Supply Chain as a Source of Capital
Bob Hess noted that with capital markets still tough, many companies are turning to the supply chain to deliver free cash flow that is needed to fund growth opportunities – or, in some cases, to survive.
Cost reduction is part of that, he said, but much importance is on reducing inventories as a percent of sales, which directly improves free cash flow, and getting better return on assets deployed in the supply chain.
He gave an example of just how tight the capital markets can be, noting one large retailer that had the opportunity recently to save an expected $50 million supply chain network redesign project, included shifting from a number of smaller distribution centers into larger ones. The project had a great ROI and the capital was available – but the company delayed the project just because of the potential for Wall Street to view the project as too risky operationally and financially.
“Achieving return on assets is more critical then ever,” he said. “You must achieve what you set out to do, or Wall Street will crush you.”
He said companies are pursuing some number of the following strategies, which link financials with the supply chain:
- Consolidating and monetizing assets;
- Rationalizing SKU and service portfolios;
- Focus on innovation and new product development process excellence;
- Breaking down cross functional silos within the company;
- Improving “demand management” through additional analytic tools; and,
- Better understanding the cost of quality.
“You better know that cold,” he said.
But, he added, the financial crisis has made many companies and their supply chains stronger.
“Flexibility is in," he said. “Companies will want to ensure they can survive a stress test like this again.”
Bill Hunter of Jeffries noted that right now there seem to be two types of CEOs.
“The one type is saying, I am just hunkering down and not doing anything,” he said. “I have some cash and I'm just sitting on it to be safe.”
Others, however, are starting to think offense.
“These will be a lot more strategic, and are looking to grab market share through innovation, execution, and acquisitions.”
Hunter follows the transport sector, and added that he expects significant changes in the rail industry, especially more “coordinated strategies” between competitors, including track sharing and similar arrangements.
As a final thought, Hess said the more forward-thinking CEOs are anticipating recovery – and whether their supply chains will be ready when it does.
“They are asking: Do I have the right people and the right talent in place to gain on the competition when the market comes back?” he said.
What’s your reaction to the thoughts from these Wall Street pros? What changes have you seen with regard to Wall Street and the supply chain? Let us know your thoughts at the Feedback button below.
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