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distributor, retailer, importer, exporter, supplier, customer, logistics service provider or other type of firm that participates in supply chain management, a major key to success is time compression. Increasing velocity, rapid response to changing market conditions, minimizing time-and sustaining that velocity--are the reasons for collaboration, integration, supply chain visibility and other endeavors to accelerate the movement of product and information.
There are numerous financial and non-financial cycle time metrics, for example-on-time customer order delivery, manufacture to order complete, cash conversion cycle and days sales outstanding. A good one should be a measure of the length of time for a process, especially one that crosses the organization. The cycle time metric should be important to the company. It should recognize pain points or should add value and competitive advantage for the company.
A key process that crosses the organization is days in inventory that measures the number of days that inventory is held. For manufacturers this would include raw materials and work-in-process. Days-in- inventory is an important part of the cash conversion cycle. Reducing inventory levels and days of inventory improves profits and frees up needed capital; and this pleases CEO, CFOs and shareholders.
This measure is often calculated as Inventory/(Cost of Goods Sold/365 Days). This method of calculation can be misleading and understate the total inventory in the supply chain. It excludes inventory that is on order and is being manufactured at suppliers and inventory that is in-transit. This is an omission that results in an understatement of the real days of inventory and the cash conversion cycle.
For purposes of this article, we will include the time from placement of purchase orders on suppliers until delivery. With Section 404 of Sarbanes Oxley, adding this inbound portion to the calculation...