This morning I was thinking about purchasing as a pivotal supply chain component and how critil this department is to the economic welfare of both manufacturers and distributors. We are used to expressing the supply chain economics in terms of ratios like “book-to-bill” or “order-to fulfillment.”
Book-to-bill is a very telling ratio. If over a one-month period I have booked a million dollars in sales that have not yet shipped, and I also have a million dollars in outstanding receivables, then I can say I have a 1:1 ratio and I can quickly picture a short-term economic health posture for my company. I might conclude that I have enough money coming in to cover my payroll, replenish inventory, and pay my vendors. But I cannot rest on this 1:1 ratio and say my business has a long-term survival guarantee.
If I look at the same ratio on a quarterly or yearly basis, I can see trends that provide the extra visibility to allow me to assess my business strategies going forward. For instance, if I have a yearly book-to-bill of 1.2:1, I am in good shape and maintaining a strong backlog which may eventuate in an extended product lead time until I can manage the necessary infrastructure growth. If my book-to-bill is 0.8:1, then I have to tighten my spending belt. Eventually, my billing will drop to my lower booking numbers; I am not growing. I am in fact shrinking. So how does this impact purchasing?
If sales are down and the book to bill is <1:1, I will want to look at and possibly adjust terms on supplier contracts going forward. I will also have to consider the boiler plate terms wording on my company’s purchase orders. I may have to decide with Accounts Payables who is going to get paid on time and which vendors I may have to leave twisting in the wind. I may decide to build less for safety inventory or adjust my build-to-stock quantity and only build to order.
When the book-to-bill ratio changes, the materials strategy needs to be looked at for a possible change. This implies that the book-to-bill numbers are made known to purchasing management and that the company has a way of adjusting procedures to guarantee that the economics track to ensure the short and long term health of the company.
As a system, the purchasing department asks the basic questions: What do we want to build; what do we have on hand and; what do we need to buy? The build-to-order is the minimal requirement for materials in any given factory production plan. The forecast is salted with what we will try to sell over the next “X” months and what we will build as backup inventory.
The purchasing department has to protect the integrity of the vendor relationships and part of that is paying on time. While finance actually cuts the check, they do this because they have to. Purchasing want vendors paid on time because there is a reciprocity of faith between buyer and seller that should not be jeopardized.
The bottom line is that purchasing should be informed of the book-to-bill ratio and the department head should be able to push back or reduce the amount that is purchased based upon actual needs vs. overly ambitious sales projections. if those projections or build-to-stock numbers have had a history of not being very accurate in both quantity or model numbers, then the company y is threatening its long term viability by tying up too much money in inventory and ultimately sacrificing relationships with suppliers by not being able to pay terms on time… if at all.
A simple way to say this is that there is no revenue coming in on projected sales or inventory sitting in the stockroom. The “bill” part of the ratio drops, the company has less cash to reinvest in growth and the extra inventory may have to be sold for pennies on the dollar. Part of good inventory management involves inventory turnover numbers; the higher the better. Purchasing can have a tremendous influence by just keeping at least one eye upon the book-to-bill ratio. The finance department will welcome your concern.