CASH TO CASH CYCLE TIME IMPROVEMENT

INITIATIVES AT LEXMARK
Executive Sponsor
Donna Covington

Authors
Alfredo Saenz, Biju Damodaran, Ching-Wei Wu, Eric Portzline, Jesse Shim, Mick Keck,
Mike Habersack, and Steve Rardin.

Lexmark International, Inc., 740 W New Circle Rd., Lexington, KY 40550, USA

INTRODUCTION
A number of supply chain practitioners, not to mention Wall Street, are of the opinion
that the cash to cash cycle time is a good indicator of the health of a companys supply
chain and overall competitiveness. Over the past five years, Lexmark International, Inc. has
implemented a number of supply chain initiatives aimed at improving its cash flow position.
This paper outlines the internal and external initiatives that lead to improving cash to cash
cycle time at Lexmark International, Inc.

COMPANY BACKGROUND
Since its inception in 1991, Lexmark has become a leading developer, manufacturer
and supplier of printing and imaging solutions for businesses and homes. The company's
products include laser printers, inkjet printers, multifunction devices, associated supplies,

services and solutions. The principal customers for the company's products are dealers,
retailers and distributors worldwide. The companys principal offices are located in
Lexington, Kentucky, with manufacturing and assembly facilities in USA, Mexico, Scotland,
China and the Philippines. Lexmarks major competitors are HP, Canon, Samsung, Epson,
Kyocera, Ricoh, Fuji Xerox, Xerox, Konica-Minolta and Brother.

CASH TO CASH CYCLE TIME

There are many metrics that companies use to measure its supply chain. Cash - to Cash cycle time is a metric that is used to assess how well a company is managing cash flow.
Cash - to - Cash cycle time is defined as:

Cash-to-Cash Cycle Time Definition

Cash - to - Cash cycle time =

Inventory days of supply + Days sales outstanding

Days payable outstanding.

Reducing this cycle time improves a firms cash flow position and also reduces the
working capital requirements. The cash cycle equation has three components: 1.) Inventory
days of supply, 2.) Days sales outstanding, and 3.) Days payable outstanding. Analyzing the
three components tells you how your supply chain is impacting your companys cash flow
management. For instance, a high inventory could mean that there are deficiencies in demand
forecasting, raw materials and/or components planning, supplier delivery reliability,
transportation and warehousing among others. High accounts receivables (DSO) could point

to shortcomings in order fulfillment and invoicing. And finally, accounts payable measures
supplier management and leveraged buying power.

Supply Chain Strategy

Lexmark embarked on a supply chain strategy in 2001 aimed at providing a
competitive advantage. The strategy was comprised of the three Cs customer loyalty,
reducing cash cycle, and focusing on the best total cost.
While the supply chain strategy is relatively simple, execution of this strategy brings a
competitive advantage. Lexmark has been able to drive service level improvements for
customers, reduce total cost, and reduce the cash - to - cash cycle. Driving customer loyalty
through improved service levels and metrics such as delivery performance and cycle time
drives revenue growth. Reducing total cost year on year allows Lexmark to be the low cost
leader across the supply chain. This is an important initiative in a market where prices
(AURs) can decrease at 20% or greater year on year. In addition, reducing the cash - to - cash
cycle allows for cash to be invested in new initiatives for Lexmark.
The supply chain strategy and the improvement initiatives have allowed Lexmark to
grow revenue, be cost competitive, improve EPS and the companies cash position. This
competitive position has aided our sales and marketing teams in increasing revenues from
$3.8 Billion to $5.3 Billion since 2000.
This paper will focus on one component of the strategy: Cash to - Cash Cycle.

Why did LXK focus on the C-C metric?

The printer industry is highly competitive with high capital and R&D investments.
Since 2001, in an attempt to improve its cash position and competitiveness and to reduce the
working capital requirements, Lexmark has pursued numerous structural initiatives focusing
on reducing cash - to - cash cycle time. By focusing on the three components, Lexmark has
improved its supply chain performance and its competitive position. The positive business
impact from focusing on cash-to-cash cycle time, while maintaining customer service levels,
over the past four years can be easily seen in the charts below:
Chart 1 shows the decline in cash to - cash cycle days of over 45%
Chart 2 shows the cash flow from operations, nearly a 300% increase since 2001
Chart 3 shows the reduction in inventory (in days) of just over 32%.
Chart 4 shows the improvement in service levels for customer deliveries that increased
by 15%
The performance demonstrated in charts 3 & 4 is more impressive when you consider that a
portion of our business had an increase in manufacturing lead-time due to sourcing
adjustments.

