Fortenberry Cash to Cash White Paper -3

The Fortenberry
Cash to Cash Series:
The Missing Equation: A formula that
determines your company’s financial health
whitepaper
cash
to
cash
c=cash
i=inventory
r=receivables
p=payables
d=days
payables (days)
receivables
(days)
inventory
(days) Minus
Days of Inventory + Days
-Days of Payables=Cash-
cash to cash=i(d)+r(d)-p(d)
Fig. Working Capital = (Cash to Cash)

Executive Summary 2
Purpose of the White Paper 2
Introduction 3
The Fortenberry Cash to Cash Method 8
Element 1: Cash to Cash and Running the Business 9
Managing the Culture and People 10
Financial Controls 13
Sales, Inventory & Operations Planning (SIOP): A Continual Process 18
Portfolio and Product Review 21
Business Continuity 31
Element 2: Cash to Cash, Cycle Time
and Optimizing the Supply Chain 34
Supply Chain Design: An Approach for Improving Cycle Time 36
Element 3: Building a Productivity Machine 47
A Climate for Continuous Improvement 48
Conclusion 49
Contents
whitepaper
1The Jay Fortenberry Cash to Cash Method

Executive Summary
The old adage that “cash is king” is truer than ever. But handling cash effectively, with foresight, insight and top-down
management awareness of the stakes involved can mean the difference between merely surviving and long-term, profitable
viability. Unfortunately, many companies don’t know how to leverage and optimize their cash, working capital, free cash
flow and the cash to cash cycle—and how those financial management tools are interconnected.
This paper maintains that a company’s health is determined by reviewing and refining its working capital and cash to
cash positions. Here are some of this paper’s major conclusions that underscore the importance of cash flow in your
business, optimizing your supply chain and building a company-wide productivity machine:
Purpose of the White Paper
Every company has to deal with issues involving cash, cash flow, working capital and debt. How efficiently these
issues are handled can determine their long-term success or failure. This is why the “cash to cash” cycle is important.
The cash to cash cycle is a process to calculate how long cash is tied up in a company’s cash producing and cash
consuming areas, including receivables, payables and inventory. It can determine the financial health of a company.
Yet few companies are aware it exists. Or, if they are, only one in three of them understand its importance.
This paper explores the three elements of the cash to cash cycle and shares how companies can leverage it as an effective
way to improve their bottom lines and create efficiencies in their business.
The fact that only one in three companies consider their cash to cash cycle important is a costly mistake—on the
order of tens of billions of dollars—that can be fixed. That is the purpose of this white paper and why almost any
business executive with concerns about cash and working capital can profit by implementing the Fortenberry Cash
to Cash Method.
• The cash to cash cycle is the period of time between
when a company spends a dollar on purchases from a
supplier until it is turned into a dollar of revenue from
the customer. Thus, the shorter the timeframe the better.
• Aggressively managing the speed and agility of the
cash to cash cycle by managing end-to-end cycle
time is a key driver for cash performance.
• It all begins at the top. A company may
have the processes and tools to manage through a
cash or operational crisis, but if the leadership team
is not actively engaged and/or is second-guessing the
frontline managers’ abilities to execute the plan, then
all could be lost very rapidly.
• Contrary to a popular myth, inventory is located
throughout the entire business, not just in a
manufacturing or a distribution center. By managing
cycle time, a business brings together all of its processes
from customer service to delivery in order to direct how
its cash is used.
• Optimizing supply chain design is about positioning
resources in ways that enhance profitability and working
capital while producing shareholder value.
• The simple but vital message to convey is that your cash
is a major asset. It must be used effectively to make all
aspects of your business—from finance to manufacturing,
from inventory to the supply chain—run smoothly,
reliably and profitably.

Introduction
“Cash...is to a business as oxygen is to an individual,” says Warren Buffett.
“Never thought about when it is present, the only thing in mind when it is absent.” 1
According to the New York Times, of the Top 10 Reasons Small Businesses Fail
2
, six of those reasons revolve around
money and money management, including poor accounting and the lack of a cash cushion. Whether it is out of control
growth, operational inefficiencies or declining markets, the old adage that “cash is king” remains as true as ever because it
allows companies to grow, become, and remain profitable.
This isn’t new. Every company must deal with issues surrounding cash, cash flow, working capital and debt. There is a
process called cash to cash that directly impacts cash flow, working capital and how companies access and handle debt.
Few companies are aware it exists, and among those that are, one of three don’t understand its importance.
3
The bottom line: the cash to cash process illustrates the financial health of a company.
Companies such as Honeywell and Toyota do have internal processes for cash to cash and working capital management,
but based on my years of experience, many large as well as small companies don’t know what cash to cash is. And if they
do know something about it, many top level executives “don’t really understand how to go after it,”
4
says Dave Cote,
Honeywell CEO.
Cote’s point was underscored by J. Paul Dittmann, Ph.D., The University of Tennessee’s Executive Director Global
Supply Chain Institute: “When the CFO at Whirlpool asked us if we could somehow use our supply chain to cut
working capital in a major way, I was clueless. In fact, I’m embarrassed to say I couldn’t even define working capital. I
was stunned when I discovered the huge impact working capital has on the firm’s overall financial health, cash flow, and
ultimately shareholder value. And I was surprised and gratified when three years later we had taken $600 million out of
working capital using supply chain projects.”
5
Because there is a lack of knowledge about cash to cash or how to “go after it,” companies often take on debt rather than
cleaning house by clearing up bad processes. Instead of having what could be an intense, even emotional, conversation
with their suppliers, they have a matter-of-fact conversation with their banker about borrowing money.
It is easier to borrow than it is to clean up cash management practices. But debt comes with its own set of
potentially harmful complications. As Warren Buffett says, “I do not like debt and do not like to invest in
companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates
can drastically affect company profits and make future cash flows less predictable.”
6
Even with current financial conditions where money is cheap, one might surmise that after the tumultuous financial
upheaval of 2009, business leaders would hoard as much cash as possible as a defense mechanism and hedge against
another downturn in the highly volatile global economy.
While some companies do maintain large “rainy day” cash reserves, the Hackett Group’s 2015 Working Capital Survey
7
found that seven years after the Great Recession, debt continued to grow at the alarming rate of more than 113%.
“It was the global financial crisis of 2000-2009 which brought a renewed focus to risk mitigation and liquidity in supply
chains,” observed Lisa Ellram in a report (with Ryan Fernandes) on “Unlocking the Potential of Supply Chain Working
Capital Finance.”
8
The report continued: “Cash was in short supply, and those who had cash were heavily favored by
analysts. Cash was difficult to access through conventional credit channels as banks tightened their belts, lending criteria
and in some cases withdrew from certain countries or segments.”

I believe that companies trying to access credit, or that already have sizable debt, are largely indifferent or often ignore
best-practice cash management practices. In addition, they don’t implement a cash to cash process. These companies can
get into serious trouble when they overextend themselves with debt, rather than focus on cash management.
Also, I have observed that companies don’t manage cash very well during difficult economic times or emergencies.
Don’t wait for a crisis to occur before you start to take the cash to cash cycle or debt seriously.
So, what exactly is the cash to cash cycle? The cash to cash cycle is usually defined as the period of time between when a
company spends a dollar on purchases from a supplier until it is turned into a dollar of revenue from the customer. Thus,
the shorter the timeframe the better. Furthermore, a dollar of profit does not necessarily generate a dollar of cash in the
bank as there are obligations to pay employees, suppliers, etc.
THE FORTENBERRY METHOD
© 2016 Jay Fortenberry
RECEIVABLESINVENTORY
(DAYS) (DAYS)
Minus
c = cash
i = inventory
r = receivables
p = payables
d = days
PAYABLES
(DAYS)
cash to cash = i(d) + r(d) - p(d) Days of Inventory + Days of Receivables
- Days of Payables = Cash to Cash Cycle
CASH
TO
CASH
By reducing its cash to cash cycle a company firms up its balance sheet, improves cash flow and cuts working
capital requirements.
Cash to cash cycle time reductions (the smaller the cycle time reduction the better) are vital in a globalized world with
complex supply chains. Ted Farris, Paul D. Hutchison and Ronald W. Hasty of the University of North Texas note that
“Increased global competition has made firms take a hard look at their efficiencies in manufacturing, distribution, and
marketing as well as financial management.”
9
Companies that are best at supply chain management have a 40-60% advantage in their cash to cash processes, according
to Seock-Jin Hong’s white paper, “Is Cash to Cash Cycle Appropriate to Measure Supply Chain Performance?”
10
Hong
says an even more impressive statistic is that those top organizations “carry 50-85% less inventory than competitors.”
And as Jacob J. Bierley, Jr., succinctly notes in his “Cash to Cash Cycle” white paper, “Your business’s cash is out of reach
when it is uncollected from customers and when it is soaked up by inventory that sits on the shop floor, in office storage
areas, or on computer disks.
11

