Improve Demand Forecasting: The forecasting is not a true science, but its accuracy can be improved over a period of time. The forecasting is nothing but prediction of future sales based on the past consumption pattern or sales of products by using regression methods some times for better decision. The forecasting begins with historic sales and inputs from front line staff and later on monthly basis providing estimated product wise sales in quantity for the following months. If numbers of SKUs are very large and demand is not uniform across SKUs, then follow SKU level forecasting. Though it may be a very cumbersome and time taking exercise, it is worth the effort. Demand forecasting should form the basis for production planning and material procurement plan. This would help in achieving lower level of inventory and thereby avoiding unnecessary stocks. The whole process will bring more accountability in all departments.
Keep a Tab on Receivables: If left unnoticed, receivables can hold a lot of cash. The time to time reminders are to be sent to customers a week before the due date. Further, continuous follow-up needs to be done, if the bill is not paid on the due date. For better and transparent follow-up, better to have a grouping of receivables under different heads: Bills not yet overdue, Overdue and non-moving. The criteria for classifying receivables as non-moving can be decided based on the credit term and nature of industry. Next, a detailed analysis of each non-moving receivable should be done along with the accounts department. If there is dispute for any receivable, the concerned person should quickly convert the outstanding into cash. When receivables are difficult to recover, it may be possible to recover the goods from the customer, if goods are in perfect condition. Taking back the goods will result in reversal of sales and profit booked earlier, but it is better than not recovering at all. The company may have to sell such returned items at a discount if the goods are sensitive to change in seasons. Even then, it makes more sense to convert such receivables into cash rather than keep it as an irrecoverable amount. Finally, overdue outstanding is very high and if it looks impossible to recover the amount in the ordinary course of business, company may have to recover it through legal means. This action may also helps in sending out a message to other customers who may require a similar approach. Of course, taking legal action should be the last option after understanding the value of the customer in the long run, cost of litigation and value recoverable.
Dynamic & Robust Credit Policy: The robust credit policy is must for supplying goods on credit to the customers. The credit policy should be based on assessment of credibility of the prospective customer, expected sales value, credit terms and the risk which the company may be willing to take and should require strict adherence to the credit limits while dispatching goods. It needs to have a built in system to review credit limit while booking orders. If the credit limit is likely to exhaust with new order, it should be communicated to the customer to either receive the payment before delivery or to at least take an assurance that payment will be made on delivery. Credit policy should also have a provision for any overdue outstanding bill. Such cases should be treated as if credit limit is not available and no dispatches should be made until overdue outstanding is paid by the customers. Deciding credit limit should not be a onetime affair. The limits should be reviewed at least twice a year even in the normal course. If there are continuous defaults by customers, the limits should be reviewed and revised without waiting for the periodical review. The review should take into account sales history and payments.
Robust & Dynamic Inventory Clearance Plan: The inventory needs more attention than receivables and similar but more stringent policy is required for control as well as reduction of inventory level. All kinds of inventories including Raw Material, Work-In Process, Finished Goods as well as consumables (Stores & Spares Inventory) should be categorized as moving or non-moving based on the nature of industry, type of process, age of the spares (duration not in use, but kept in stock) and its value. Based on this statistics, management can consider various options to convert non moving into cash. The classification of inventory into moving and non moving items needs to become a regular feature of any reporting system and real action is more important based on this data. Such non moving stocks should be disposed off either selling at discounts or to make use of items for some final products which could be saleable. If non moving finished goods include some un saleable items, then the management may have to take a decision to dismantle the system, make use of parts wherever possible and sell the remaining as scrap because there will be no gain by keeping the items in stock. In case of export orders, invariably, some export leftovers remain, which need to be disposed of in the local market. If the left overs are not the standard items sold in the local market, they may command far less price than the export price or a comparable price. The company should accept the fact and make a decision to dispose of such items at the earliest instead of waiting for a particular price. This is better instead of allowing left overs as non moving inventory, tying up cash. If not sold in time, the value of such items would further decrease, putting an additional burden on companys profitability as well as cash.
Focus on Flow of Material Instead of Production: The concentration on flow of material rather than production in the manufacturing process will reduce not only inventory level, but also improves inventory turn over ratio. The lead and spread time can be reduced to great extent. This concept is very well understood by Theory of Constraints. The implementation of TOC will help you to reduce and control inventory to minimum required level.
Eliminate Communication Barriers/Gaps: The management should have a well defined communication system to pass information along the chain. The holding of meeting with production, planning and purchase departments is a must wherever a custom order is received. If orders received are more, meeting at fixed interval are essential. In case of any confusion, the concerned person should escalate the problem fast to stop producing any wrong product. The systems like SAP can do this job better helping in decision and tracking the product status at any movement of time.
Align Performance Indicators with Organization Goals: When the cash is made part of a companys performance indicators along with sales and profitability, it should also reflect in key performance indicators of concerned sales representatives. Sales team should be measured not only on achievement of sales targets, but also on collections from customers. Similarly, the production personnel should have inventory turn as a key performance indicators along with production, machine utilization and on time delivery.
Rotating Discount Sales: If companies have many shops at different locations across the country, and sale is not uniform across all the shops. Then shift balance material from the shops where no chance of further sales to the shops where there is a scope of sale. Such finished non moving stocks must be kept rotating still the stock is exhaust completely. This is possible only when all shops have been connected each other and sharing mutually the data for taking decisions time to time.
There is a need to manage working capital more efficiently in good as well as bad times in order to free up hard cash tied up in inventory and receivables. The steps to release cash are not one time fixes, and should be followed in a continuous basis. By adopting a systematic approach, exercising more discipline and providing right incentives, organization can free up extra cash, and reduce their working capital requirements.
The author is Senior Manager & HOD Spinning PV, Raymond Limited, Textile Unit, Chhindwara (Madhya Pradesh)