In our previous article, we explained why a supplier of a chain store in Europe faced a cash flow problem, including the detailed case scenario. The ultimate goal is to manage inventory and supply chains successfully so as to avoid cash flow issue in a chain business.

We can find practical solutions and implement several practices based on the IAAD China Working Method.
Solutions vary in different situations and issues. You may take this case as a reference to apply the key of the solution to the same or similar cases with a customised strategy, when necessary, to prevent similar supply chain and cash flow issues.

To reach the goals mentioned in the previous part of this use case, there’re several steps we need to follow carefully:

4. A practical solution to solve the cash flow and inventory issues

Before digging into the details, let’s review our step-by-step goals:

• Shorten the 95-day supply chain cycle.
• Shorten the production lead-time.
• Convince the manufacturer to accept smaller orders with lower order amounts.

To some extent, the goals are also the solutions to solve the origin of the problem for the long term. Here’s why:

• A shorter supply chain cycle enables the client to purchase and make changes with more flexibility.
• A shorter supply chain cycle shortens the cash cycle in production orders, making cash more flexible to place new orders on demand.
• A shorter manufacturing lead-time makes a shorter supply chain cycle possible.
• When smaller orders are possible, the client has more flexibility to handle the orders when changes are requested, making more time for the client to deliver the goods and avoid fines.
• Delivery in time with changes also helps avoid missing the golden sales season and generate more sale revenue, resulting in an increase of cash out of profits and a more flexible cash flow cycle.

Why is it challenging to implement the solutions?

The client wanted to execute solutions to reach the ultimate goal. However, it wasn’t easy to implement the solutions in reality.
First, let’s review the origin of the problems:

• The manufacturer’s operational model was based on a 60-day production cycle.
• The manufacturer needed to change its business and operational model for only our client who asked to shorten the lead-time. But the manufacturer was not willing to cooperate. They could have agreed and invested in changing this model—stocking up more materials.
• The manufacturer also needed to wait for the parts and raw materials from their suppliers, which was one of the critical factors that affected the lead-time.

As we can see, the only way for the manufacturer to reach a shorter lead-time is to invest in inventory (stocking up parts and raw materials). Usually, the manufacturer does not want to take any risks and only starts to act after receiving the deposit.
If you expect the manufacturer to stock up the materials for you, they also need to know what products you would order. Unfortunately, the client was not aware of this because the sales data was missing.

For this reason, we need to discuss with the manufacturer to prepare the parts and materials before the order confirmation.

Our proposal: A longer-term or bigger buying plan is needed to thoroughly implement shorter repeating fixed order cycles—at least a fixed minimum 6-month buying plan.

A long-term 6-month buying plan

Firstly, let’s categorise the product lines into two collections: the Basic and Variable.

• Basic lines: are stable and always needed.
• Variable lines: can randomly meet the delivery demand of a sudden sales spike or drop.

Within 6 months, a fixed 2-week shipment cycle should be possible:

• Basic collections: a fixed amount to be delivered every 2 weeks.
• Variable collections:

That is to say:
Within every 2 weeks, a shipment and payment with the fixed basic + variable collections shall be ready:

• A deposit of a 2-week ordering cycle shall be made to the manufacturer. 
• Stock for 2-week basic and variable collections shall be ready at the client’s side.
• Stock for 2-week basic and variable collections shall be ready at the factory’s side.
• Orders with basic + variable collections shall be prepared and delivered every 2 weeks.

In this way, the manufacturer will be willing to BUY (parts and raw materials) and PLAN (production) with the 6-month commitment. Thus, the client will be able to benefit from this 2-week shipment cycle and request changes for the variable collections on sudden demand.

The direct outcomes of a fixed 2-week cycle:

• 2-week payment cycle: the client has a faster movement of cash that enables them to make changes on demand.
• 2-week delivery cycle: a more flexible supply chain cycle is possible for the client to make changes on demand.
• 2-week stock at the client’s side: the client will be able to deliver the products in a short period if any spikes in sales.
• 2-week stock at the manufacturer’s side: the manufacturer will be able to deliver immediately on demand in case of any sales spikes.