CASH TO CASH CYCLE AVERAGES
Athletic Apparel
Automotive
Chemical
Consumer Products
Food & Beverage
Hard-Disk Drives
High-Tech & Electronics
Medical Devices
Retail
Pharmaceutical
Semiconductors
119
100
82
44
32
19
25
275
23
161
93
110
89
78
21
37
19
14
269
18
168
98
94
87
77
18
40
15
5
309
13
182
92
INDUSTRY SECTOR 2000-2003 2004-2007 2008-2011
Source: Supply Chain Insights LLC. Corportate Annual Reports 2000-2011
It seems rather incredible, but why do only one in three companies view the cash to cash cycle as important? Also
disturbing is that according to JP Morgan, each year Fortune 500 companies incur more than $81 billion of unnecessary
supply chain and working capital costs due to cash flow inefficiencies and lack of visibility.
12
Former Supply Chain Insights Research Associate Abby Mayer asserts that the health of the supply chain can be “quickly
assessed” through the analysis of the cash to cash process.
Her paper, “Supply Chain Metrics That Matter,”
13
says that while supply chain leaders have focused on the reduction of
cash cycles, “little progress has been made. “For most, despite a decade of investments in channel connectivity and supply
chain optimization, there is limited progress on receivables and inventory.”
As seen in the figure below, she says that over the last 15 years, “the only industry that has shown dramatic and
continuous improvement in reducing cash to cash cycles is high-tech and electronics.”
The figure shows that major industries have had cash to cash cycle reductions that are quite dramatic. For example, during
the period 2000-2011 cash to cash cycle time averages in the High Tech and Electronics industry decreased to five days from
25 days. But even a small reduction in the cycle averages can be highly valuable when it comes to the cash flows needed to
operate complex operations.
The figure illustrates the value of using cash to cash in major industries.
Mayer’s analysis supports the need for supply chain teams to align in order to improve cash to cash cycles: “While
companies have claimed to reduce cash to cash cycles, few have been successful. Industry results are often overstated and
inflated, especially self-reported metrics. There is a wide belief, largely unfounded, that supply chain projects over the
past decade have had a dramatic impact on reducing cash-to-cash cycles and inventory levels. What we see in the data
is that progress has been slow for industries, but that the most marked progress is by a few leaders operating in several
different industries.
“Those that have succeeded focused on year-over-year progress and consistent improvement. They managed the supply
chain holistically and balanced the varying demands of the C2C cycle. They used technologies and valued planning
processes. For leaders, the proof that supply chain matters is in the (cash to cash) numbers.”
14
Whether it was Messrs. Toyoda and Ohno at Toyota teaching us Just-In-Time (JIT), Bob Lane at John Deere talking
about the obligations to shareholders for Estimate to Cash, or Honeywell’s Dave Cote’s boundless enthusiasm for
reducing overall cycle time—all of these leaders have had a firm appreciation for how the supply chain worked and
a vision for how it should evolve.

Management’s principal focus for a business should be on growing profits and cash flow as these are primary elements
in creating shareholder value. A business can be profitable with a strong return on investments, but may not consistently
generate cash. Cash—not earnings—reduces debt, and a business without sufficient cash ultimately is bankrupt.
I was deeply involved in reducing the cash to cash cycle, cycle time, JIT, working capital optimization for Toyota
and Honeywell.
The two graphs below look at those two companies, which aggressively managed their ten-year free cash flow performance
as result of reducing their cash to cash cycle. In both cases we see how working this process yields benefits both to the
shareholders as well as to the business. The cash generated could be used for:
• Increasing growth opportunities
• Expansions into adjacent and other industries
• Mergers & Acquisitions (M&A)
• Research and Development (R&D)
• Retiring debt
• Shareholder dividends
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FCF/Sales Stock Price Linear (FCF/Sales)
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TOYOTA STOCKS
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60
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100
120
140
160
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0
0
00
0
0
00
00
0%
20%
40%
60%
80%
100%
120%
140%
160%
STOCK RETURNS
(5 YR. TRAILING AVG. STOCK PRICE)
HON Toyota S&P DOW
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Also, if we look at how these two companies fared against the broader market we find that they consistently
outperformed their peers and the other industrials.

As shown, the failure of a business to recognize the importance of managing free cash flow can literally kill it.
The pages that follow introduce the Fortenberry Cash to Cash Method.
Terms
Following are some of the cash and cash management terms referred to in this paper.
Cash to Cash Cycle (cash conversion cycle): The cash to cash cycle is usually defined as the period of time between
when a company spends a dollar on purchases from a supplier until it is turned into a dollar of revenue from the
customer.
Cycle Time: Cycle time is the end-to-end total time from when a customer creates demand until the product is
delivered and cash collected. It comprises all information and material flows, such as order processing time, inventory,
manufacturing, and logistics/distribution, as well as any processing and queuing time.
JIT: From Investopedia—Just-in-time (JIT) is an inventory strategy companies employ to increase efficiency and
decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs.
This method requires producers to forecast demand accurately.
People, Process, Tools: A methodology defined as the three elements needed for successful organizational
transformation. It is the foundation of the Fortenberry Cash to Cash Method: People (or the culture), the Processes
(simple, repeatable methods of meeting the desired output) and Tools (software) are utilized.
Working Capital: From Investopedia—Working capital is a measure of both a company’s efficiency and its short-term
financial health. Working capital is calculated as: Working Capital = Current Assets - Current Liabilities.
Free Cash Flow: Free cash flow (FCF) is a measure of how much cash a business generates after accounting for capital
expenditures such as buildings or equipment. This cash can be used for expansion, dividends, reducing debt, or other
purposes. The formula for free cash flow is: FCF = Operating Cash Flow - Capital Expenditures.

The Fortenberry Cash to Cash Method
All companies should know what their cash to cash cycle is and focus on reducing it as a key element of their financial
health. This white paper shares my decades of experience working with companies of all sizes to implement and reduce
the cash to cash cycle. That experience is embodied in The Fortenberry Cash to Cash Method.
Actively managing the cash to cash cycle involves multiple functions and processes of a company. The figure
below shows that cash to cash is at the center of six vital areas of business, including Leadership, Business strategy,
Operational Excellence, etc.
It’s often assumed that having world-class software and processes will solve almost any problem, making companies
more efficient and therefore resulting in improved cash flow, but that is often an expensive non-solution.
I worked with a billion-dollar company’s consumer product division that had world-class processes and forecasting
software. But the culture actually “conspired” to undercut positive results.
CASH TO
CASH
Operational
Excellence
Functional
Alignment
Business
Strategy
Market
Strategy
Leadership
Continuous
Improvement

Based on many experiences like that one, the foundation of my method is grounded in the People, Process and Tools
methodology: People (or the culture), the Processes (simple, repeatable methods of meeting the desired output) and
Tools (software) are utilized.
When it comes to the cash to cash cycle, everyone needs to be involved, from the owner (or CEO) to the CFO to the
supply chain leader to the purchasing and logistics professional.
The Fortenberry Cash to Cash Method targets the various functions in a business in order to create and effectively
manage cash. For example, the increased length and complexity of supply chains has a significant, negative impact
on working capital—cash is tied up with in-transit inventories that are difficult to reduce due to the complex, global
nature of today’s supply chains.
The Fortenberry Cash to Cash Method has three main elements:
1. Running the Business
2. Optimizing the Supply Chain
3. Building a Productivity Machine
These elements, discussed in more detail below, comprise the core organizational processes that instill and ensure a deep
understanding of how a company operates, especially with respect to its working capital and cash to cash cycle times.
First however, answer the questions in the Basic Self-Assessment (see below) to gain a greater understanding of where
you stand regarding your company’s working capital and the cash to cash cycle.
Basic Self-Assessment
View your company’s operations and perform a basic self-assessment. The key individuals who should participate in this
assessment include the Business Leader, CFO, COO, Sales, Planning, Sourcing, Logistics and Manufacturing Leaders.
The fundamental questions to start the process rolling are:
• Is there a strategy for reducing inventory with end to end cycle time in the business?
• Are the metrics defined?
• Has there been a baseline analysis to determine key improvement priorities?
• Are there targets, with time periods, established?
• Is it clear who has the ownership for meeting the targets?
• Are plans in place that are focused on key improvement priorities to achieve objectives?
• Is there a process to regularly review the progress towards objectives?
Scoring
1 = Does not exist 3 = Partially exists 5 = Complete and effective across the business
SALES ORDER MGT SOURCING MANUFACTURING QUALITY LOGISTICS
FINANCE

Element 1: Cash to Cash and Running the Business
Why do so few business leaders take the time to understand how their businesses operate? They spend their energy
beating up sales teams, suppliers or manufacturing for a lack of delivery. Then they turn around and demand longer
payment terms from these same suppliers or shorter reimbursement times from customers without grasping what really
occurs from the time an order is placed until it is delivered at the customer’s dock.
Quite often these issues are not with the manufacturing or suppliers, but rather the business itself and the way the
information is processed from the flows that have developed over time. Understanding how the business operates costs
little, but yields huge benefits.
Standardizing the management of human resources, finance, planning and technologies stabilizes a business and gives a
great opportunity for improvement.
In addition, building in a business continuity plan to deal with unexpected events and/or adversity ensures a company
can survive these type of events, while protecting its cash flow.
Understanding how these areas function is where real pain is identified as well as where the investment of cash is
required to be infused by the business. By grasping these issues, a business can discover whether these are self-inflicted
wounds, a supplier or manufacturing delivery problem, or a demanding customer driving unprofitable behaviors.
The health of a business can be determined by understanding its cash to cash cycle. As noted, the cash to cash cycle
is the time between when a company spends a dollar on purchases from a supplier until it is turned into a dollar of
revenue from the customer, as illustrated in the figure.
Minimizing the effect of these three components takes effort from all functions within a business to manage the
process from the time the product portfolio is planned until a product is delivered.
COMPONENT HOW TO CALCULATE IT
INVENTORY
RECEIVABLES
UNPAID BILLS
Days Cash is
Locked-Up as Inventory
Average Dollar Value Inventory
During the Reporting Period
Cost of Goods Sold/Number of Days
Days Cash is Locked-Up
in Receivables
Average Dollar Value of Accounts
Receivable During the Reporting Period
Receivable During the Reporting Period
Days Cash is Free Because the
Business Has Not Paid Its Bills
Payable During the Reporting Period
Cost of Goods Sold/Number of
Days in the Reporting Period
CASH TO CASH AND RUNNING THE BUSINESS