Chart 1 Cash to Cash cycle time in days, 2001 2004.

45%

2001

2002

2003

2004

Cash to Cash Cycle

YoY Change %

Chart 2 - Cash flow from operations, in millions of US Dollars, 2001 2004.

300%

2001

2002

2003

2004

Cash Flow

Chart 3 - Inventory days of supply. 2001 2004.

32%

2001

2002

2003

2004

Days of Inventory

Chart 4: Service Levels, 2001 - 2004

15%

2001

2002

2003

2004

Service Level

CASE STUDY

Achieving significant, sustainable, improvements to the supply chain as highlighted

above is no simple task. No one change to the business could result in the improvement of all
areas of the cash cycle, therefore this paper will outline the supply chain process changes
resulting from Lexmarks strategy. The highlighted processes include: new product
introduction (NPI), manufacturing flexibility, and product flow optimization (PFO). We will
also describe initiatives in accounts receivables, accounts payables and inventory
management. Lastly, we will describe some of the organizational changes and the effective
use of metrics to drive operational improvement.

NEW PRODUCT INTRODUCTION

Lexmark involves the supply chain organization in its new product introduction (NPI)
process primarily through the use of cross-functional supply chain development teams for
managing the transition from one product to another.

Supply Chain Development teams

Lexmark established Supply Chain Development teams focused primarily on each
new product and product enhancement during the design and development phase. This team is
responsible for monitoring, identifying, and resolving issues related to logistics and supply
chain early in the development process. Some of the supply chain benefits due to this
involvement are:

Design for flexibility to enable low-cost, low inventory product differentiation at point
of distribution.

Definition of factory-level build plans to optimize flexibility while reducing the

number of touches in final-stage assembly and at distribution.

Optimization of shipping cost and time by early review of product size and weight
specifications.

Optimization of product handling at the distribution center by ensuring optimal pallet

configuration at the factory.

Transition Management Teams

Several months before production begins for a new or follow-on program, the Supply
Chain Development team facilitates a weekly meeting known as the Transition Management
Team (TMT) meeting. While the focus of the meeting is to ensure a successful start of
production, transition management is the key. This transition management has two facets:

Transition from team to team (e.g. from Development to Tooling Manufacturing)

Transition from old product to new product.

The TMT is established on a per-program basis. Some of the departments or

functional areas involved include development engineering, manufacturing engineering,
tooling, supply chain, demand planning, supply planning, information technology, packaging
engineering, and software development.
To aid in the transition process from an old product to its replacement, this team is
also responsible for the monitoring and purchase of long lead-time parts for both the old and
new programs to ensure a low inventory level of end-of-life product -- The proper inventory
level of the new product and a low number of stock-outs (the Holy Grail of Supply Chain
Management!). Recent successes at Lexmark have resulted in very low stock outs of product
during the transition period, while ensuring low levels of obsolete inventory.
Historically, a products end of life often resulted in higher than optimal inventory as
separate groups managed the withdrawal of the existing product and the introduction of the
replacement product. Lexmarks Transition Management Teams, lead by supply chain
professionals, developed a process to minimize EOL inventory without impacting customer
service levels.
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Two areas are key to reducing EOL inventory - product transition synchronization and
part commonality. Synchronization of outgoing and incoming products well before new
product start of production (SOP) is crucial to maintaining service levels and minimizing
scrap. The supply chain facilitates this process by holding milestone meetings, typically
before the order dates for long lead time components, with key groups such as engineering,
manufacturing, marketing, supply planning, service, and supply base management to cover
product ramp plans. The entire group can then execute end - of - life purchasing and
production based not only on demand, but also the status of the replacement product.
Part Commonality is the second key to EOL inventory management. Supply chain
works early in the development process to drive key part commonality across product
generations. Often key parts and add-on features can be re-used across generations with little
to no modification if they are specified early enough in the design process. Retaining an old
design may slightly raise the bill of material (BOM) cost of the new product, but when
looking at the overall lifecycle costs, part commonality can make a strong business case.

