Crunching the OEM Cash Cycle During a Component Shortage

Regardless of the industry your company operates in or the products you bring to market, you are subservient to the cash conversion cycle (CCC). While explaining the factors that create this in detail is worthy of an article in itself, for the sake of simplicity I will define it as the amount of time it takes for OEMs to convert the investments made to create a product into revenue, which is attained following the product’s purchase by a customer.

Using this definition, it follows to reason that the smaller window of time between these two points, the better. A cash cycle of 30 days, for example, would imply that the OEM would acquire the raw materials and other critical electronic inventory, assemble the inventory either on their own or through a contract manufacturer, receive and pay all respective invoices, and receive payment from the buyer all within a month. This time frame is inherently ridiculous, but it helps to illustrate the cycle from beginning to end — and it also helps to show why OEMs put such a premium on crunching this cycle as much as reasonably possible.

To say this an uphill battle is an understatement; there are nearly an infinite number of variables that can cause this cycle to extend. Knowing which aspects of your supply chain are responsible for this is vital for a supply chain manager to understand, especially when adopting a strategy to overcome it.

Many of the variables that cause the cash cycle to extend are beyond the OEM’s control. Some more substantial customers, for example, such as municipalities and cities, have special terms that require manufacturers to wait six to nine months for payment, in addition to the time already necessary to complete final assemblies. From the purchase of raw materials to turning the inventory for profit, it’s possible for an OEM to have to wait in excess of 15 months to see returns. That’s a long time to operate without sustained income, and stretching those limits risk the manufacturer dipping into precious working capital, which is necessary to achieve the long-term goals of nearly every business (expansion, new hiring opportunities, R&D investment, etc.).

The Last Time Buy Solution at Partstat was designed from the very beginning as an option for OEMs to acquire necessary critical inventory without the loss of working capital. This gives the manufacturers unprecedented flexibility to fully customize the section of the cash cycle they have the most control over: inventory sourcing. At the very beginning of the design process, an OEM can source the electronic components and semiconductors needed to support the entire lifecycle of their product. Not only does this allow them to bypass issues such as component allocation, obsolescence and other issues related to the current component shortage, but also dictates the ebbs of flows of the cash cycle on their own terms. Even if the terms of their customers require the OEM to wait several months to receive payment on their invoice, their working capital is never in jeopardy.

Partstat offers this solution with no limits in terms of time length, scheduling, or quantity. We will purchase, securely store, and fulfill last time buy inventory (or inventory that is already owned) for three years, five years, or longer than 10 years.

For more information about our Last Time Buy Solutions and their numerous applications in an OEM’s supply chain, click here.