MANAGING THE CULTURE AND PEOPLE
Business Strategy Deployment
Over the course of my career I’ve seen many examples of how corporate culture can stand in the way of new initiatives
and strategy deployment. It’s all about getting the culture to move in a unified direction and “drive around perfection.”
Actually, getting a corporate culture to adopt a new program or process takes more effort than simply designing and
executing it. In a global organization, areas like languages, native customs, skills, etc. can have a profound impact on
the success or failure of a program. A company can have world-class processes and tools, but can fail at sustaining
improvements if it does not take the time to fully bring its people along.
In addition, often the company bureaucracy works hard to avoid change. People become comfortable with the way
they are performing their job, scared that the change will have a negative impact on their lives, or they have developed
a power base around the process to be changed. This can actually prevent improvements designed to enhance cash
and the bottom line from taking place. Managing human resources is therefore a vital part of improving any process.
Areas such as Leadership, Organization Effectiveness and Continuous Improvement are all areas of emphasis in order
to achieve and sustain a business strategy deployment.
Business strategy deployment is an integrated approach to drive organizational development by focusing on company
objectives and goals. It concentrates on employee engagement and continuous improvement to assure a process is
sustainable, including these factors:
• Prioritizing: Critical business objectives are developed, prioritized and flowed from the
business leadership to the point of execution.
• Alignment: All functional areas are clearly aligned with the goals of the business.
• Precision: Assures a disciplined management process that integrates the business objectives and that
annual goals are developed, communicated and measured through all levels of the organization.
• Accountability: Ensures that the responsible functions drive accountability for achieving the objectives
and annual goals. In addition, the focus is to integrate all functions so that they move in one direction.
The intent of clearly rolling out the strategy through the entire organization is to:
• Communicate expectations
• Remove all ambiguity
• Insure a complete understanding by the culture
• Hold the responsible parties accountable for their actions
Business strategy deployment is a tool to help focus the organization to meet the desired business results.
The Human Factor
A company is not just a ‘for profit’ enterprise: it also bears a social responsibility to its customers, employees and the
community to make quality products at reasonable prices. All of the facilities, equipment and capital don’t build a
single product, employees are actually the ones that perform the work.
All companies have a set of core values. It is critical that employees grasp these values and actively work to put them
into practice. These values must be used repetitively in order to become sustained and integrated as part of the culture.
There are five programs that can be implemented with little investment to assist in developing a company’s culture.
They illustrate directly to employees leadership’s commitment to doing the right thing.

1. Safety First
A business’s relationship with its employees starts with safety. A company-wide safety policy is the first and primary
method used to communicate a business’s commitment to its employees. It should set expectations regarding the
management of health, safety and environmental policies and captures all issues and risks. This safety policy is used
to communicate to a global workforce with the objective of conveying the business leadership’s commitment to
employees and contractors. It establishes the framework and guidance for performance standards, strategic planning
and setting of objectives and targets.
2. Mutual Trust
The building of mutual trust between a company and its employees is essential to any improvement process. Trust is
earned through building a cooperative environment where the employees feel their contributions are valued. Equally,
the company gains trust with its workforce when it recognizes that rules and policies are respected as well as employee
contributions to productivity. In this environment, everyone works in the same direction for the prosperity of the business.
3. Employee Empowerment
For people accustomed to regimented work environments, employee empowerment can be quite intimidating.
However, responsibility and authority to improve your work are motivational. Experience has proven that the more
authority employees have to manage their jobs, the more they are inclined to pursue improvements. Employees that
can translate their ideas into viable business improvements take pride in their work and the company.
4. Building a Culture of Continuous Improvement
Kaizen (or continuous improvement) is baby steps that add up to great big steps. Each day should be about continuous
learning and improving. The business leadership needs to set the expectation that all employees think about process
improvement as part of their daily work routine. A continuous improvement organization should:
• Integrate lean principles
• Anticipate the future
• Reduce cost
• Eliminate waste
• Create a learning experience for all
Ultimately, Kaizen is about job ownership. It entails giving an employee full responsibility and accountability for their
job. By taking charge of turning out products that are desired by customers, employees receive the authority to modify
and shape their work in ways that improve quality and enhance productivity.
5. Leadership
Leadership is the ability of an individual or organization to guide other individuals, teams, or entire organizations to a
desired outcome. It involves:
• The capacity to establish, communicate and execute a clear vision for others to follow
• Providing information, processes and resources to make timely decisions
• Guiding the process by balancing conflicting priorities
• Insuring teams are accountable for the performance of the organization

FINANCIAL CONTROLS
Finance departments understand the cash priorities, protect the company from unethical and illegal behavior, insure
accounts are properly used by uniformly applying general ledger coding of invoices and protect transparency of the
entire process for accurately reporting Sarbanes Oxley.
Some believe that Wall Street focuses only on earnings while ignoring the real cash that a firm generates. Earnings
can often be adjusted by various accounting practices, but it’s much tougher to mask cash flow. For this reason, some
investors believe that free cash flow (FCF) gives a much clearer view of a company’s ability to generate cash and profits.
Free Cash Flow (FCF)
It is important to note that negative free cash flow is not bad in and of itself. If free cash flow is negative, it could be a
sign that a company is making large investments in improvement. If these investments earn a high return, the strategy
has the potential to pay off in the long run. FCF is also a better indicator than the P/E (price to earnings) ratio.
Additionally, while revenue, earnings growth and the quality of earnings are all important, cash is still king. The
management of FCF has a direct impact on shareholder value-added, therefore, improved cash to cash processes create
shareholder value.
Sales Growth
Cash Flow
from Operations
SHAREHOLDER
VALUE ADDED
Debt
Tax Rate Cost of Capital
Capital Structure
Dividend Policy
Operating Profit
Working Capital
Fixed Capital
M&A
SHAREHOLDER VALUE ADDED
A leader drives changes in the way people think, work and act. Leaders create and set the expectations that shape the
culture. They step up in times of crisis and can think or act creatively in tough situations.
“Servant Leadership” is an ancient philosophy and set of principles that are still practiced today. Traditional
management revolves around the accumulation of power at the top. Conversely, a Servant Leader shares power, puts
the needs of the organization first and assists in developing team skill sets in order to perform at the highest possible
capability. They make people better by building a safe workplace, nurturing the team’s growth and taking responsibility
for their actions. They are fully engaged in the activities they are responsible for and encourage experimentation,
celebrating success and empowering employees by giving up control.

Management’s principal focus for a business should be on growing profits and cash flow as these are primary elements
in creating shareholder value. A business can be profitable with a strong return on investments, but may not consistently
generate cash. Cash, not earnings reduces debt and a business without sufficient cash ultimately is bankrupt.
FCF is a measure of how much cash a business generates after accounting for capital expenditures. Shareholder value
grows when a business generates free cash flow in excess of its investments. Therefore generating free cash flow is
directly correlated to creating shareholder value, which is a fundamental for stock pricing and has a direct impact on
the worth of a company.
As also seen in the introduction, the following charts below illustrate how two companies’—Toyota and Honeywell—
aggressively managed free cash flow over ten years. In both cases we see how working this process yields both benefits
to the shareholders as well as the business.
The cash generated could be used for:
• Increasing growth opportunities
• Expansions into adjacent and other industries
• Mergers & Acquisitions (M&A)
• Research and Development (R&D)
• Retiring debt
• Shareholder dividends
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$70.00
$80.00
$90.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Also, if we look at how these two companies fared against the broader market, we find that they consistently
outperformed their peers and the other industrials.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
TOYOTA STOCKS
$0.00
$20.00
$40.00
$60.00
$80.00
$100.00
$120.00
0
20
40
60
80
100
120
140
160
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
0
0
0
0
00
00
0%
20%
40%
60%
80%
100%
120%
140%
160%
STOCK RETURNS
(5 YR. TRAILING AVG. STOCK PRICE)
HON Toyota S&P DOW
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

The failure of a business to recognize the importance of managing free cash flow can literally kill it. When a
liquidity crisis hits, options for raising additional financial resources include:
• Use excess cash
• Expand bank credit with associated increased debt costs
• Cut production, marketing, and/or product development activities
• Reduce dividends for shareholders
• Sell assets
Each of these activities may have a different timeline to generate funds and may negatively impact future growth. The
best way to ensure business stability and value creation is to consistently grow cash flow generated from the operations
of the business. Therefore, a successful business must make free cash flow a top priority.
During the financial crisis of 2008-2009 many companies developed collaborative relationships between Finance and
the Supply Chain. This relationship was further extended with increasing globalization by insuring the business had
improved cash management, flexible trade terms and the ability to secure funds from trusted resources around the
world. This collaboration broke the traditional performance barriers by reducing errors and streamlining processes,
increasing compliance and improving the ability to track cost by activity.
During the financial crisis, cash management was imperative for the survival of many companies. Therefore
aggressively managing the speed and agility of the cash to cash cycle by managing end-to-end cycle time became
viewed as a key driver for cash performance.
Finance’s role in the cash to cash cycle process is to create a cadence for reporting progress. This is established at the
outset with the objective of reporting on each part of the supply chain by bringing all interested parties to the table. In
addition, Finance leads the way by ending gamesmanship between functions as well as by clearly laying out the entire
supply chain performance.
MATERIAL, INFORMATION AND FINANCIAL FLOW
ORDER ENTRY:
SALES, PURCHASE
SUPPLIER
LEAD TIME
MANUFACTURING
LEAD TIME
DISTRIBUTION
LEAD TIME
Sales Entry
to Planning
PO Creation
Supplier Delivery
Receiving
Inspection
Factory Queue
Schedule
Production
Plant to Distribution
Center/Customer
Distribution Center
to Customer
mer
FINANCE

