Fitness tests for your supply chain
Industry benchmarking
Kurt Eder
©2014
Just like us humans go for a medical check
from time to time we should put our finger
on the pulse of our supply chain (s) and
take it through a fitness test.
A simple definition – it is the time it takes a
company to turn its resources into cash.
A good way to evaluate the performance is
Industry Benchmarking. To define the
meaning of it in a bit more detail I quote
from Wikipedia
In order to work out the C2C cycle we need
to have the following information
“Industry Benchmarking is the process of
comparing one's business processes and
performance metrics to industry bests or
best practices from other companies”.
The measurement units as I call them will
be expressed in ratios which will assist us
in
the
comparison
against
other
companies. The ratios will tell us if our
performance is up there with the best in
class companies or if we are lacking
behind below the average line and urgent
action is required.
Ratios are
categories




divided
into
four
basic
Profitability Ratios
Operating Ratios
Valuation Ratios
Financial Ratios
As this space will not allow for the
coverage of them all we shall pick out the
operating ratios.
The main items we measure in the
category of operating ratios are






Asset turnover
Inventory turnover
DIO (Days Inventory Outstanding)
DSO (Days Sales Outstanding)
DPO (Days Purchases Outstanding)
Cash to Cash Cycle
For the purpose of this exercise I have
picked the Cash to Cash Cycle which we
are going to examine more closely.
How does it work?
DIO - the average number of days a
company holds inventory before it’s sold.
Days inventory outstanding = (average
inventory / cost of goods sold) * 365 days
DSO - the average number of days it takes
a company to collect its money´s for goods
sold
Days sales outstanding = (Current
Receivables/Total Credit Sales) *365 days
DPO - the average number of days it takes
a company to pay its suppliers.
Days purchases outstanding = (Accounts
Payable/ (Cost of Sales/365)
The formula to work out the cash to cash
cycle reads as follows –
C2C = DIO + DSO – DPO
Example 1
DIO = 45 DSO = 40 DPO 55
45+40-55 = +30
In this example your company has a
positive C2C of 30 days. This is however
a negative result as the company pays its
suppliers an average 30 days before they
get paid for the goods sold. There will be a
strong need for action.
Example 2
DIO = 12 DSO = 25 DPO = 60
12+25-60 = - 23
In this example the company has a
negative C2C which is a positive result as
the company collects payments for goods
sold as an average 23 days before they
pay their suppliers.
What we have just worked out was one
operating ratio of an organization. The
same exercise can of course be applied to
all the type of ratio´s listed above.
The result of this exercise will clearly show
you how well your company is managed
and where some areas are that need some
urgent attention.
This type of data can be accessed freely
for every public company. This is a great
tool to compare yourself with some of your
competitors and evaluate how well you
perform against the best in class
candidates.
In well managed companies this
information should be available at all times.
Author: Kurt Eder is an international
consultant, owner of “Eder Consulting”
specialized on Supply Chain Design,
Analysis and Optimization and lecturer for
Supply Chain Management and Logistics.