varies by customer,” said Frank Cespedes, senior lecturer at Harvard Business School. “Some buyers say ‘yes’ or ‘no’ when you make a call; others require multiple iterations of proposals. Some buy what you have in inventory; others require customized items. Tose things affect the time to receive cash and the cost to fulfill orders. Good account reviews unearth that information.”
Companies might also explore requiring bigger deposits from customers, said McQuaig. Sweeten the increase by emphasizing customer benefits. Maybe you already have some needed material in inventory that the customer can actually come and see. Or offer free early delivery so the customer can maintain the material on site. Emphasize that earlier payment helps the customer avoid higher prices later.
As for the outward flow of cash, a tried-and-true tactic is delaying the payment of monies owed. “Good financial management on the buy side has always stretched out payables,” said Cespedes. “Tis is particularly so in an inflationary environment where businesses must pay a lot more attention to the payment cycle.”
Stretching payables can, of course, backfire. For starters, it can mean the loss of the 5 percent or 10 percent discounts many companies offer customers that pay before their due dates. It can also result in higher prices for goods and services. “Extending too far makes you more of a risk,” said Beaver. “And suppliers tend to give better prices to customers that are less risky.”
And there’s also dependability of deliveries to consider: Ongoing supply chain disruptions will cause vendors to favor deliveries to customers that pay on time or early. Te cost of not having essential materials can be greater than the interest cost required to borrow money to bridge cash gaps.
Mitigating Costs
In an inflationary environment, suppliers of goods and services tend to raise their prices. And higher rates of inflation tend to make the increases bigger. “When inflation is 2 percent, everything tends to increase by that amount, plus or minus a little bit,” said Conerly. “But at 7 percent inflation, say, prices tend to increase by that amount plus or minus a lot.”
Businesses should try to get readings on anticipated future increases and shortages. Tis can be done by maintaining close contacts with vendors. “Work closely with suppliers and develop good relationships with them,” said McQuaig. “What do they see ahead in terms of product availability and price?”
Tere’s another advantage to close contact, notes McQuaig. Te suppliers may give you a little more favorable treatment. For example, you might leverage any significant volume you’re doing by asking the vendor to hold inventory
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you would normally keep in stock. You can also ask if a price commitment now will remain firm for the duration of the season.
Another cost-saving move is to pursue less expensive alternatives to pricier goods and services. “Domestic inflation has been higher than in most of the world,” said Conerly. “Some businesses are shifting sourcing to other countries.”
Finally, dig deeper into the reasons for suppliers’ price hikes. “Are goods and delivery cost increases in line with inflation?” poses Beaver. “Or are suppliers trying to pad their own margins a little bit, just because they see inflation as an opportunity? Tat sometimes happens.”
Trimming Inventory
Before inflation appeared on the horizon, businesses responded to supply chain disruptions by purchasing and holding whatever they could get their hands on. Any step to avoid running out of product seemed like a good thing.
Times have changed. Now too many warehouse goods can tie up cash just at a time when company treasuries need more liquidity. “Businesses need to be thinking about how to manage their inventory better,” said Anderson. “Tey need to make the right decisions on what, when, how, and where to buy it, as well as where to store it. And they need to manage their supply chain network to maintain strategic inventory stockpiles.”
Also relegated to history is the unmodulated “just in time” ( JIT) delivery paradigm seen as a strategic hallmark after the great recession of 2008. While JIT helped companies maintain good cashflow by trimming inventory investment, the supply chain debacle highlighted the importance of moderation.
“Businesses have to ask whether it’s better to have too much inventory or to run your customers out,” said Anderson. Given that neither situation is ideal, Anderson advises maintaining sufficient inventory stockpiles to support key customers while maintaining JIT stock for others.
Beefing up stock of critical items can be a smart move even in these inventory-cutting times, said McQuaig. Given the continuing supply chain issues, stocking out of a needed item can result in the loss of important customers.
Te decision on overstocking key items must be made on a case-by-case basis. “Generally speaking, it's a good idea,” said McQuaig. “Te danger is the possibility of running out of cash if you do not have enough working capital.” Companies can obviate such difficulties by running the monthly or weekly cashflow forecasts described earlier in this article.
TPI Turf News July/August 2022
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