Tools to Help
Identifying expenses and how they are applied is the beginning point of understanding the various components for
how cash is spent in a business. We will review three components: Managing the General Ledger, Establishing Total
Acquisition Costs and identifying Inventory Carrying Cost.
Managing the General Ledger
A fundamental for understanding how cash is spent in a business is by managing how costs are applied to the general
ledger. The objectives are:
• To standardize the method in which expenses are identified and applied
• Establish business rules around expenses
• Achieve visibility and the ability to manage all expenses
Completing this process provides the ability to consistently identify how cash flows throughout the business.
Additionally, it assists with lowering costs by standardizing processes to insure strong financial controls and process
audits are established for all expenses.
Total Acquisition Cost
After completing the General Ledger clean up, Total Acquisition Cost can begin to be established:
Total Acquisition Cost (TAC) is a tool used to evaluate the total cost that a company recognizes on its General Ledger
for the purchase of an asset that is ultimately delivered to a customer. The objective is to identify and eliminate all non-
value added activities in the supply chain.
Inventory Carrying Cost
The cost of carrying inventory is what a business incurs over a period of time to hold and store its inventory. There are
four main components to inventory carrying cost: capital cost, storage space cost, inventory service cost, and inventory
risk cost. It is described as a percentage of the inventory value which includes taxes, employee costs, depreciation, and
the cost of insurance.
TOTAL ACQUISITION COST
TAC = ORDERING COST + MATERIAL COST + PACKAGING COST+
INBOUND FREIGHT + WAREHOUSING + MATERIAL HANDLING +
CUSTOMS & DUTIES + OBSOLESCENCE/DAMAGE/SHRINKAGE
+ INSURANCE

Most companies do not compute inventory carrying cost. The value is usually estimated to range between 15-40%,
but my experience puts it at 25%. Averages
15
for the components are estimated to be:
Inventory reductions are typically not driven by the idea of optimizing a company’s inventory. Rather, it’s a reaction to
a cash shortfall. Understanding inventory carrying costs does not necessarily lead to inventory reductions. However,
understanding the cost drivers of storing and handling materials is essential to mapping out areas of greatest cash and
cycle time reduction.
THE “INVENTORY CONSPIRACY”
In January, 2012, I participated with the chairman of my company in a conversation on the improper use of working
capital with regards to inventory. Through this dialogue, he coined the term, “The Inventory Conspiracy.” As operating
managers we were challenged to change the approach we took to managing inventory. The chart above describes
the problem.
As a result of this interaction we agreed to:
• Drive the process from a business strategy deployment with ownership by the general manager.
• Identify all critical value streams (key products or product families) and perform a baseline analysis of end-to-end
cycle time for each of these critical streams.
• Integrate cycle time results into Sales, Inventory & Operations Planning (SIOP), with gains linked to inventory,
delivery and quality improvements.
In order to complete this agreement, establishing standardized financial practices was critical to our success. Without
building this foundation, it was an impossible quest. However, by using this as a starting point the goals were then
within reach.
FAILURE MODEPROBLEM
THE INVENTORY CONSPIRACY
• Sales Says “Customer Service
Requires More Inventory”
• Manufacturing Says “Lower Costs
Requires More Production”
• Finance Says “Need to Deliver Earnings”
(Earnings Tend To Trump Inventory Focus)
CONCLUSION – No One Really
Committed to Lower Inventory Balances
BUSINESS CONSPIRES
TO BUILD INVENTORY
• Traditional Approaches Translate To Lower
Customer Service As Inventory Goes Down
• Manufacturing Guys Don’t “Own” The Problem
Because Most Inventory Is In Finished Goods
• Multifunctional Problems Need
Multifunctional Solutions
CONCLUSION – Inventory Reduction Must
Be Tied to Enhancing Customer Service
MOST EFFORTS FAILED
BECAUSE:
Cost of Money 4%
Taxes 3%
Insurance 2%
Warehouse 3%
Materials Handling 3%
Inventory Control 3%
Obsolescence 4%
Damage & Shrinkage 3%
Total 25%

SALES, INVENTORY & OPERATIONS PLANNING (SIOP):
A CONTINUAL PROCESS
The ideal business model maintains no unnecessary inventory, responds to changes in the marketplace, and supplies
the required products in a timely manner. This is especially pertinent when implementing a cash to cash program.
However, in most businesses:
• Manufacturing complains that sales overstates demand forecasts, doesn’t sell the product and then the supply chain
gets blamed for too much inventory, or
• The sales team then complains that manufacturing can’t deliver on its production commitments and therefore hurts
sales, which creates:
• Unplanned demand “spikes” used to meet financial targets, coupled with a constant struggle for new product
launches that strains the sales and operations teams.
SIOP, or Sales Inventory & Operations Planning, is the single process that brings a business together to create a
forward looking, 12-to-18-month plan that aligns functions, makes decisions on how to optimize resources and how
to achieve the goals of the business. It must be standardized and the corporate culture must be fully engaged and
provided with world-class tools. To quote Dave Cote, Honeywell’s chairman and CEO back in 2009,
The SIOP process (shown in the above figure) does not set strategies for channels, customers, products, or supply.
However it does identify trends in delivery, product revenue, inventory and reliability. Furthermore, from a tactical
perspective, SIOP doesn’t manage the day-to-day execution of a sales plan, customer order fulfillment, production
scheduling or sourcing, but it allows a business the ability to understand its revenue vs. plan, schedule attainment and
inventory levels.
DEMAND
PLANNING
INVENTORY
PLANNING
SUPPLY
PLANNING
FINANCIAL
PLANNING
SIOP
“...To achieve improvements in working capital, robust SIOP processes are
critical. Reducing working capital, while still meeting our customers’ needs, will
force us to improve our operating practices and will make us a better company.
We need everyone to be engaged in these efforts….”

SIOP is based on the People, Process, Tools methodology; many companies buy into the idea but fail to drive the
process throughout the culture. Therefore, companies spend time, money and manpower without gaining value from
their investment. Success comes from strong leadership, education of the participants and a desire to drive these
key elements:
• A process that produces one single number to run the business
• A comprehensive set of forward-looking plans matched with a financial summary
• Reviews of alternatives and their impact on objectives
• Decision-making to improve the business outlook
SIOP also requires an engaged leadership and business team that utilizes standard processes and world class tools to
help manage through the upturns and downturns of a business cycle, or swings in the economic environment. SIOP
is a forward looking, continual monthly loop used to anticipate and act on the changing business outlook by:
• Reviewing the product portfolio, understanding lifecycles and implications
• Planning future demand, considering risks and opportunities
• Developing supply response and the ability to react to changes
• Reconciling all plans with a financial assessment of risk
• Creating a forum for executive review and agreement on team decisions
This is where everyone “puts skin in the game,” reflecting on the current environment and gaining common
understanding across business lines. Executed properly, a business can manage good times as well as bad with a
consensus built from all parties.
PORTFOLIO
REVIEW
INVENTORY /
DEMAND REVIEW
Statistical forecast
based on historical
demand
Addition of marketing
intelligence from
commercial team
Review forecast
performance
Review safety stock
levels &Inventory Policy
Review key inactive,
obsolete and surplus
issues
Review New Product
Introductions (NPI)
status and plans
Review of last time buy
and obsolescence
items
SKU/ family
rationalization
Inactive and Surplus
inventory review
WEEK 2
2
SUPPLY
REVIEW
Review rough cut capacity
plans by resource and
flag issues
Review inventory
projections based
on supply plan
Gain commitment from
the factories and suppliers
to the demand plan
Review key supplier
performance and
expectations
WEEK 3
3
SIOP
RECONCILIATION
Translate SIOP plans
into $ and compare with
annual plan for gaps
Solve or escalate issues
Generate summary for
Executive review
WEEK 3
4
EXECUTIVE
SIOP MEETING
Overall Business Review
Solutions Review
Confirmation of
alignment to annual
and strategic plans
WEEK 4
5
WEEK 1
1
SIOP: A CONSISTENT CYCLE OF EVENTS

Portfolio and Product Review
Product portfolio management aims to understand any and all changes to product offerings. The inputs are the
product development pipeline, SKU (stock keeping unit) rationalization and positioning with a constant examination
of the marketing channel strategy and the end-of-life for any product. Outputs are a volume and dollar-based plan
for any and all portfolio changes. To effectively manage a company’s portfolio, the focus should be on two areas, with
planning different for each phase:
• Beginning of life
• End of life
Product Rationalization
As a part of the portfolio management process, an effective way for a business to manage at the right level
of complexity is through production rationalization. This enables the company to:
• Optimize the portfolio for top line growth and bottom line profit
• Identify the lines of business that are trending towards non-profitability
• Identify competing lines that can create channel conflicts
• Identify exit strategies that target cost control and customer disruption
The handling of inactive, obsolete and surplus inventories has a direct impact on cash to cash and requires aggressive
actions to reduce, eliminate and prevent inventories from needlessly growing. Standard definitions for managing these
types of inventories are:
• Inactive—no use in last 12 months and no demand in next 12 months
• Obsolete—Items that are no longer in the product catalogue or any BOM (bill of materials)
• Surplus—Inventory in excess of previous 24 months of sales
TIME
Maturity
Growth Decline
Launch Deletion
REVENUE
SIOP CLASSIFICATION
PRODUCT LIFECYCLE MANAGEMENT
NPI/PHASE IN
SKU RATIONALIZATION/
PHASE OUT

