Product businesses are holding more stock than ever before, creating new cash flow problems for manufacturers. In our latest Supply Chain Roundtable, four supply chain experts share their advice on avoiding insolvency during turbulent times.
Meet the experts:
- Lauren Du Plooy: 14+ years of accounting experience, Partner at Rae and Associates – specialists in cloud-based accounting.
- James Ewing: Procurement Manager at Renewable Parts Ltd. with 20+ years of supply chain experience.
- Darren Glanville: Country Manager UK & EMEA at Fathom – a technology and data-led finance partner that builds and runs smart finance functions.
- Tim Wright: Founder of two medical equipment manufacturing companies and currently MD of Langcroft Consultancy – specialists in digital transformation.
The snowball effect of recent supply chain issues
War, inflation, and the remaining wisps of a global pandemic have led to a recent uptick in supply chain disruptions. To counter these disruptions, manufacturers are resorting to carrying extra stock.
While this may prevent critical stockouts, it’s created another problem:
All their cash is tied up in inventory, leaving manufacturers desperately scrambling to pay bills and employees on time.
Our own research recently revealed that the average stock-on-hand value for manufacturers has doubled in the last 18 months.
Some of the blame, Lauren Du Plooy explains, falls on international suppliers.
“Overseas suppliers are holding some people to ransom,” says Lauren. “They say, ‘For this production, we can do it at this unit price. But from next month, our pricing is going up.’”
“It was forcing our smaller clients to place much larger orders because they don’t want to deal with a new price.”
Moreover, the cost of warehousing has been steadily rising across 52 global markets.
“In South Africa, there are a lot of third-party fulfilment companies, so costs were going up with them.”
With cash flow at risk for many product businesses, we see no better time to consult with the experts for their advice. Below are five effective solutions extracted from the roundtable conversation to help manufacturers maintain healthy cash flow despite capricious supply chains.
1. Maximise manufacturing productivity
One way to protect your cash flow is by assessing and optimising your current processes.
As Tim Wright explains, production needs to be productive. And that means making the most of modern technology and warehousing best practices.
“Review how you manufacture things,” Tim says. “Try and make your capacity plan and your production plan realistic. If you know you’re going to have an issue, plan around that. [It’ll give you a] better chance of working with the customer and maintaining that cash flow from their future orders.”
One productivity technique James Ewing deployed in his former product company was a focus on sub-assemblies.
“We managed to look at the bill of materials and make it up to three or four sub-assemblies that then make a larger one. So we were assembling the product to a point where we can leave it on the shelf and then pick it up again and attach it to something else.”
Implementing a data-driven approach to process optimisations
James believes that the use of historical data is key when looking to increase efficiency in the factory.
His team rely on Unleashed inventory management software to pull that data and break it down into accessible reports.
“We’ve been using Unleashed since very early 2017,” he says. “And from 2017–2023, we managed to amass a huge amount of data. Not only the customers’ buying trends and what products they use, [but also] what suppliers we’re using and not using.”
He says that the data gathered by Unleashed over the years has helped them to grow or combine customer accounts and interact with customers and suppliers better.
“Knowing exactly what you’re going to buy based on last year’s usage is a really important aspect of our business. We’ve actually employed a data manager to help us understand the data better [and] display it within our business better.”
At the start of the Covid-19 pandemic, one of James’ main suppliers changed their lead times from four weeks to twenty-four.
“Having access to the data tables in Unleashed allowed us to approach the customers with previous sales. It allowed us to manipulate our min/max levels and our minimum order numbers as well, so we’re constantly ahead of the curve rather than chasing ourselves all the time.”
Reduce processing times by using the best technology the right way
Software isn’t just useful for manufacturers; in modern times, it’s crucial for improving productivity.
“Up-to-date cloud-based apps help you plan forward,” Lauren says.
She explains that proper training around new software systems will reduce employee anxiety. Educating staff on how to use technologies the right way is paramount.
“If [manufacturing staff] know what to expect when they come in the day of implementation then they’re not going to feel overwhelmed. [Get] a really good plan in place to ensure your team are trained.”
Considerations when investing in new equipment
To round off the topic of implementing technologies to improve processes, we asked Darren Glanville for advice on purchasing new equipment.
He says: “If you’re going to buy a new bit of machinery, you need to factor in the insurance, the power, [other costs]… What would happen if that machine were to break and you would have to replace it?”
Costs are not as straightforward as they may seem when it comes to new equipment. Maintenance and staff training are just two of the costs that must be factored in.
New equipment can improve cash flow in the long term, but it will also lock some of your cash into assets. Only purchase equipment you’re certain won’t leave you penniless in the short term
“Make sure that you’ve really looked at your production plan properly to confirm you need the new piece of machinery.”
2. Preparation, planning, and accurate accounting
Cash flow must be a core consideration when deciding order quantities and placement dates.
For businesses importing stock from other countries, Lauren recommends an initiative-taking approach to replenishment.
“Some serious planning needs to be done when you’re going to be ordering stock,” Lauren tells us. “Try and order smaller quantities throughout the year.”
Proper preparation and putting cash flow first are essential in surviving the current state of the supply chain.
“I really want to see a drive for small businesses to start looking at liquidity, and [prioritise] having access to those funds more than just sitting with physical stock on their floor.”
Accurate bookkeeping is more important now than ever
There’s a lot of money to be saved by simply costing things correctly.
According to Lauren, manufacturers sometimes forget about things like stock costs, electricity costs, and rent.