As long as both parties agree to always stock up the basic and variable products, there is a high chance to sudden changes. Basically, we will still have 4 weeks to stabilise the situation.

With a 2-week delivery cycle, there will be regular payments going to the manufacturer to lower their risks for each order.
With a 6-month buying plan commitment, the manufacturer will also be able to plan their purchasing so that they are more “comfortable” to support this 2-week supply cycle.

*** An important note:

As the order amount will rise within the 6 months, the client will be able to place separate orders outside this Buying Plan if needed; or in the meantime, be able to make the manufacturer agree to increase the order quantity of the basic collections on demand.

Thus, we will achieve a shorter cycle that enables us to scale up the items by expanding the Buying Plan.

Supported by the IAAD China Working Method, it enabled us to convince the manufacturer to agree with our proposal and maintain the quality and stability. It requested 3 essential tactics based on the IAAD China Working Method:

(1) Interest – IAAD China Working Method used by CIL

As mentioned, the manufacturer usually is not willing to change its business and operational model for one client.

Interest, as mentioned in our previous USE CASE articles, is the trigger for the manufacturer willing to cooperate with you. An interest incentive leads the manufacturer to work with you in a way that helps fulfil the buying plan.

First, we look at the financial interests when we have expectations from the manufacturer. If it requires a manufacturer to change its business and operational model for you, the financial benefits must be attractive enough for them to negotiate with you.

Second, the strategic interests.
Strategic interests generate more financial benefits naturally to the manufacturer, such as mutual growth opportunities, a shorter cash flow cycle, and a long-term business commitment. A proposal with these strategic interests on a new horizon helps you grab their full attention.

Third, the legal interests.
When a financial and strategic interest is seen in your proposal, the manufacturer still needs certainty and assurance.  When you commit legally to a long-term business relationship, you create a legal interest for the manufacturer to accept the plan. They would be more than willing to sign the contract with you. The more detailed and well prepared your agreement is, the stronger impact the legal interest you would create on the trust and reliability of the cooperation.

(2) Agreement – IAAD China Working Method used by CIL

The proposed buying plan commits long-term cooperation. The agreement describes legally how the plan eventually works in the practical execution, covering the buying plan, delivery plan, responsibilities, amount of products, and step-by-step actions that shall be taken accordingly.

In addition to the responsibilities, we need to avoid quality failures or other damages while executing the plan. It’s also important to have the manufacturer agree with the quality standards and specifications. The supply cycle is short, and there would be no room for any negotiations and disputes. Any negotiations and disputes will affect the buying plan execution, causing shipment delays.

A strategic agreement covers obligations and compensations in detail:

• Who would take the responsibilities if quality failures were found, the shipments or payments were delayed?
• What would the compensations be?
• When and how the parties would compensate in all situations?

With a clear agreement, it helps you avoid unnecessary negotiations and disputes that would significantly affect your supply chain cycle, especially when you only have 2 weeks for each cycle.

(3) Assessment – IAAD China Working Method used by CIL

With a 2-week cycle, both production and inspection timelines are very short. If the quality inspection is affected by the production, it will directly affect the delivery window. That means you have higher risks of missing the delivery window and eventually affecting the whole supply chain cycle.

There are 2 options you can choose to take action:

• You can classify the quality inspection priority/time you would spend on each type of items. You can focus on the items that show a high potential of defectives or issues in history.
  Shortening your overall inspection time helps save up some of your time. It reduces the risks of quality issues for specific products, covering most of the whole order value.
• You can implement the inspection assigned to the inspector who works daily at the end of the production line. As a team member, he will inspect the goods as a part of the inspection on the production line. In this way, there will be no separate inspection needed that might hold up your delivery. The onsite inspection will be part of the assembly line, taking no extra time but working together with the lines in parallel.

Conclusion:

Cash flow management is the key factor to successful Strategic inventory and supply chain management helps you manage your cash flow successfully.

To learn more about solutions to your cash flow and inventory issues when dealing with manufacturers in China, contact us now.