Activities designed to reduce or prevent these products from growing can include the development of action plans and
timelines to sell or dispose of material as well as developing how to predict slow moving inventory with what will be
excess in the next 3, 6, 12 months.
New Product Introductions through the End of Life
Every additional product line increases complexity from the design through the delivery processes. Product portfolios
with their complexity will have an impact on cash as well as P&L performance. Consequently, managing the portfolio
of products—including the beginning of life, product rationalization and end of life—has a profound impact on cash
and operating expense. When evaluating which product to make, a business needs to evaluate certain factors for cost,
sales and margin. Listed below are some of the costs related to delivering a product to the marketplace.
SIOP and NPI
NPI (new product introduction) is a vital element of the SIOP Process. Demand planners need a view of all upcoming
product introductions, including timing, volumes, probability of projects happening, assumptions to be understood
and documented, opportunities and risks. Any changes should be recorded for incorporation into the demand review
(schedule, volumes, risks, etc.). Creating demand profiles to support product launches, as well as an understanding of
launch and growth strategies is important to managing to cash and operating expenses.
End of Life
Most companies create and maintain their product lines, but very few know how to manage the end of an SKU. Few
understand the financial ramifications on both the profit and loss sheet and on lost working capital by not managing
end of life processes well. Simply put, not performing these tasks leads to a proliferation of unneeded SKUs as well as
increases in inactive, surplus and obsolete inventories.
Manufacturing Costs:
• Changeovers
• Schedule changes
• Component part management
• Tooling
• Maintenance
• Work in process inventory management
Logistics Costs:
• Warehousing and facility costs
• Inventory management
• Freight
Procurement:
• Supply management
• Materials management
• Design Engineering
• Developing and maintaining specs
• Testing
Sales and Marketing Costs:
• Training
• Communications
• Close outs
Customer:
• Warehouse/storage changes
• Display changes

Two ways to identify products for end of life are:
• A combination of low sales and margins
• Determining if there are any strategic reasons for a product to stay
Managed properly, end of life assists a company in cleaning up its inventories. Conversely, failing to manage it can
result in higher operating costs by holding inventory, as well as increased cash requirements.
Demand Planning
The demand plan is a realistic view of future sales based on known activities and trends. It’s used by sales and
marketing units to focus or change the commercial direction of the business. It is also a formal request for the supply
chain to have the relevant materials and schedule capacity for anticipated customer requirements. The demand plan is
a financial commitment to manage top line revenue as well as bottom line margin.
Forecasting
I once attended a supply chain forum where the president of a well-known consumer electronics company exclaimed,
“My sales force turned out to be the world’s worst forecasters, but the world’s best adjusters…” This was a great
statement on the art of forecasting. The forecasting process provides an ongoing, sustainable 12-to-18-month forecast
for the business that uses the collaboration of sales and product management knowledge based on historical actuals, as
well as the future expectations of existing and new customers for existing and new product listings. The objective is to:
• Provide an accurate forecast of unconstrained demand by product listing quantity with 12-to-18 month visibility
• Overlay the forecast with market intelligence, trends and exceptions
• Deliver ongoing metrics of forecast accuracy by product listing
• Enable feedback to sales and business teams for improvement to forecast accuracy
A forecasting process that works best for one company probably will not work for another due to differing customer
bases, products, data and people. Other important points to remember regarding forecasting is that a data
warehouse is required to guarantee data integrity and the forecasting system must integrate “seamlessly” with
other corporate systems.
Supply Planning
The supply planning process objective is to resolve any issues in the demand plan that prevent optimal operation
of the supply side of the business. The inputs are the demand plan, previously demonstrated capacity, and supplier
constraints with output being a rough cut capacity plan.
Key elements include:
• Reviewing the unconstrained demand plan
• Demonstrating performance abilities for factories, logistics and suppliers
• Developing a “rough cut” plan against raw materials, labor, machine hours and suppliers
• Creating “what if” scenarios
• Understanding assumptions for risks and opportunities
• Performing a gap analysis of the annual plan vs. the supply plan with recommendations to close any gaps

Suppliers are key to the SIOP process because they have direct impact on delivery, inventory and cost. Suppliers’
performance should be included in the monthly SIOP process with an understanding of constraints and volumes. This
should generate visibility of supplier requirements through the planning horizon. Suppliers should assess the changing
requirements as well as review whether they are within the structure of the existing service agreement. Additionally,
supplier input should be used as feedback to overall planning with the impact/risk to the factory supply plan and
alternatives of any risks or constraints included. Finally, by including supplier input into SIOP it sets the stage for
planning contract negotiations including:
• Service agreements that define service levels and lead times
• Capacity commitments and ability to respond
• Performance measures and goals
The goal of supply planning is to provide the data that allows the business to make long range, data-driven decisions
to optimize future inventory plans, capacity adjustments, and changes in customer lead-times based on forecasted
unconstrained demand. It is a coordinated effort between planning, manufacturing, sourcing, suppliers and logistics to
develop the manufacturing and replenishment strategies to provide the highest availability at the lowest inventory and
cost: what is needed, when, where and how.
Reconciliation
Reconciliation is the act of balancing supply and demand. It is the prioritization of serving certain market segments,
geographies or customers when capacity is constrained or product isn’t available to satisfy demand. The reconciliation
process manages the gaps and translates the plan into dollars to compare with the annual plan for exceptions. It is
through reconciliation that problems are solved or escalate to the leadership level.
Executive
The objective of the executive SIOP process is to review the performance of the business and to resolve all outstanding
issues as well as the alignment of the functions, with assigned action items to meet any variances.
Finally, cycle time reductions directly impact SIOP performance. As data becomes more accurate and lead times better
defined inventory can be reduced and the improved service levels communicated to a customer.
Inventory Reduction
CRITICAL SIOP
ELEMENTS
CYCLE TIME
IMPROVEMENTS
ENABLES
Cost Reduction
Better Cash Flow
Fast NPI Processess
Resources Optimization
Forecast Dependency
Reduction
Flexibility to Meet
Demand Variations
Delivery Performance
Increase

CUSTOMER CARE
The Order Management Process
Customer care is the process that begins when a customer first inquires about a product and continues through the
time the product is delivered. Order management strategies are driven by how a business wants to present itself in the
marketplace and is the company’s main contact point for customers. Some of customer care’s responsibilities are:
• Developing customer requirements
• Determining how orders are defined
• Quoting pricing and lead times
• Providing technical support
• Managing return goods
• Working with “checkout abandonment” in the process
The information that flows from customers follows a completely different path than the product’s physical flow. It is
common for a company to mature with layers of systems that feed each other back-and-forth. Often these systems
are batch-driven and can take up to a week to transfer information. In these cases, inventory is required to protect the
goods that have been reserved in the queue.
Creating a Customer Order
Order management does not mean just simply taking a customer order. Rather, it works to manage the customer
relationship by:
• Defining back order, partial order, and allocation/reservation policies
• Insuring lead times in the system and/or catalogs are correct
• Keeping both customer and product masters accurate, in a timely manner
• Protecting the business by making sure “denied party screening” is completed
• Defining geographical coverage with no currency games allowed
• Managing the return goods process including customer debits and credits
• Delivering performance metrics
Furthermore, with the advent of B2B (business to business) and B2C (business to consumer) web-enabled activities,
customer care can also be required to manage shopping carts and their abandonment, updating websites with current
stocking levels, as well as providing order confirmations and tracking.
The customer care and/or order management processes can have a profound impact on the management of working
capital by ensuring the data administered is in sync with the rest of the organization. A single voice to the customer is
necessary: this is where it starts.

Technologies
Employing an Enterprise Resource Planning (ERP) system is supposed to be a way for a company to reduce cost,
improve its processes and be more responsive to customers. Sadly though, it has been my experience that most of these
have either failed, been forced to hit the reset button and/or lost valuable data due to the simple fact that few people
understand how processes interact with each other.
I was once instructed by a very wise man at Toyota that you put a computer in a bad operation and you get a worse
operation quicker. I have lived by these words for the past thirty years. For every action we think we know, there are 99
others that we have failed to understand properly. Businesses should own their processes from beginning to end.
Unfortunately, these powerful new systems are rolled out without a true understanding of processes, with tentacles that
reach deeply throughout the company. Often old inferior processes are simply adapted or translated into a new system
without regard to how they will operate in the fresh environment. Equally as bad is to implement a standard “vanilla”
package (whatever that means) without understanding how the operations are run. Both result in the same miserable
outcome for all: massive overtime, exploding inventories, past due deliveries, thus missed financial results.
HUMAN
RESOURCE
MANAGMENT
DISTRIBUTION
DRP
CUSTOMER CARE
& SALES
PURCHASING
MANUFACTURING
FINANCIAL
MANAGEMENT
ENGINEERING
TRANSPORTATION
SIOP &
PRODUCTION
PLANNING
FULLY INTEGRATED SYSTEMS

What is MRP?
A Materials Resource Planning (MRP) system is software that assists in doing the calculations needed to plan
manufacturing based on inputs from a forecast that includes:
• Inventory control
• Production planning
• Management information system
• Manufacturing control system
MRP has evolved to group demand by calculating from need date and integrating business planning and
operations. Used properly, it plans production so that the right materials are at the right place at the right time.
Ideally, MRP should:
• Reduce inventory levels and component shortages
• Increase shipping performance and customer service
• Simplify and provide accurate scheduling
• Improve productivity while reducing scrap and rework
• Decrease purchasing costs and lead times
• Enhance production scheduling and reduce manufacturing costs while producing higher quality
Data Integrity is the Key to MRP System Accuracy
Accuracy is essential for accurate routings and to maintain accurate standards in the following areas:
MRP does not foresee events—it only provides calculations from the data it is fed. It can be a classic case
of “garbage in/garbage out” if not implemented and maintained properly.
Inventory Records
• On hand
• Open purchase orders
• Work in progress
Bills of Materials
• Data
• Structure
Item Master
• Part numbers
• Source—make/buy
• Lead times
• Order quantities
• Ordering rules

In addition, because multiple people maintain data streams, MRP can quickly get out of sync unless planners stay
vigilant about maintenance. While Bill of Materials (BOM) are generally maintained well, variations in inventory
record accuracy, lead time adjustments, capacity changes, missed processes, NPI or supplier performance can produce
profoundly different accuracy results. For instance:
The illustration above shows that if you are 98% accurate with your BOM, while not maintaining inventory and lead
times properly, this will mean meeting only 75% of production schedules.
INVENTORY ACCURACY
BILL OF MATERIALS ACCURACY
ITEM MASTER ACCURACY
90%
98%
85%
ITEM ACCURACY
MASTER PRODUCTION SCHEDULE ACCURACY 75%
SYSTEM ACCURACY

