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Demand and Supply Velocity and Variability - October 2022

Bill’s Building Blocks - October 2022
Demand and Supply Velocity and Variability

You can relate to this. Your monthly paycheck is deposited into your checking account from which you issue a regular monthly payment for your electric bill. This cycle of receiving pay and making a payment is repeated each month. The number of days, measured at the same point (i.e., your checking account balance) between the date your paycheck is deposited and the date your payment is issued is the velocity of a cash-to-cash cycle. The number of days in this cash-to-cash cycle should be the same month-to-month except when payday falls on a Sunday, when payment service is suspended for a holiday, or when you have an insufficient checking account balance, or when… These exceptions introduce variability into the cash-to-cash cycle.

Now substitute a customer’s downstream demand order-to-delivery-to-cash process for your paycheck and substitute a supplier’s upstream supply order-to-delivery-to-cash process for your bill payment. There still defines a regularly reoccurring cycle with cash-to-cash velocity and cash-to-cash variability. Last month I wrote about separating what you control from what you cannot control. While keeping this idea simple, you control the choice of supplier but have little control over upstream supply lead time. You control delivery but have little control over who is your downstream customer.

 
The primary risk comes from the probability that supplier inventory will not be received on time and from the probability that customer cash will not be sent on time. Your supply base needs to be segmented into different degrees of lead time predictability. Lead times depend on the transportation mode, the international and/or domestic logistics routing, warehousing space constraint, and the integrity of the end-to-end freight priority. Your customer base needs to be segmented into different degrees of payment reliability. Payment depends on cultivating new customers, matching product value with market need, repeat ordering, and the customer’s cash and/or credit position.

Measuring the velocity and variability of both demand and supply order-to-delivery-to-cash cycles can provide early warning of supplier inventory risk and customer cash risk.

©2022 William T. Walker, CFPIM, CSCP-F, CLTD-F, CIRM has 42 years practitioner experience, authored Supply Chain Construction and Supply Chain Architecture, and teaches Supply Chain Engineering at NYU Tandon plus Demand Planning at Rutgers Business School. He is a 40+year ASCM member and APICS E&R Foundation past president. email: [email protected]