but can be large for very slow-moving items.
Transportation Lower than manufacturer storage. Reduction is highest for faster
moving items.
Facilities and handling Somewhat higher than manufacturer storage. The difference can be
large for very slow-moving items.
Information Simpler infrastructure compared to manufacturer storage.

Service Factor Performance
Response time Faster than manufacturer storage.
Product variety Lower than manufacturer storage.
Product availability Higher cost to provide the same level of availability as manufacturer
Customer experience Better than manufacturer storage with drop-shipping.
Time to market Higher than manufacturer storage.
Order visibility Easier than manufacturer storage.
Return-ability Easier than manufacturer storage.

Distributor storage with last-mile delivery

Cost Factor Performance
Inventory Higher than distributor storage with package carrier delivery.
Transportation Very high cost given minimal scale economies. Higher than any
other distribution option.
Facilities and handling Facility costs higher than manufacturer storage or distributor
storage with package carrier delivery, but lower than a chain of
retail stores.
Information Similar to distributor storage with package carrier delivery.

Service Factor Performance
Response time Very quick. Same day to next-day delivery.
Product variety Somewhat less than distributor storage with package carrier delivery
but larger than retail stores.
Product availability More expensive to provide availability than any other option except
retail stores.
Customer experience Very good, particularly for bulky items. Slightly higher than
distributor storage with package carrier delivery.
Time to market Less of an issue and easier to implement than manufacturer storage or
distributor storage with package carrier delivery.
Order visibility Easier to implement than other previous options.
Return-ability Harder and more expensive than a retail network.

Manufacturer/distributor storage with customer pickup

Cost Factor Performance
Inventory Can match any other option, depending on the location of
Transportation Lower than the use of package carriers, especially if using an
existing delivery network.
Facilities and handling Facility costs can be high if new facilities have to be built. Costs
are lower if existing facilities are used. The increase in handling
cost at the pickup site can be significant.
Information Significant investment in infrastructure required.

Service Factor Performance
Response time Similar to package carrier delivery with manufacturer or distributor
storage. Same-day delivery possible for items stored locally at pickup
Product variety Similar to other manufacturer or distributor storage options.
Product availability Similar to other manufacturer or distributor storage options.
Customer experience Lower than other options because of the lack of home delivery.
Experience is sensitive to capability of pickup location.
Time to market Similar to manufacturer storage options.
Order visibility Difficult but essential.
Return-ability Somewhat easier given that pickup location can handle returns.

Retail storage with customer pickup

Cost Factor Performance
Inventory Higher than all other options.
Transportation Lower than all other options.
Facilities and handling Higher than other options. The increase in handling cost at the
pickup site can be significant for online and phone orders.
Information Some investment in infrastructure required for online and phone

Service Factor Performance
Response time Same-day (immediate) pickup possible for items stored locally at
pickup site.
Product variety Lower than all other options.
Product availability More expensive to provide than all other options.
Customer experience Related to whether shopping is viewed as a positive or negative
experience by customer.
Time to market Highest among distribution options.
Order visibility Trivial for in-store orders. Difficult, but essential, for online and
phone orders.
Return-ability Easier than other options because retail store can provide a substitute.