Cycle Time/MRP Examples in Action
In the first example, the raw material purchases of a multi-national manufacturer from a German supplier with a
global customer had inaccurate lead times loaded into MRP.
In the second example, when the system was installed no one actually understood how long the manufacturing process
took. The system was loaded with dummy data, therefore the information that flowed out was erroneous. This meant
deliveries missed, inventory exploding and missed financial results for the year.
Regardless of their function or position, nobody should promise customers due dates that are impossible to achieve or
not agreed to by the factory. This raises inventory levels, misses deliveries and negatively affects financial performance.
CYCLE TIME FOR A GERMAN SUPPLIER TO MEXICO
Customer with a 180 day lead time does not receive order on time—WHY?
No supply in the distribution center—WHY?
Factory could not make it—WHY?
Raw material shortages—WHY?
German suppliers have long lead—WHY?
Suppliers are unsure of when/what to make due to lack of forecast or trigger
RESULT Material arrives late/order missed© 2016 Jay Fortenberry
Cycle Time
Order to Delivery
>210 Days
2
DAYS
165
DAYS
Order for
Raw
Material
Place by
Plant
Maximum
Supplier
Lead
Time
?
DAYS
Plant Dock to
Assembly
to Ship
5
DAYS
Maximum
Logistics
Lead Time
Plant to DC
3
DAYS
DC Service
Class 3
5
DAYS
Arrival
Customer
30
DAYS
Maximum
Logistics
Lead Time
Europe
to Plant Air
Shipment
CYCLE TIME FROM MEXICO
? No one knew manufactoring leads times

BUSINESS CONTINUITY
Business interruptions can take many forms: natural disasters such as the earthquake and ensuing tsunami in
Fukushima, Japan; labor stoppages similar to the occurrences on U.S. West Coast docks; a health crisis where segments
of a population are required to be quarantined; or social unrest and wars. These types of events are growing in numbers
as well as increasing in severity. In an ideal world, incident response is the execution of a well thought out, focused and
rehearsed plan that engages all of the team that will manage the future crisis.
Resiliency is the capacity to recover quickly from difficulties; a toughness. It is also the ability of an object to spring
back into shape; or elasticity. Regardless of the type of business interruption, the fundamental role of a manager in
business continuity is to protect the brand and company by resuming “normal” operations as quickly as possible with
a minimum of disruptions to the company.
When a business continuity plan is implemented, vital resources such as cash, people and facilities are being diverted
in unusual ways to insure the long term viability of operations. Therefore, it is much easier to have these discussions,
prior to the emotion of a developing or ongoing disaster when a business is in the thick of protecting itself.
The subject is vast and entails literally every aspect of a company. For many, the only experience with managing in
this environment comes as an exercise of survival when a disaster strikes. Others have had to learn the practice from
repeated incidents over time.
The initial steps for building a business continuity process is to do a self-assessment starting with examining the
company’s tolerance for risk through its People, Processes, Tools:
• What defines a crisis that would trigger the formation of a response team?
• Who would be on this team?
• How does the team communicate and to whom do they report the details of their activities?
• If a disaster occurred would a company be resilient and keep going, or limit its losses via insurance
and/or just pick up and move?
• Finally, are the systems agile and scalable to support changes in operations, or is the business back in manual mode?
From here, a basic framework can be created for managing under crisis.
Disaster Preparedness
There is nothing worse than trying to quickly find contact information for team members and suppliers during a
crisis. A dynamic contact document must be updated regularly; it is necessary to create it at the outset of a business
continuity process. Call logs should be kept, with meeting minutes and status checks sent after all meetings, so that
information is understood and shared by all participants. There are no secrets—everyone is in the crisis together. All
activities are updated and distributed at least once per day.
Two types of communication are provided as a business continuity plan is administered:
• Technical experts and practitioners managing the process
• Leadership updates
Leadership
All too often companies do not have the time or resources to foresee the impact that an disruption may have on their
business. Rather they wait until an event or disturbance occurs, and then reactively manage the resulting situation.
This lack of preparation can turn what might be a small disruption into a full-fledged crisis.

A business may have the processes and tools to manage through a crisis, but if the leadership team is not actively
engaged and/or is constantly second-guessing the frontline managers’ ability to execute the plan, then all could be
lost rapidly.
The fundamental role of the business leader is to support the team by providing time, money and manpower. More
importantly, the leader’s job is also to provide the cover for the team to remedy the crisis. Specifically, this would be to:
• Distribute accurate information as quickly as possible
• Respond to incorrect information in a timely manner
• Trigger appropriate processes to keep employees, the public and shareholders informed on an ongoing basis
Finally, a leader must have previously built the trust within the organization to be able to make these tough decisions
in a timely manner for the mere survivability of the business.
Supply Chain Security
With advancements in globalization, supply chain security has become a vital element of doing business. One incident
of transporting illegal substances, smuggling, or aiding a terrorist organization can have a devastating impact on the
P&L as well as on cash and working capital. Failure to adhere to minimum standards can lead to fines, penalties and/
or longer lead times due to suspension of the company’s ability to transport goods.
The benefits of operating a compliant supply chain security program are:
• Maintaining good corporate citizenship by reducing risk in the supply chain
• Providing a safe and secure environment for employees, suppliers and customers
• Reducing cycle time and operating costs by operating a lean supply chain with proper business controls
A secure supply chain is the visible demonstration of the commitment to employ processes that emphasize a safe and
secure environment for its employees, customers, products, facilities and the communities they serve. Furthermore, it
is a routine way of doing business that enhances the commitment to regulatory compliance, meets customer’s delivery
requirements and exceeds productivity goals. These fundamental principles are linked by using lean processes that are
supported by the leadership team, employees and supply chain partners.
SERVICE PROVIDER RESPONSIBILITIES
SHIPPER RESPONSIBILITIES
Suppliers
Sales Logistics
HR
Plant
Operations
Receiving
Dock
Corporate
Security
Sourcing
Customer
Returns
Drayage
Customer
Broker
Terminal
Operations
Drop Ship
Destination
Transporter Warehouse
Corporate
Security
Trade
Compliance
Technologies
ORIGIN TRANSPORT DESTINATION
GREATEST
RISK

Cybersecurity
Cybersecurity is the process of protecting the confidentiality, integrity and availability of a business’ IT assets (systems,
data, networks). Conversely, compliance is often the minimum a company does to meet regulatory requirements or an
industry standard. Compliance involves checklists, whereas security involves a detailed discussion with the company
about its tolerance for risk. In compliance, both the regulators and businesses are slow to acknowledge new threats
as well as slow to implement change. On the other hand, cybersecurity requirements move quickly at the pace of the
market, threats and the risk profile of the business.
The resilience and preservation of a company’s ability to do business is crucial, because cyber threats are generally not a
matter of if, but when. A resilience program’s objective is to:
• Maximize visibility
• Minimize impact
• Enable a quick recovery
• Continuously improve
Cybersecurity focuses on a company’s critical assets first and is then applied to the next most important resources.
Elements of a cybersecurity program include:
• Network security
• Security architecture
• Data security
• Security awareness and training
• Cyber investigations
• Malicious content management
Many businesses elect to invest in security only after a significant event. The downside of this approach is that suppliers
are acutely aware when a customer is in crisis, which most likely is then reflected in the pricing. Compounding the
issue is that during a crisis third party professional services are often required to implement expensive new controls on
aggressive timelines. Thus the best strategy is to have the process in place before a company’s weakness is evident.
As a rule of thumb, large corporations spend 3% of revenue on IT, with small businesses doubling that.
16
Cybersecurity
can be benchmarked as a percent of IT spend and will depend on several factors including the risk-tolerance of the
company, and the maturity of the cybersecurity function. Cybersecurity can range from 2%-10%
of the IT budget.
17
Summarizing, the focus points when building and executing the process to manage a crisis are:
• Don’t wait until crisis hits to build a business continuity plan
• Respond in a timely manner—the longer you wait, the more damage can be done
• Establish a war room (physical or virtual)
• Encourage a mindset that this is now the team’s job. Everything else, if possible, should be moved to the side
• Don’t react: be quick, but also be fact-based and remember that nothing is off-the-record
• All communications should go through one channel with a spokesperson to represent the organization
throughout the crisis process
• Express empathy and concern for the victims
• Never hide anything; all problems will eventually surface

Element 2: Cash to Cash, Cycle Time and
Optimizing the Supply Chain
Many companies lack the flexibility and agility to maintain liquidity through tough economic times. Quite often
entrepreneurs focus on their core competencies of designing, marketing and selling their products. Sometimes they
understand manufacturing, but fail to grasp the rest of the supply chain as the company grows.
To be sure, the dynamics of a supply chain are continually changing: suppliers are added, investments made in new
plants, trade regulations grow, logistics costs increase and customers change. With the increase in international trade
and cross-border legal requirements, the supply chain has become increasingly central to the management of cash.
Briefly put, the supply chain is the management of all functions related to the flow of materials, from the company’s
suppliers to its customers, including purchasing, traffic, production control, manufacturing, inventory control,
warehousing and shipping.
A major goal of a supply chain is to reduce the overall cycle time for all products and services. This is achieved by:
• Understanding and analyzing product groups
• Developing a standard approach to cycle time improvement
• Adapting and implementing to each specific supply chain or business
• Pursuing improvements based on effort and impact
• Developing a continuous improvement process that is linked to performance
The Japanese term Kaizen is defined as baby steps that add up to great big steps. By executing the following process,
many baby steps will add up to giant steps for improving the cash to cash cycle as well as the overall health of the
business. This is the magic bullet that everyone is always looking for.
THE CASH-TO-CASH CYCLE IN THE SUPPLY CHAIN
1. Industry Sector 3. Order Confirmation 7. Order Receipt
6. Transportation
5. Pick, Pack & Ship
Customer
Payment
Agreement
On Customer
Terms Policies
& Procedures
2. Order Review & Commitment
4. Planning, Production and Distribution

