Cash flow management in the supply chain plays a significant role to supply a chain store business successfully. Especially when scaling up into supplying a higher amount of stores. As the well-known saying ‘cash is king’ goes, you are actually managing your inventory when managing cash flow. By managing your cash well you avoid the situation of lacking cash to finance your growth of scaling up supply more stores. In other words, cash flow control requires strong inventory and supply chain management strategies. The key to better managing your cash flow is to manage and forecast your inventory at the right time, with the right categories, the best cost, as well as the right numbers.

Nowadays, c. For the complex supply chain environment worldwide, there’s still a surprisingly high chance that you would get into cash flow trouble when you are growing and scaling up your supply to more stores.

In this China USE CASE article, you will find helpful insights about China’s supply chain environment. As usual, there will be a practical ready-to-use solution to the issues.

1．The use-case scenario: cash flow and inventory management

One of our clients, an online retailer and supplier to a big chain store business in Europe, experienced a difficult situation in purchasing and inventory management.

At that moment, the client and chain store had no sales data from the stores, and the product categories were new, resulted in several difficult situations:

• No actual sales data for the client to forecast sales numbers and purchasing planning.
• Cash flow was complex to manage.
• No accurate purchasing planning to the manufacturer.
• The manufacturer couldn’t meet the demand for a shorter production lead-time.

·      Unpredictable sales numbers

Without actual sales history, the client could not forecast a sales number, the product lines, or categories for multiple stores. For instance: 

• What would be the next popular items, and how many to stock up?
• What and when would drop from the best-seller listings?
• What size and colour for what items to stock up for which store?
• When would be the right time to stock up for different stores?

That’s to say:

• When an item ranks in the popular listing, you won’t be able to generate sales if you don’t have it in stock.
• When a hot-selling item becomes no longer popular, you lose the chance to generate sales and receive the cash that you spent on the stock – meaning you lose the golden time to sell the newest popular item, which you don’t have in stock.
• On top of that, the Chinese manufacturer’s production lead-time was very long: 95 days (at least 60 days for production and 35 days for loading and shipping).

Consequently, our client faced several financial fines from the chain store, as they could only deliver the items partially, or not in time, or even failed to deliver.

·      Purchasing demand changes

There are many different items in the (regular) catalogue. Some items were popular for a period of time. The sales amount increased significantly from these hot-selling items, compared with other items.

However, the sales of these items dropped dramatically all of a sudden, while other items that didn’t sell well in the past became popular and increased sales. Meanwhile, some unpopular accessories in the catalogue could coincidentally become popular and created a sale increase, but experienced sales decrease or no sales at all after a period.

Due to these unpredictable factors, a 95-day production cycle was not flexible enough for the client to plan and execute their purchasing without actual sales data for reference.

Problems were seen under this situation:

• Constant supply changes to meet the demands from different stores.
• The manufacturer/Client was not able to deliver the right items at the right time.
• The client faced fines from the chain store.
• The chain store missed the golden sales trend, missing sales revenue.

·      Cashflow stuck in production orders

Cash was needed to invest in scaling up items for stock and supporting the sales growth in number.

With a fixed 95-day purchasing/production cycle, the client couldn’t change the order when the trend (popular items/sales increase or decrease) changed.

For example, a product that never sold well suddenly became hot.

To quickly catch up with this hot sale trend, the client wanted to change the production order but couldn’t. The client had to place a new order for the new hot-selling item, meaning another 95 days to wait to have the items for sale in stores.
In this situation, the client had to invest another amount of cash to produce the new hot selling item, but the sales of this item dropped all of a sudden. In a short time, the client’s cash flow was stuck in orders, while they needed cash to purchase another potential hot selling items.

That’s one of the reasons that a supplier to big chain stores could face cash flow problems.

·      Cashflow problems

Firstly, while having the cash stuck in production, the client also missed the sales trend as the items were not delivered yet.

The direct consequence was that the sales income was missed.
What’s more, they faced fines, which made the cash flow problems even worse.

As a result, it dramatically affected the finance growth and critical time that a chain store business could possibly scale up categories, place new production orders, grow in number, and expand the chain business into more stores.

For this reason, our client needed a solution (strategic supply chain management) that would enable him to purchase the orders flexibly, having the flexibility in product supplies, no fines from the chain store for shipment delay or partial delivery.

The solution must cover all the tactics to reduce the lead-time of purchasing and production for each order.
A shorter lead-time with smaller order values was needed to adjust the purchasing in need of demand changes.
A shorter production cycle was requested so that the client could place smaller production orders, which could reduce the cash amount for production and shorten the cash cycle.

Here are the critical questions:

• How could we manage that?
• Why would the manufacturer work with us to come to an agreement?
• And why would they take this risk to adjust their business model to meet our needs?

 

Actually, there’re reasons the manufacturer set such a long lead-time.
It needs several processes to complete the order: raw materials preparation, production, and assembly.

Raw materials preparation takes time, and it’s the critical reason it took the manufacturer so long to finish the production.

In China, manufacturers prefer not to hold stock but only buy (resources and materials), produce, and sell (to their clients).
That means they would only prepare the materials with the exact volume for the production of an order after receiving the deposit.

This approach has a lot to do with the Chinese culture and mindset. The manufacturer was comfortable with the current business model: giving-taking, paying-buying, and we-they. They always act with a thought of 2 poles, 2 opponents, and 2 actions.

In other words, they wouldn’t proceed with production until the payment arrived, shaping a thought of protecting profitability and creating a barrier of making changes for a long-term mutual benefit.

2．Problems encountered: cash flow and supply chains

• Financial damage caused by fines for shipment delay or no delivery at all.
• Financial damage from missing the sales trend and finance growth.
• Cash got stuck in production, and the client could not purchase the right items at the right time.
• Experienced cash flow problems: the client couldn’t invest cash to support business growth for stores.
• A 95-day’s long supply cycle: raw materials preparation, production, assembly, and shipping.
• No sales history was available from each store.
• Unable to manage and plan inventory due to unpredictable sales changes.
• Difficult to request the Chinese manufacturer to change the business model due to long raw materials preparation lead-time and cultural difference and mindset.

3．Origin of the problems: insufficient sales history and long supply cycle

• The client had no sufficient sales data to make an accurate prediction in sales to support the purchasing plan.
• Cash was not available to invest in new production to catch up with new sales trend.
• Long supply cycle: total 95 days.
• Long production lead-time: 60 days per order.
• The client missed the resources and conditions to support the growth and meet the supply demands to enrol into all stores of the chain business.

In order to provide you with a better reading experience, our practical solution to successful supply chain management in a chain store business will be provided in our upcoming post.

If you would like to learn more about it now, please contact us.
If you would like to learn more about our working way in China, read our book the “IAAD China Working Method“.