Looking for Cash? Think About Categories

May 15th, 2009 - by franke

The recent global financial crisis has had a double impact on

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specialty chemical companies as revenues decline and credit tightens. Many companies are responding with the typical functional programs focused on specific line items in the budget or balance sheet. While offering some financial success, functional programs often drive conflict with customers, suppliers as well as internally. For example:

  • Cost initiatives focus on cost savings without a viewpoint about the cost associated with service levels.
  • Departmental cost reductions often leave managers with the same tasks, but with fewer resources.
  • Aggressive AR collection policies and longer AP times put a greater strain on customer and supplier relations.
  • Inventory reductions pose the risk of stock outs, often with the highest turnover products purchased by the largest customers.

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Category Cash Management or C2M is a proven alternative to the functional approach to cash management that offers high gains without adding risk to business operations. Based on over a decade of work with the unique sourcing, production and distribution characteristics of the chemicals supply chain, C2M offers an integrated view of cash generation and utilization, both of which are driven by specific measures of service.

In C2M, cash management is segmented by categories or segments of business with similar cash utilization related service requirements.
All categories have financial measures, like the business as a whole, including Contribution and Current Asset Return. However, each category has unique values for the measures of it service cycle – a critical driver of costs in the supply chain. These costs range from to 20 to 25% of sales (all costs with the exception of raw materials and plant direct conversion) in the business unit. Understanding trade offs between service and the financial measures is where business insights begin. Win – win break points between service and cash can be the focus of discussions with both customers and suppliers.

Performance can be dramatically improved via management of categories. Cost savings of 1% of sales and working capital reductions of over 20% are common. There is a lot of opportunity for using this methodology as most business units have 4 to 6 of 10 possible business categories.

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