Cycle Time
Cycle time is the end-to-end total time from when a customer creates demand until a product is delivered and cash
collected. This includes all information and material flows as well as any processing and queuing time. Managing cycle
time improvements drives business performance in a number of key areas:
Contrary to a popular myth, inventory is located through the entire business, not just in a manufacturing or a
distribution center. By managing cycle time, a business brings together all of its processes from customer service to
delivery in order to direct how its cash is consumed.
The first step in managing cycle time is to locate the value stream of the process. Value streams are where value is added
to a product or service. Process mapping assists in seeing where and how processes are completed as well as how money
is spent. Reducing cycle time is not always easy: however by developing value stream maps, a company can understand
the fundamental ways in which it operates.
GROWTH
WORKING
CAPITAL
PROFITABILITY
CUSTOMER
SERVICE
PRODUCTIVITY
INVENTORY
Improving responsiveness
to customer demand yields
increased market share
Lowering inventories
produces a better
utilization of cash
Eliminating non-value added
activities reduces cost, which
leads to improved margins
MANAGING CYCLE TIME

Supply Chain Design: An Approach for Improving Cycle Time
Optimizing supply chain design is about positioning resources in ways that enhance profitability cash and working
capital while producing tangible shareholder value. Customer, supplier and manufacturing strategies as well as world
events all play into how well a company responds to changes in the marketplace. As shown below, supply chains are
complex and messy. A customer can be a supplier, plants feed each other and return goods are often required to travel
back to their origin.
The ability to only deliver what is needed, when it is needed and in the quality and quantity needed is a
competitive advantage to any business that can solve this equation. This is accomplished by utilizing basic tools:
• Pull systems: produce only what’s needed
• Continuous flows: create an orderly flow to eliminate any delays or stagnation between processes
• Takt time: the lead time spent to produce a product to meet total market demand
• Cycle time: The lead time it takes from the start until the end of a process when a product is produced
Leveled flows, plus a well-planned production schedule, creates the ability for leveled production.
FACTORIES
CUSTOMERS
SUPPLIERS
SUPPLY CHAIN
Factory to Customer
Customer to Factory
Supplier to Factory

COMPANY A: CASE STUDY
The following case study is based on the analysis of two flows for a privately-owned 30-year old Canadian nutraceutical
manufacturing and distribution business with $500 million in annual revenue. I’ll call it Company A. Its supply chain
grew around rapid product growth and thus became quite complex.
One of the studies looks at raw material flows inbound for the company’s manufacturing division, and the second on
the outbound flow to customers in Australia. Both examples illustrate how supply chains naturally evolve over time
from their original design. Without a team focused on managing this, cycle times increase, which adds inventory and
reduces available cash to the business.
Raw Material Flows into Manufacturing
Background:
Glucosamine is used in over 250 finished goods. Company A’s glucosamine finished goods inventory totaled $9
million. A one week reduction in lead time was worth $497,000, and total lead time varied from 110 days to 162
days, with an average of 127 days. By using the bill of materials and sales history the total demand for glucosamine was
determined to have a very stable demand pattern with low variability.
Other facts to note were:
• Glucosamine originates from Qingdao, China
• In 2015, 23 PO’s were issued totaling 460,000kg for $5.2 million
• One week of glucosamine raw material was worth $100,000
• A 20-foot shipping container from Qingdao carries 18,000kg
• MRP made changes on 15 of 23 purchase orders
• With all of the push out/pull in changes done by MRP, only one day was gained
• Service levels for finished goods were well below the company’s 95% on-time performance standard
• Quality control testing for glucosamine was done on Wednesdays
Other Observations:
• Incoterms with the supplier were CIF Vancouver, therefore the supplier controlled the routes and shipping schedules
• Actual supplier lead times ranged from 40 to 92 days with an average of 65.5 days
• A 16-day vessel sailing from Qingdao to Vancouver was available but seldom used
• Because quality control tested glucosamine on Wednesdays, if a container arrived on Monday it could schedule
accordingly and eliminate seven days of queue time
• Enhanced logistics and quality scheduling could decrease cycle time by two to three weeks, which could improve
service levels and the cash to cash performance

Corrective Actions & Next Steps:
• Ship one 20’ cargo container every other week
• Move shipments to the 16-day transit vessel
• Standardize optimal quality testing day based on container availability in Vancouver
• Right-size glucosamine inventory by reducing $300,000 based on new cycle times
Daily MRP
Run Prompts
Purchase
GLUCOSAMINE CYCLE TIME
Supplier
Ocean
QC Testing
THE FLOW IMPROVEMENTS
CYCLE TIME—CURRENT VS. FUTURE STATE (DAYS)
Data Transfer Interval
Supplier Replenishment Time
Inbound Logistics
Quality
Total Working Capital Reduction
4
30
30
14
78
4
30
16
7
57
0
0
14
7
21
$0
$0
$199,444
$99,722
$299,166
PROCESS CURRENT FUTURE DIFFERENCE
WORKING
CAPITAL SAVINGS
PO
Placement
Released
to Factory

Finished Goods Flow from Canada to Australia
Background:
Company A’s order fulfillment for its Australian customers ranged between four to six months. All products were
forecast, however, the process was continually second-guessed by personnel in export sales, planning, manufacturing
and company leadership. In 2015, the inventories in the system became out of balance due to personnel changes, thus
extensive expediting was required to fill customer backorders.
Other facts to note were:
• One day of working capital was valued at $12,500
• Chief variance between Canadian and Australian products was that Australian health regulations require a redundant
quality control check of raw material at the time of dispensing
• Neither active nor passive temperature controls are used in the shipping process, therefore, spoilage and damage
occurs during the transport process
• When the product is expedited, air cargo is used to correct slow response times
• Ocean lead times = 30; days/air = 5 days
• New products for this customer were difficult to schedule and produce on time, largely due to a lack of coordination
with the NPI process
AUSTRALIAN CUSTOMER-FACING SUPPLY CHAIN
THE FLOW IMPROVEMENTS
CYCLE TIME—CURRENT VS. FUTURE STATE (DAYS) & DOLLAR SAVINGS
Order Processing
Supplier Replenishment
Inbound Logistics
Quality
Manufacturing
Distribution
Outbound Logistics
Total Time
4
30
30
14
70
3
30
195
4
30
16
7
42
3
3
112
0
0
14
7
28
0
27
83
$0
$0
$175,000
$87,500
$350,000
$0
$337,500
$1,037,500
PROCESS CURRENT FUTURE DIFFERENCE
WORKING
CAPITAL SAVINGS
Daily MRP
Run Purchase
& Scheduling
Supplier
Ocean
QC Testing QA Testing
Shipped from
FG W/H
Manufacturing
Port
Ocean
Air
Port
Sydney
Warehouse
Customer

As a result, the recommended implementation plan for the company’s Australian supply chain was to:
• Move active Australian SKU’s from forecast to master production scheduling (MPS) process in order to smooth out
procurement, factory scheduling and manufacturing process times
• Transfer into the MPS process for NPI, after six months of production
• Ship finished goods direct to Sydney every eight days
• Reduce inventory levels to match 140 day/$1.75 million working capital for cycle time decreases
• Investigate the effects of in-transit active vs. passive temperature controls to determine if there are value-added
benefits to customers
Summary of Case Study
In both cases, Company A failed to closely manage the monthly forecasting process, data accuracy, new product
introductions (NPI) and lead times. As a result, there was a large variability for suppliers and the customers. Also,
freight and logistics processes were not being managed, so costs were exceptionally high as a percent of revenue.
The key objectives were to:
• Identify current cycle time
• Reduce time through enhanced materials and logistics management
• Manage daily flows across all regions, suppliers and customers
• Create visibility of trade flows
• Ensure the ability to comply with changing trade regulation
• Increase flexibility by reducing touch points
The primary focus was on creating and maintaining the flexibility to absorb order fluctuations. In addition, a
secondary focus was to take the “nervousness” out of the system by standardizing the way the material was ordered,
received and shipped.
This was simply a back to basics campaign of management by walking around. From here value stream mapping
(VSM) could be developed that illustrated where value was added versus where it was taken away. This enabled the
ability to see where to go, how systems interacted with humans and the results of those exchanges. Building value
stream maps also highlighted where each process started and where it stopped with all of the inputs and/or overlaps as
well as where money was spent. VSM takes the emotion out of the conversation and so the focus is solely on the facts
for developing the best flows for the company, their supplier and customers. Finally, VSM points to where waste is
created as well as assist in determining how to eliminate it.
For raw materials, the process was slowed down, but eliminated the push out/pull in activities that sourcing routinely
was executing from system prompts. This enabled a calming effect to the entire supply chain and allowed the team to
focus on what was important and truly in need of intervention.
The process for finished goods was decreased by over 80 days. The products were taken off forecast and put directly
into the master production schedule based on actual usage. Also, the pathways for introducing and managing new
products were standardized, which improved quality and cost.