NPI Quality Improvements

Supply chain managements involvement in NPI has provided Lexmark new avenues
to improve quality, and thus reducing the exposure to the higher inventory that accompanies
product defects.
One of the biggest challenges when launching a new product is having a controlled
production ramp that has the shortest time to reach announced volumes and, produces a defect
free product. Traditionally, different functional areas or departments were measured on
different objectives/performance measures, often working in a silo. Each department sought to
optimize its objectives without regard to the firms overall strategic objectives. This situation

is even more challenging when a third party is involved. For example, when contract
manufacturers are involved, the ramp speed - to - quality ratio is especially difficult to
manage. Additionally, some defects only appear after long-term use. The supply chain
organization at Lexmark developed a number of processes to deal with these issues.
1.) The first step in quality is process control. Supply chain has worked with
engineering, quality assurance, and manufacturing to develop the Product Quality Process
(PQP). This process looks at the product ramp in small daily increments to qualify the
production line as a whole. While each assembly station must meet its own qualification
goals, the entire line must meet a pre-determined production unit and quality rate to advance
to a higher production level. When an assembly line proves it has the ability to assemble X
number of units, in timeframe Y, with quality rate Z, only then will it be allowed to produce a
greater number of units. This series of predetermined ramp goals forces the manufacturing
team to focus on building a quality product if they want to increase volumes to the levels they
need to meet their internal metrics. This is especially useful for managing contractors and
suppliers. This process also forces the quality assurance team to provide very specific quality
testing guidelines and react quickly to quality issues.
2.) Producing a quality product in the manufacturing plant is only the starting point for
delivering a defect-free product to the end customer. The product must be transported to the
region of the world where it will be sold and where there is often a final stage light
customization of the product before it is ready to be sold to the customer. Supply chain
collaborates with marketing, engineering, manufacturing, and packaging to improve product
design to reduce assembly costs and rework. In the box following, there are some examples of
the success achieved by different supply chain teams at Lexmark.

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Reprogramming a printer
Initiatives such as the ability to reprogram a printers memory (re-flash) without
removing it from the packaging and reducing the size and number of unique cosmetic
parts reduce cycle time to prepare a printer for sale. Excess inventory caused by dwell
time in the distribution network is a key area where minor improvements can easily
remove a day or two of inventory from the entire system. In addition to these savings,
reducing product touches directly reduces the amount of damage that may occur to a
machine during assembly.
The in-box-flashing program allowed reduction in both the cycle time and
product touches. By working with package engineers and firmware developers,
Lexmark supply chain led a successful program to allow printer codes to be updated
without ever having to take the printer out of its packaging. Cycle times for re-flash were
reduced 90% and space needed to execute the re-flash was also reduced. Eliminating the
need to remove the printer from its packaging also reduced the chance of accidental
damage.
Design changes
To reduce the number of parts required to customize the exterior of the printer,
Lexmark attacked the size and placement of unique identifiers such as model numbers and
company logos. Eliminating a hard-coded unique identifier is the first option. Where the
company logo was once molded into the plastic, it is now a snap attachment. Where
unique identifiers cannot be removed, the size of component containing the identifier is
reduced to the smallest size possible and is engineered for quick replacement. These
changes do not always allow for the lowest BOM cost, but those additional costs are more
than made up for later in the supply chain and with reduced component inventory.

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MANUFACTURING AND ASSEMBLY FLEXIBILITY

As Lexmark started to complete its product lineup over the past few years, a new
challenge surfaced: how to control the ever-expanding number of unique models made in the
factory. While total plant capacity was not an issue, capacity limitation at the model level was
an issue. The short product lifespan made the problem particularly challenging. Guessing
wrong to the high side meant capital waste on tooling that would never be used and floor
space that might be better utilized by a different model. Guessing wrong to the low side would
result in lost sales thereby lowering revenue. To mitigate this issue, Lexmark turned to
modularity, software, and postponement to reduce the chances of incorrect guessing.
Modularity is one of the major supply chain initiatives Lexmark has undertaken.
Using a common printer engine in numerous products allowed for model expansion with only
a minimal increase in unique tooling. For example, the same engine could be used in a
regular printer and an all-in-one printer with the addition of a few components. Additional
printer models could also be made to target different segments of the same market. For
example, the same engine might be used with fewer features at a lower price point, and with
additional features such as an LCD screen and network port for the premium market segment.
The modular approach also allows for market experimentation. For example, a derivative
model with more or fewer features could be launched relatively fast, and at a low cost, and
either pulled or expanded as the market dictates. Overall manufacturing complexity and
inventory are controlled due to the high cost part of - the engine - being standardized across
many printer models.
Further flexibility is driven through the use of software to control the printer features.
Lexmark designed flexibility into the modular engines to allow the printer firmware to be

