A little story---
I had a client who sold ornamental fish to pet stores. He had a good business going, and made strong profits, on the order of 30%. He had about $2.5MM in sales.
As it turns out, his reputation was so good, that Wal-Mart called and asked him to supply their Southeast stores with fish, to the tune of about $.5MM per quarter, or $2.0MM/year. My client was stunned with the possibilities. He immediately signed the contract and went about ordering more inventory and setting up the delivery runs.
Everything went fine for about 30 days. Then it dawned on my client that he was having some cash flow problems, and couldn't figure out why. He brought me in, and it took all of about 12 minutes to realize that Wal-Mart paid on 90 day terms. His profits were great, his balance sheet was terrific with great receivables, but he was going to go out of business because he had no cash. He had too much business!!
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10 comments:
1. What is the most critical issue in establishing working capital policy?
There are several issues related to establishing working capital policy. However, I think the most essential issue is the what if theory and how to handle unexpected situations that causes a company to spend unexpected capital. For instance, insurance deductibles can fit into this situation because you know that you have to pay it if something happens but you cannot plan for an accident. Furthermore, I think that companies don't plan for inflow cash shortages. for example, if there was natural disaster and it caused consumers to using your products or services. It will affect a company's working capital.
Does size make a difference?
I would think that size does matter as it compare to the size of the loan or interest rate. For instance, if a company has a $100k loan with a 3% fixed interest rate for 6 years. The monthly payments would be smaller then a loan for $50k with the fixed interest rate of 15% for 3 years. Each item will have its own size to deternine how it would affect the situation. Furthermore, the size of the package makes a diference. If there are more items in the package then the projected profit is higher compared to a higher price and lower amount of items.
What is the most critical issue in implementing working capital policy?
The most critical issue with implementing the working capital policy is follow through with the process. In most cases, decisions has to be made on the spot and the people just don't follow the correct process. Some one may accept a return when the are not suppose too or they may lose or damage inventory and don't report it. If you look that Bestbuy, they discourage returns with a 15% fee for restocking, whereas Walmart will take anything back with or without a receipt. With the size of Walmart, they can afford to have that kind of return policy but with Bestbuy, they have to be more mindful dealing with mainly electronics.
1. How does inventory management effect the cash conversion cycle in your company?
Inventory plays an essential role in the cash conversion cycle of any company. My girlfriend's family business is a hauling company. When they buy top soil or stone, the amount determine how much they make or lose. When they order too much inventory for the season, they will lose money because their inventory sits too long. On the other hand, if they buy too little inventory then the will lose money by the lost of sales by not being able to fulfill the customers' needs. therefore, the management of inventory determines everything.
Who are the stakeholders in your company’s supply chain?
The Short answer is anyone who has a vested interested in the company. Now that vested interest is not always money. Well you have of course the owners or investors and since I work for US customs, that makes the Taxplayer the investor. Then you have the employees because as long as the company continue to make money or provide the service, the will have a job. Lastly, I would say the consumer and that would be the taxpayer again. Now with another kind of company, that plays an essential role. How many times have you been exposed to something that is the best thing since slice bread. Then out of the blue, it is gone in the wind. Now it could have been that the company understand forecasted their demand and now there is another opportunity for another company to take their consumer.
How is forecasting done in your company?
I work in the training department for customs and I feel that they use needs of the agency to determine what kind of training is needed. For instance, there was an increase in the fatal accidents with trucks turning over. Therefore, the office decided to create and implement a training program help reduce the amount of deaths related accidents in the field. Another example is that the computer users have not be trained on how to use security procedures while using their desktops. There are all kinds of passwords and important information that travels in and out of poeple's computers everyday and the personnel needs to understand how to protect the information.
1. What are some “best practices” in global supply chain?
When I think about global supply chain, two words comes to mind and they are functionality and technology. I was having a conversation with a close business friend, Jawar www.makemoneyselfpublishing.com. He was telling me how it is easier for small businesses to go global if they have the know-how and the understanding of technology. He went on to say how some you will be able to buy this on your cell phone. Now the important thing is to be able to fulfill the orders of global or internet sales. I would say the best practice is not out market your inventory ability.
Who are the stakeholders in your company’s supply chain?
The Short answer is anyone who has a vested interested in the company. Now that vested interest is not always money. Well you have of course the owners or investors and since I work for US customs, that makes the Taxplayer the investor. Then you have the employees because as long as the company continue to make money or provide the service, the will have a job. Lastly, I would say the consumer and that would be the taxpayer again. Now with another kind of company, that plays an essential role. How many times have you been exposed to something that is the best thing since slice bread. Then out of the blue, it is gone in the wind. Now it could have been that the company understand forecasted their demand and now there is another opportunity for another company to take their consumer.
What are the ethical issues supply chain stakeholders can have?
I think the ethical issue that company have is the point of selling items to people who cannot afford them. For instance, on BET they are pushing more and more bling items like they are the best thing since slice bread. I also seen a commercial to rent car rims. That mean that people will 3 or 4 times the amount of the value and then still will not own the property. I feel that these companies are praying on the weak and is not look out for their customers.
How could you improve the supply chain of your organization?
I that the company or the government agency that I work for can be improve their supply chain by cutting out some the layers in management and the delay in decision making. For instance, we issue blackberries to any user that a Director feels needs the equipment or device. However, the Deputy Asst. Commissioner wanted to change the policy for budgeting reasoning but she never confirmed the policy. Therefore, there are many issues because the issue is not in writing but we know that is what she wants.
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