Final Thoughts on the Supply Chain Design
By walking through the supply chain from supplier to customer, we have been able to uncover where we add value
and where it is lost. Furthermore, we have been able to analyze:
Additionally, taking the nervousness and uncertainty out of the supply chain, people were inspired and empowered
to make further enhancements. Finally, inventory was reduced by making flows simple, clear and streamlined with no
investment in expensive software packages or adding new people.
MANUFACTURING
Manufacturing lead time is the elapsed time throughout the manufacturing process. It begins when the raw material is
dispensed and the manufacturing site receives the go-ahead to produce, and ends when finished goods are available for
shipment. Manufacturing plays a key role in:
• Providing input for plant capacity on machine, labor, and suppliers
• Meeting schedule attainment and adherence
• Controlling quality through yield, scrap; including reworks, reclaims or sorting
• Managing cost per unit and units per hour output
• Supervising raw and WIP inventories including programs for their reduction
• Communication and escalation of issues
• Supplier performance
• Quality and productivity issues
The Complete Flow of the Supply Chain within Manufacturing
Creating an environment of simplified flows, material availability and schedule stability helps to build a credible
process for customers and employees alike. Understanding the key elements of lead times, quality and costs allows a
business to better grasp response times, takes the nervousness out of the system and help the business grow.
• Financing cost
• Operational cost
• Administrative cost
• Capital purchases
• Machine output/ maintenance
• Labor management
• Logistics and trade
• Lead/response times
• Material cost
• Pricing
• Supplier Relationships
• Metrics
• Understood the impact of existing constraints
• Quantified the gaps
• Modeled the trade-offs
• Executed

As a value stream map is developed, it should become readily apparent whether the flows are orderly or disorderly.
Particular attention should be paid to where the process pauses and sleeps. In most cases, this is non-value added time
and is typically greater than 50% and should become the primary target of the manufacturing leaders.
Workflows have to be balanced or the Takt time (the average time between the start of production of one unit and
the start of production of the next unit) will increase to the time of the longest work station thereby creating sleep or
idle time. These potential bottlenecks rule the throughput and inventory of the overall system, so schedules should be
made with anticipated constraints in mind. Inputs required for properly balancing a line are:
• Takt time
• The number of stages required
• Variations with task
• Work station layout
Creating clean flows inside the four walls of a plant is the key to minimizing the overall cycle time, thereby minimizing
working capital.
SUPPLY CHAIN WITHIN MANUFACTURING
1. Leveled production (Heijunka)
2. Pull system
3. Small lot flow
4. Flow is simple (limited branching or merging)
5. Flow follows fixed routes and sequence
6. Flow matches rhythm of entire system
1. Fluctuation in quantity and products
2. Push system
3. Large lot flow
4. Sorting and temporary storage occurs throughout process
5. Multiple complex flows
6. Flow ignores timing
ORDERLY FLOW DISORDERLY FLOW
Suppliers
Receiving
and
Inspection
Production
Inspection
and
Packaging
Finished
Goods
W/H
and
Shipping
Raw
Materials,
Parts, and
In-process
Warehousing
Customers
MATERIALS MANAGEMENT
Purchasing
Supply
Planning
Shipping &
Transportation
Warehousing &
Inventory Controls
Physical Materials Flow Information Flow
THE COMPLETE FLOW OF THE SUPPLY
CHAIN WITH MANUFACTURING

Materials and Production Management
There has been a long-standing debate between sourcing and materials management regarding the difference between
buyer vs. planner responsibilities.
Material management is the coordinated effort between planning, sourcing, and suppliers to develop replenishment
methods which provides for the highest availability at the lowest cost by addressing these questions:
• How much is needed?
• When is it needed?
• How is it to be triggered?
• And how will it come in?
The goal is to consistently deliver material by managing low inventories and is achieved by the use of standard
definitions, work and tools. There are three types of manufacturing:
• Make to stock, which uses a Bill of Material (BOM) expressed in end-use part number/catalogue number terms
• Make to order, which is based on customer’s order. Product definitions are typically completed just
prior to production
• Assemble to order, which specifies components via a planning BOM and utilizes inventory buffers, providing
flexibility by hedging inventory
BUYERS’ VS. PLANNERS’ RESPONSIBILITIES
How many do we need?
When do we need it?
How do we need it to come in?
Who do we buy from?
What price do we pay?
How does the company do business?
BUYER PLANNER

Elements of MRP
Due to the complexity of most operations, businesses have turned to the use of a Materials Resource Planning (MRP)
systems to assist in planning. MRP’s methodology is to:
• Explode the master production schedule
• Use BOM to identify parts needed
• Check availability of inventory
• Identify when work should start so that material is available when needed
• Generate work orders and purchase orders
• Repeat the process for other levels of BOM
MRP is a tool for understanding the timing of requirements for an item down to the component level. It applies to all
levels of the BOM and uses existing inventories in order to reduce requirements. Finally, MRP is based on dependent
demand and allows for the lead times for ordering, transit and manufacturing to be taken into account.
The benefits of MRP include:
• Realistic commitments, which provides for better customer service
• Controlled reduction of inventories, which reduces the use of working capital
• Improved responsiveness and flexibility through better forward planning
• Enhanced employee involvement through availability of information
• Stronger relationships with suppliers
• Integrated financial management
Material Replenishment Strategies
Inventory is created to compensate for the differences in timing between supply and demand. Some of the reasons
for holding inventory are:
• Expected demand or cycle stock
• Demand variability or safety stock
• Capacity shortages or pre-build
• In transit inventory
• Purchase prices discounts
• Lot sizing
• Postponement strategies

As the diagram below shows, an effective inventory strategy includes minimizing costs and inventory, while
maximizing customer service to create a desirable “sweet spot.”
The cost of not holding inventory can be lost customers, production delays, uneconomical batch sizes and missing
supplier volume discounts or price advantages. Therefore, the purpose of holding inventory is to maximize service and
maintain manufacturing efficiency while minimizing the cost of delivering a product.
Inventory can be reduced by shrinking lead times for raw materials and finished goods as well as by reducing the
uncertainty of demand with customers and/ or suppliers. Typical cost of carrying inventory are 20% to 25% with
some of the components being:
• Cost of money
• Warehousing and handling
• Inventory losses
• Freight
• Administration
• Insurance
THE
SWEET
SPOT
MINIMIZE
INVENTORY
MINIMIZE
OPERATING
COSTS
MAXIMIZE
CUSTOMER
SERVICE

Inventory strategy clearly lays out a process to be used to achieve the targeted results and can be based on things such
as the voice of the customer (VOC), economic conditions or market intelligence.
CYCLE STOCK
PREBUILD
STOCK
MERCHANDISING
STOCK
SAFETY
STOCK
PIPELINE
STOCK
Cycle stock is quantity kept on hand to satisfy the predicted demand
for the month.
Prebuild stock is additional inventory kept to compensate for future
capacity constraints. This may also be known as build ahead stock or
pre-season build inventory.
Merchandising (retail) stock is inventory kept on hand to satisfy
demands at retail locations.
Safety stock is additional inventory kept on hand to buffer against
the variability of demand and/or lead time.
Pipeline stock is in-transit inventory to distribution center.
TYPES OF INVENTORY
REPLENISHMENT SYSTEMS
PUSH SYSTEM
PULL SYSTEM
VMI
Consignment
PUSH REPLENISHMENT OF MATERIALS IS BASED
ON ANTICIPATION OF FUTURE DEMAND
• Anticipates a forecast, firm order or production schedule
• When a projected inventory drops to a certain threshold,
a recommended order is generated
• Common form of push is MRP or DRP
PULL REPLENISHMENT OF MATERIALS IS TRIGGERED
BASED ON ACTUAL CONSUMPTION OF MATERIALS
• Manual or electronic signal is generated when
on hand inventory falls below a defined threshold
• Common forms of pull replenishment are:
Kanban, Min-Max, Reorder point
VENDOR MANAGED INVENTORY (VMI) AND CON-
SIGNMENT IS THE REPLENISHMENT OF MATERIALS
MANAGED BY A SUPPLIER
• VMI has the vendor making the decision to replenish
• Consignment inventory is a similar setup where the vendor
manages inventory specifically available for the business usage
• Common forms of VMI are:
In-plant store, 3PL store, or direct to floor

Element 3: Building a Productivity Machine
A CLIMATE FOR CONTINUOUS IMPROVEMENT
Building a productivity machine and improving cycle time isn’t difficult, but it does take time, energy and
collaboration from the entire enterprise. Everyone within the organization needs to be fully engaged and in
agreement. This starts in the boardroom and flows down through all People, Processes and Tools.
Assembling the Team
When building a Cycle Time Team, your best athletes must be on the field and enthusiastic. This should not be an
assignment of dread: rather, it should be viewed as an opportunity to help build the company into a healthier and
stronger business.
The CEO is unquestionably the spiritual team leader, but they also have very real obligations to investors, shareholders,
and customers that require their time. This means that the team needs a strong person granted authority to wander
through every nook and cranny of the company. This is typically the senior finance leader. They have the power and
knowledge, as well as the ability to draw on the necessary financials to develop base lines and execute a scorecard for
the process.
A cross-functional team of experts needs to be organized to examine customer care (or order management), sourcing,
manufacturing and logistics. Health care, nutritional, or pharmaceutical industries will want to include product
quality as a key team member.
The Cycle Time Team needs to be small and agile, with the ability to move quickly through divisions, processes and
geography so that the bureaucracy has difficulty keeping up with their activities and progress. Assignments given to
each function need to be completed on time, with any blockage—be it employee, supplier or constraint—identified
and positively resolved. No victims are allowed— instead, celebrating success and having fun should be a constant. It is
inspiring to watch the progress and see the results in the monthly financials.
Managing the Organization
As the team’s journey begins, the bureaucracy will wonder what the initiative is. Town hall meetings can be used to
introduce and describe the journey the company has elected to take, and leadership should take pride in the new
program and explain the way forward to the workforce. It needs to be stated that all supply chain practices are up for
review, but that unless there is flagrant bad behavior, amnesty will be given for an initial period. This will disarm the
bureaucracy’s concerns and allow the team to advance.
Organizational alignment is fundamental in rolling out this program. The team needs to understand the reporting
relationships, who makes the decisions for what, and how those decisions are made: this is critical to identifying
opportunities. Additionally, aligning goals, compensation and incentive plans streamlines the ability to get the process
moving quickly, efficiently and in a high-quality manner.

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