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modified. Postponing application of the brains of the printer gives Lexmark the ability to
work more closely with end-customers in producing a product that meets their unique needs
while reducing complexity in the factory.
Another supply chain initiative that improved the cash cycle is the adoption of the
concept of postponement. Postponement is defined as differentiation of the product as close to
the customer as possible. Lexmark has final stage assembly (FSA) operations in each of the
major markets Americas, Europe and Asia. Base printer engines and components (such as
power cords, sheet trays, user guides etc.) from both Lexmark facilities and suppliers are
combined to form the final saleable printer at the FSA locations. Postponing FSA allows
Lexmark to rapidly respond to changing market conditions while avoiding high inventories of
finished goods. Base engine flexibility and FSA postponement has also allowed Lexmark to
shift some production from a build to stock (BTS) to a build to order (BTO) environment.
These manufacturing and assembly strategies are key examples of how Lexmark
increased sales and introduced a number of new printer models while simultaneously reducing
total inventory by approximately 32% over the past four years.

PRODUCT FLOW OPTIMIZATION

Lexmarks key initiatives in the area of product flow optimization (PFO) have helped
improve its inventory and cash cycle. PFO is the vision to minimize physical touch points and
reduce storage throughout Lexmarks distribution network. This is accomplished by: 1)
shipment of product from the manufacturing plant and/or customization center directly to the
customer, and (2) channel consolidation.

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1. Direct ship to the customer from manufacturing/assembly facility:

Lexmark needed to simplify its supply chain by minimizing touch points and
streamlining supply chain initiatives with major customers in both the retail and business
industry. Given long transportation lead times, and the complexity of managing a global
distribution network, Lexmark was able to negotiate direct shipment contracts with key
customers. This allowed Lexmark to ship the product directly from the manufacturing facility
to the customer without using Lexmark distribution centers. This not only improved flexibility
for both Lexmark and its customers but also reduced inventory and carrying costs.
The following chart outlines the difference between direct ship to customer and the
traditional distribution path to customers.
Graph 1:

Direct Ship Product Flow vs. Traditional distribution

SMI

SMI

Components

End Users

Retailers

Distributors

Regional Touch Points

Transformation

Channel Partners

Production

Direct to Customer

Transformation
- Customization

Cross
Docks

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Charts 5 and 6 show the progress made in direct shipments, with customized product shipped
direct increasing 2100% and factory direct shipments increasing 975%. Product shipped
direct to the customer greatly reduced total supply chain cycle time resulting in significant
reduction in the cash cycle.

Chart 5: Increase of Customized Product Shipped Directly to Customers, 2001 - 2004

2100%

2001

2002

2003

2004

Shipments

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Chart 6: Direct Ship Increase, 2001 2005

975%

2001

2002

2003

2004

Shipments

2. Coordinating & Collaborating with Channel Partners / Collaborating with Supply

Chain Partners
In 2001, Lexmark began an effort to align more closely with their customers and
supplier channel partners. The three main areas of focus were channel consolidation, customer
collaboration and supplier integration. These initiatives streamlined the many supply chain
processes spanning the top tier suppliers all the way to our customer channel partners;
effectively managing information, driving supply chain improvement and ultimately
improving cash-to-cash cycle.
At the time, Lexmark maintained relationships with many different customer sets
ranging from large distributors, large and medium retailers, to small individually owned
businesses. Doing business with small, individually owned companies increased Lexmarks

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overhead cost in order administration, distribution touch points, and transportation ship-tolocations. Lexmark consolidated sales from these companies and diverted them to several
major distribution and retail channel partners. In addition, Lexmark realigned its business
team to be more customer focused by creating a dedicated team with personnel from
marketing, sales and supply chain for each retail partner.
The ability to consolidate the distribution channels and ship-to locations simplified the
distribution network and reduced delivery times. Chart 7 shows Lexmarks success in
reducing the number of ship-to locations. The key benefit from channel consolidation was
improved distribution efficiencies by enabling full container / truck loads. The end result of
the Lexmark PFO initiatives was lower costs and an easier to manage, more streamlined
supply chain.
Chart 7: Channel Consolidation, 2001 - 2004

