A couple weeks ago I wrote a post Game Changing Supply Chain Business Model that was the beginning of my conversation on challenging the traditional supply chain management models. I’d like to continue the conversation by discussing Order to Cash, and how expanding our views on what is really needed for margin management can drive serious, positive change in our supply chain businesses.
Order to Cash is a common approach to managing business; however, the name itself implies that neither profit nor planning is at the center of this management approach.
Quick Review of the O2C Process
- An order is placed by the customer
- The order is entered in the system and approved
- The order is picked/filled, whether a product or a service
- The product or service is delivered to the customer
- An invoice is created and sent to the customer
- The customer remits payment
- The transaction is entered into the general ledger
- The vendor receives payment
It seems simple enough, but that’s precisely the problem – it’s too simple.
The truth is the Order to Cash process does not show a true picture of any transaction. It does not provide any visibility into profit and loss, margins, sales predictions, or future inventory requirements. O2C is merely a subset of the actual process a business needs to go through in order to be successful.
There’s More to it Than That…
The O2C model, while currently an industry standard business process, has many limitations because it has no built-in methodology for dealing with variables like:
- What products should be carried in inventory
- When to carry seasonally-related inventory
- What quantities to maintain layered inventory vendor-managed inventory (VMI) costs, where inventory is consigned by the vendor to gain a selling presence within a distributor without the latter paying for carrying costs
- Invoice VMI (vendor managed inventory), where the vendor generates a suggested replenishment order that is ordered and paid for by the distributor
- Dispute submission and resolution
- Manufacturers’ return policies, refunds and deadlines
In other words, Special Price Agreements (SPAs), other Trade Agreements and Vendor Support Agreements are not taken into account.
However, what may be the most adverse outcome of the O2C system is the lack of real-time data that will allow businesses to see trends and react to them before any real damage can be done. Because the eight steps of the O2C process work in isolation, the best c-suite leaders can do is to look at monthly or annual reports so they can see what the company’s financial position is.
Business planning that relies on historical data reviewed and analyzed at year end is just like driving by looking in the rearview mirror – it is not going to get you where you need to go. At the very least, you won’t get there on time!
ERPs do an excellent job of streamlining workflow between various departments within an organization, but while they might contain vast amounts of distributor data, they often require third-party add-on report writers to mine the data held captive within the system. Due to complexities or lack of know-how, distributors are often unable to “slice and dice” the available data in a way that would give them insights into their business and help them plan for increased profitability.
Each sale has its own profile which impacts margins, profit and loss. With no way of knowing you’re going to meet the margin you’re hoping for, you’re out of control. You need a full system in place that shows a true picture of any transaction.
Getting to a true profit-based planning model requires evolving from a conventional O2C approach to a powerful business analysis/intelligence focus that will allow a company to find more effective ways to streamline their organization, increase profits and execute on initiatives that drive a competitive edge.