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Analyzing Dollars Lost to Improve Net Cash

Posted on April 8, 2009 by Jeff

Managing any area of business invariably means pouring over a myriad of reports. Reports created from queries with sophisticated refinements like sales by criteria, supplier, manufacturer, and date ranges, or downloaded as raw data into excel to be manipulated with “Vlookups” and array formulas, to numbers pinned on Staples yellow note pads.  If yellow note pads are your preference I suggest the five by sevens.  Whether generated monthly, weekly, or daily for performance or projection; the bottom line when reviewing many reports is identifying areas for improvement.

My confession here is that I’ve looked at all the aforementioned reports in both numerical values and colorful charts and at times have been less than clear on how to use them effectively to improve performance and not head into a finger pointing session, particularly when attempting to advance supplier performance. With the current economic environment Cash is King.  Not that it hasn’t always been, but it’s much more pronounced in this climate.  In focusing on driving net cash I was able to find a reporting motivator by combining several individual reports, “Ready to Ship”, “Open Orders”, and “CRAC” (Cancellations and Returns), into one cohesive performance report.

Understanding the Data:

Understanding Cancellation Data

Ready to Ship - Identifies the suppliers communicated inventory as a percentage of total inventory.  (SKUS In Inventory  / Total SKU Offering = % Ready to Ship)  It should be anticipated that these orders would ship within a predetermined timeframe based on warehouse fulfillment rates, let’s say 48 hours from the time in which the order was received.

Ready to Ship Cancellations - Identifies the total dollars cancelled as a percentage of total volume sold ($ Cancelled / $ Sold = Cancellation %). The total lost dollars are included.

Dollars Lost - This is an important piece of information to know if you want to effectively move the conversation into a positive light. Communicating the opportunity of dollars lost positively, without getting into the finger pointing that can happen if the cancellation numbers become the focus of the conversation, should motivate the supplier to make improvements. I frequently hear from suppliers that our extensive product offering negatively impacts their cancellation rate because our business model turns their inventory that they consider C’s and D’s, or items that they normally do not have to replenish as often. This is in fact true but the actual impact is seldom a part of that conversation.  This is where “Dollars Lost” data helps turn the conversation back to performance as we are already only considering “Ready to Ship” inventory. This percentage identifies Cancellations as a percentage of Ready to Ship items ($ Cancelled / % Ready to Ship = Dollars Lost). This is where the customer expectation is no longer being met by the supplier.

Overall - By assigning a simple ranking to where each supplier stands, related to the average, in each of the areas reported, you provide a point of reference for how an individual supplier is performing related to your overall business. Again this helps move the conversation from finger pointing, to a more productive “search for solutions” focus as suppliers see their competitive comparison.

You’ll note I’ve chosen to not focus on open orders or returns in an effort to focus suppliers on those improvements yielding the greatest impact to net cash. Aging open orders naturally turn into cancellations.  These are accounted for in our data after refining return’s into their respective categories.  Once the returns have been categorized into “Don’t Want”, “Damaged”, “Defective”, or “Wrong Product”, the impact to net cash, with improved supplier performance, is relatively insignificant as compared to “Dollars Lost”. Don’t get me wrong, in a perfect scenario those dollars would be nice, but prioritize, prioritize, prioritize.

Opportunities to be communicated:

Understanding Lost Dollars

Cancellation Changes - I’ve provided here the average cancellation % and total dollars cancelled at the bottom of each respective column. Rather than discouraging struggling suppliers by pressing them to perform relative to your top performers; encourage them to drive towards the average cancellation rate, in this case we are using 4%.  In order to show the impact of such an improvement, calculate what their numbers would look like if they did meet our set cancellation goal of 4%.   Not only does the supplier then have a reasonable goal, but the available dollars is also clearly represented. Your impact to average cancellation rate is significant, by focusing on only two of the poorest performers in our example our average cancellation rate moves from 6% to 4.13%.

Long story short, ship what you’ve communicated is in stock + stock more = $$.


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