Cash Flow Optimization for Manufacturing
In a World of Inflation

For manufacturers, cash flow optimization has always been important, but it will become an even more important priority in the current inflationary climate. According to Gartner, more than 40% of companies increased inventory in 2022 to mitigate scarcity and inflation. This is just one example of how cash can be trapped as companies respond to inflationary pressures.

Addressing the impact of inflation can also impact other strategic priorities. For example, 67% of US manufacturing executives indicated that their sustainability strategies had been stalled due to cost pressures resulting from inflation. This is despite the fact that sustainability is becoming a major consumer and business buying criteria.

Understanding how customer behavior will change in a world of inflation thus becomes critical. As customers are managing their cash and prioritizing their purchases, it is important to ensure that products are positioned and priced to succeed in a world of inflation. According to Charan, companies that have not adopted digitization and are not using analytics to understand their operations and forecast demand, as well as understanding the macro-level drivers of inflation and how they affect their business, will be left behind.

Crises do not need to be negative. They can be a positive driver for change. COVID-19 accelerated digital transformation initiatives both during and after the pandemic. C-level executives were pleasantly surprised by how quickly their organizations implemented digital solutions and adapted to new ways of working. These learnings have driven even more ambitious digital transformation initiatives.

In the same way, inflationary pressure can act as a catalyst for digital solutions that can help manufacturers free up cash that is trapped in the process and enable better cash flow management techniques.

One of the digital solutions that can be used is automation. For example, many manufacturers still deliver solutions based on an Engineering-to-Order (ETO) process. Customers request a quotation for a solution that requires engineering resources to analyse and design before a quotation can be provided. Engineers need to be involved again to provide a manufacturing Bill of Materials (mBOM) and support the manufacturing, delivery and installation of the solution, not to mention any support required in the future.

As can be seen, this is a resource-intensive, manual process that takes a relatively long time and is prone to errors and miscommunication. The risk of delivering a solution that does not meet customer requirements is real. But, from a cash flow perspective, expensive resources taking a long time to both quote and deliver solutions not only delays the in-flow of new cash, but also leads to high acquisition costs, which is also a type of trapped cash. These cash flow issues are only exacerbated if the wrong solution is delivered to the customer!

By migrating to a Configure-to-Order (CTO) process using an automated quotation and delivery process, manufacturers can free up trapped resources leading to lower costs as well as a shorter-time-to-money. The net result is more cash being freed.

CTO processes rely on pre-configured modules that can be combined to deliver a customized solution to customers. While some compromises need to be made, as the solution can no longer be tailored to each customer, CTO can meet the majority of market and individual customer needs at a fraction of the cost.

Now, instead of the need for engineering resources to be involved throughout the quotation and delivery process, engineering effort can be focused on designing and manufacturing standard modules that can be configured and combined to meet customization requirements. Configure Price Quote (CPQ) systems or dedicated Product Configuration Applications can be used by sales, partners or customers to configure solutions without the need for engineering assistance. Since the solution is based on standard configurable modules, manufacturing can build-to-order or inventory depending on the sourcing strategy, but the opportunity exists for cash flow optimization in this regard. The entire process frees up engineering resources and results in shorter time-to-money, both of which free up valuable cash.

Some manufacturers still want to maintain an Engineer-to-Order (ETO) component to their offering as this provides them with a competitive advantage. But even in these cases, automation of the configurable or non-engineering part of the delivery process provides the same benefits in cash flow optimization while supporting the possibility of additional engineered customization and personalization.

The “secret sauce” that makes the ETO-to-CTO migration viable is Configuration Lifecycle Management (CLM). For CPQ systems and Product Configurator Applications to be effective, they need to be able to present valid configuration options to customers that can be immediately verified to ensure that they are available and deliverable.

CLM solutions, such as Configit Ace®, provide a platform for defining the rules and constraints dictating what configurations that can be offered to customers and under which circumstances. This provides both control and efficiency as Configuration Lifecycle Management (CLM) solutions are designed for fast validation no matter how many configuration choices are available. The same Configuration Lifecycle Management (CLM) solution can power multiple sales systems and applications. This provides a single-source-of-truth on product configuration to both CPQ systems and Product Configurator Applications across multiple brands and channels.

Using Configuration Lifecycle Management (CLM) reduces the risk of offering or delivering solutions that are not valid, but also accelerates and automates the quotation and delivery process effectively leading to cash flow optimization.

Henrik Reif Andersen is the Chief Strategy Officer and co-founder of Configit, the global leader in Configuration Lifecycle Management (CLM) solutions and a supplier of business-critical software for the configuration of complex products. He holds a doctorate in computer science from the University of Aarhus and has more than 25 years of experience in IT development and research.