'Supply' Challenges Ahead

In the year that has passed since the financial community raised a cry for increased free cash flow from cable operators, the industry has been confronted with the need to transform a corporate culture of project- and capital-expenditure-based supply chains into demand-driven, success-based supply chains.

With Wall Street and shareholders asking, "How can you realize a better return on capital invested?" MSOs have faced the challenge of increasing the velocity of cash — and free cash flow — by lowering the overall costs associated with subscriber acquisition.

The rules have changed for cable operators. They need to demonstrate control and predictability in capital budgeting and asset management. They must reduce inventory while improving the availability and quality of existing stock. Yet they must continue to invest in new, revenue-generating and subscriber-retaining services.

The challenge ahead is to implement — either internally or through third-party solutions — supply-chain best practices that quickly, efficiently and positively impact the MSO's cash position. At stake: As much as $354 million in free cash flow and operational savings on a $1.2 billion budget.

During the past five years, cable operators have focused time and money on upgrading, rebuilding, and extending networks to provide advanced services. In the race against satellite providers, cost-conscious and centrally controlled supply-chain management was traded for speed to market. The available capital budget determined what supplies needed to be purchased.

The result: cable operators are experiencing low inventory turns, managing more technologically obsolete items and carrying the cost of excess inventory, as well as the cost of managing that inventory region by region.

Today, with a large percentage of upgrades complete, cable operators are facing a shift in performance requirements away from EBITDA toward generating free cash flow, getting the balance sheet under control and reducing debt levels.

Benefits of SCM best practices

Best practices supply-chain management encompasses all aspects of planning, management, and improvement of material, information, and financial flows among suppliers, manufacturers, distributors, third parties, operators and their customers. Success calls for a commitment from all involved to invest themselves in collaborative, close, trusting relationships. For example:

  • Collaborative, cooperative forecasting ensures a steady flow of material to meet customer demand and better enables suppliers to level-load their factories. The result is a supplier-vendor relationship based not simply on price, but on optimizing inventory across the value chain.
  • Creating real-time end-to-end visibility means all in the supply chain have a common view of current inventory and order information, and have access to key decision making data.
  • Integrated processes merge functional silos and shift the focus toward the business process. Additionally, information technology is enabling the transactions to occur by managing data and work flow.
  • Demand-driven supply chains balance supply and demand through optimizing and synchronizing inventory levels with demand. With a clear view of demand and visibility to existing inventory, policy can be set and quantities can be established with auto-replenishment triggers.
  • Metrics for understanding total supply-chain management cost are centered around customer- and company-facing criteria, balancing cost and performance. For example, delivery performance will balance with inventory days of supply, allowing for a best in class 94.8% delivery performance with an industry best 19.4 days of supply on hand, compared with cable's average of 63.4% and 90.5 days, respectively.

Unique cable situations

As there are various functions across the supply chain, there are also several unique, but closely related supply chains, mostly determined by product families. Product flow for upgrading plant has a different pulse than product flow for maintenance and operations. Because the environments are different, the flow rate of materials, information and finances is different and must be managed accordingly.

A well-managed supply chain, for example, removes the high cost of financing and carrying large quantities of CPE devices (set-top boxes, cable modems, etc.) as well as drop and installation materials.

On a system-wide level, a best-practices supply chain provides visibility to all deployed and non-deployed assets. For daily maintenance, rebuilds and new construction projects, criticality, historical usage, homes passed, and miles of plant can be used to determine optimal inventory levels. Operators also should track asset warranties, license expirations and repair transactions.

Optimizing inventory means that the right inventory is at the right place in the right quantity, at the right time. An increase in inventory turns leads to a decrease in inventory, which leads to a reduction in working capital as well as a reduction in carrying costs, shrinkage and obsolescence. Another opportunity is to streamline and centralize accounts payable, as well as reduce the overall volume of purchase orders by aggregating materials requirements and consolidating the purchasing transactions.

If a cable operator had planned on spending $1.2 billion on materials during the course of a year and traditionally averaged three turns annually, then inventory levels would be about $400 million, carrying costs about $60 million, and shrinkage/obsolescence would be about $12 million. By implementing supply-chain best practices, this same operator can achieve 12 turns, which would result in a $300 million free cash flow savings, plus a $54 million operational savings.

Ultimately, the success of a cable system is not measured on the inventory it keeps, but on the number of customers and their overall satisfaction.

As cable operators restructure their operations and exploit their core competencies to accommodate this shift away from "projects" and toward customer-focused activities such as marketing, sales and cost-efficient delivery, they will be able to measure up to investors' new financial yardsticks.

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