Friday, August 21, 2015

Supply Chain Optimization: The Financial Impact


supply chain optimization: the financial impact
Supply chain optimization contributes to the success of any manufacturer. Imagine how much of your business relies on the successful management of the process! The importance of this business function is often overlooked by many small business owners, but proper supply chain management helps alleviate a myriad of problems and contributes to the overall success of your organization. 

Supply chain management controls goods from the point of origin to the point of consumption. This process manages the movement and storage of raw materials to work-in-progress to the finished product. Proper management of this process can have amazing results, while poor management can be devastating to the viability of your business.

The Benefits of Supply Chain Optimization
Among the many advantages of effective supply chain management is helping your financial viability. A leading cause of small business failure is the growth of the business outpacing its financing.  Proper supply chain management helps alleviate this possibility by controlling inventory levels and maintaining customer satisfaction by eliminating missed sales opportunities.

Working capital financing is another story, and inventory management plays a crucial part. Inventory management is critical to the survival of the enterprise. Unfortunately, the purchasing of inventory is often done by the “seat of the pants” and carries two particular risks:

1.     Delays in fulfilling orders due to under-ordering
2.     Tying up working capital due to over-ordering

Working Capital and Manufacturers
A small manufacturer that can reduce the cash conversion cycle will be able to minimize its financial risk. A common way small businesses fund working capital is through asset-based financing provided by banks. This financing uses the assets of the business as collateral for the outstanding loan. The trick is different assets have different collateral financing values. Accounts receivable have the highest value, while inventory and equipment have the lowest. In a typical asset-based financing formula, a bank may finance up to 70% of the value of accounts receivable, and 50% of the value of inventory and equipment value. 

Some inventory items, such as work in progress and branded supplies (i.e. boxes imprinted with the name of the company) are often assigned no collateral value. Efficient supply chain management reduces the need for inventory and reduces missed sales because of stock outs.

The amount of working capital needed for inventory is therefore reduced while the amount of financing available from accounts receivable is maximized. Supply chain management maximizes the amount of asset-based financing through techniques such as “just in time” inventory management and economic order quantities.

Key requirements of supply chain management include enterprise resource planning software and the proper procedures surrounding the use of the system. The corporate culture itself may need to be changed to ensure the discipline needed to make supply chain management effective. Implementation can often seem daunting. Do not let the complexities of installing supply chain management system bog down your business and prevent your company’s success!

Supply Chain Consulting Services
MMTC’s Supply Chain Optimization Program focuses on increasing alignment, visibility, and collaboration, resulting in reduced costs, increased quality and delivery, a trained workforce, and compliant processes. For more information about available supply chain consulting services, call MMTC at 888.414.6682.


Since 1991, MMTC has assisted Michigan’s small and medium-sized businesses compete and grow. Through personalized services fitted to meet the needs of clients, we develop more effective business leaders, drive product and process innovation, promote company-wide operational excellence and foster creative strategies for business growth and greater profitability. Find us at www.mmtc.org

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