As countries shut down, stock markets crumble and economic activity slows to a crawl, it is hard to believe that in a few months the coronavirus crisis may be over. Bigger, well-capitalized companies have the financial strength to withstand the rapidly developing downturn, but most other companies are in tougher situations and survival for many will come into question. However, it is not too early for companies to think about how to position themselves for a successful, speedy recovery.
To do that companies must look deep into how they manage the most basic mechanisms of their supply chains and operations. One of the most important short-term goals is to conserve cash as the world heads into what could be a significant recession. For supply-chain managers, this means four basic things:
Increase days payable outstanding. This is the average time that a company takes to pay its bills.
Reduce days sales outstanding. This is the average time that receivables remain outstanding before they are collected. In simple terms these two initiatives mean longer payment terms for suppliers so the company can keep its cash longer, and collecting money owed from customers as early as possible. Companies should strive to balance DSO with DPO on every project.
Reduce days of inventory on hand. Inventory ties up cash. Even in today’s just-in-time inventory management systems, most companies accumulate too much inventory. The favorable business environment over the last decade encouraged companies to focus on customer service and use large inventories to reduce out-of-stock situations.
Defer capital expenditures and even use force majeure clauses to get out of contracts with long-term paybacks.