“My suggestion to any manufacturing business would be to make sure that you’ve got support from an accounting professional or somebody that understands what cost accounting is.”
A common case is that businesses look at their sales and their inventory costs and assume it’s profitable. Later, when all the other expenses come out, they’re surprised to discover they’ve lost money.
“We see it all the time: Clients cannot understand why they’re not making a profit. When we go back and look at how they’re building their BOMs, the electricity [costs], the staff, rent … they’re losing track of what the costs actually entail.”
Putting somebody that knows what they’re doing in charge of the books is a must when it comes to protecting your cash flow. Simple mistakes, like excluding additional costs when calculating margins, can be expensive in the long run.
“It’s not only about the raw material,” Lauren concludes, “and sometimes people just lose sight of that.”
3. Storing call-off stock in your own facility
In better days, customers could rely on suppliers for call-off orders. This is where stock is reserved in bulk but purchased and received piecemeal. Most of the stock is stored with the supplier until the customer is ready for it.
James Ewing believes those days are behind us. He says the quality of service from international suppliers has diminished in recent years.
“With a lot of [our] suppliers, we would place larger orders and call them off in batches of 10, 20, 100. [The suppliers] have changed their business model. They don’t want to be holding the stock; they want to ship it all once.”
According to James, the solution he’s found is placing larger orders based on historical data and holding the call-off stock themselves until they need it.
“What we’ve managed to do is get them to ship [the call-off stock] out,” he explains. “Then we hold it in our warehouse. It’s effectively still their stock, but we’ve taken ownership and are only paying as we actually consume it.”
How much can businesses save with this approach?
James’ solution allows businesses to maintain optimal stock levels without impacting cash flow. But in many cases, it means paying for extra storage space. And not all suppliers are willing to agree to this system, despite the obvious benefits.
“It is a cost saving,” he says, “but it’s very difficult to identify how much of a cost saving it is. You’re getting economies of scale, but you’re also spending money on storing the material.“
Darren adds: “The suppliers get more availability and more floor space to store more stock to sell to other customers. Holding stock and giving you that service as a value add is no longer there.”
A large part of the problem is that businesses never thought a contingency plan necessary for this scenario.
“It’s a difficult position to be in,” says Darren. “We’ve gotten so used to being in the heady days of just-in-time deliveries coming in from our suppliers that the moment it hits it has such an impact.”
It’s important to identify all the costs and risks ahead of setting up an arrangement like James’. It may be that you lack sufficient space to store the goods yourself, in which case you’ll need to factor in the ROI of expanding or changing premises along with storage costs.
4. The enemy of my enemy is my friend: Collaborating with the competition
It may sound counterintuitive, but one solution our experts point out is teaming up with your local competitors.
“Sometimes being a business owner can be very lonely,” Lauren explains. “We see it with our clients. You’re struggling, you’re battling, you don’t know what you’re doing wrong. Trust me, 10 businesses in your street are feeling the same way.”
But loneliness isn’t the only reason to seek an alliance with fellow manufacturers.
A problem shared is a problem halved. And the opportunities that pop up when you collaborate aren’t available elsewhere.
“If there’s a group of you looking for a similar raw material and you’re getting it from one supplier in China, if you came together and you ordered 10,000 units instead of 10, you could probably get a better price.”
5. Precise credit terms are key to protecting your cash flow
Next, we asked the panel how credit affects cash flow and what you can do about it.
For manufacturers dealing with clients that don’t pay on time, Lauren offers this advice:
“First of all, make sure you have up-to-date records. There’s nothing worse than chasing clients for money when your information is incorrect. It’s imperative to ensure your systems are integrated and running correctly.”
Accurate information comes from integrating your accounting with your inventory management and sales data. Another critical element when dealing with credit, Lauren explains, is reference checks.
“Make sure that the references are correct and that your payment terms are strictly laid out. Set credit limits. Make sure that your clients are not going over their credit limits, that they’re paying things on time.”
One way to mitigate the risk of late credit locking up your cash flow is to dictate your terms – rather than let the client set them. After all, you’re the one loaning the credit.
“Sometimes, the bigger companies, they can be bullies. Businesses need to be cautious. Do your homework and make sure that it’s going to be worth it.”
Outsourcing credit control to the experts
Chasing unpaid lines of credit can be time-consuming, frustrating, and ineffective.
Tim argues that it’s much more beneficial to leave the pursuit to the credit experts.
“From [my] previous experience as a credit controller: Get someone who’s not afraid to chase money and can do it professionally. Not every company has that luxury of staff. But if you can find a calibre of person who could do that, they’re going to pay dividends.
Darren says that it’s one thing to get the invoice out, but there’s also an entire approval process your client must go through.
“I wholeheartedly agree with outsourcing your credit control function,” he says. “People can generally ignore emails, but a good credit controller will get through the best gatekeepers.”
Darren also advises that manufacturers implement late payment charges to motivate clients to pay faster.
“There are many businesses that are fearful of applying overdue payment charges to invoices. People forget they can charge up to 8%, [which is] often enough to jog someone’s memory around payment.”
So, what can we make of all the cash flow lessons our experts have shared?
Tim neatly sums up the importance of staying on top of your cash flow in the current climate with this analogy:
Lauren adds that being open and adapting to shifts in the supply chain landscape will be paramount in sustaining your business through tough times.
“For success,” she says, “adaption is going to be key. People need to be [more] open to change. It’s going to be imperative that people have the right systems in place. I think the way of manually running data information is [on the way out].”