2001

2002

2003

2004

Locations

Lexmark improved its ability to be more flexible and react more quickly to the needs
of its customer by consolidating smaller customers through channel partners. In addition to
this, by realigning the business around a customer centric team, Lexmark has been able to

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better collaborate with customers and build relationships built on trust and accurate
information. To reduce the effort required to maintain these relationships, Lexmark
implemented tools, systems and processes with several of our distribution and retail partners.
Lexmark utilizes CPFR (Collaborative Planning Forecasting Replenishments) tools as its
main communication process with several retail customers. This allow the customers to input
sales and order forecasts for the next eight weeks directly into the Lexmark collaboration
system, where the customers retail customer representative can view and distribute the
information to marketing and supply chain personnel. This enables quick propagation of
forecast and inventory outlook information so Lexmark and their customers can resolve any
discrepancies quickly, before long lead-time orders are placed with suppliers. In line with
CPFR, Lexmark has also begun to implement a system solution with a 3rd party provider to
automate the new part number creation for NPI. This system will allow customers to view any
new part numbers that Lexmark has internally created and generate a new set of part numbers
related to the Lexmark part numbers in their own systems. These system and tools
automations will help Lexmark achieve better customer collaboration.
Since 2001, Lexmark has made tremendous strides in working closely with their
customers. However, in order to drive overall supply chain performance, Lexmark needs to
integrate with their suppliers as well. By using existing and new systems and processes,
Lexmark has made progress in linking customer sales forecasts to supplier build plan
forecasts. Weekly sales and planning meetings are held with customers and suppliers to tie out
any differences in weekly forecast from cycle to cycle. Collaboration tools will eventually be
able to translate a sale and order forecast from a customer into a build schedule for the
supplier. Leveraging improvements in systems and processes enables better information

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sharing across the supply chain and will enable true end-to-end customer and supplier
collaboration and drive further cash-to-cash improvements.

Customer Satisfaction
During the period from 2001-2005, Lexmark earned a number of awards from customers, as
well as, markedly improving customer service levels. In just the last four years, Lexmark was
recognized nine times by its North American based customers as follows:
Tech Data Difference in Distribution Award - 2005
For successfully improving supply chain efficiencies and reducing costs throughout its
logistics operations. Lexmark and Tech Data worked together to identify opportunities to
reduce "touches" throughout the vendor's supply chain, resulting in savings in areas such
as warehouse space, management costs, labor and freight charges.
Best Buy "Bravo" Award 2004 & 2001
Chosen from over 700 vendors for most improved supply chain scorecard, most strategic /
creative vendor, fastest revenue / profit growth, and best provider of data and analysis.
Circuit City "Supply Chain Excellence" 2004 & 2002
Ranked as a top-ten vendor for achieving best-in-class supply chain performance, crossfunctional customer collaboration and service.
Dell Most Improved Supplier 2003
Selected as number one out of a pool of 500 production suppliers. Lexmark was chosen as
most improved, specifically for the ability to launch eight products within nine months on

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or ahead of schedule and for maintaining continuity of supply during a period of very high
volumes.
Staples "Supplier of the Year" 2002
Lexmark won this prestigious award based on supply chain improvements, outstanding
company-to-company support, revenue growth, and creative sales/marketing programs.
Sparc "Supplier Performance" Award 2002
Voted number 1 for computer hardware by US retailers
Wal-Mart "Supplier of the Year" 2001
Earned this very prestigious award for dramatic revenue growth and on-time supply rates.
Dell "Hardware Partner of the Year" 2001
Lexmark was named for this distinguished recognition for providing outstanding
account service and logistics support.

This improvement in customer satisfaction is also reflected by the steady improvement in

measured customer service levels, as shown in chart 4.

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ACCOUNTS RECEIVABLE (A/R)

A high accounts receivable or, days sales outstanding (DSO), metric can point to
shortcomings in order fulfillment and/or invoicing. Lexmark focused its efforts on three major
areas - credit policies, invoicing, and receivables management. The following pages outline
the different methods that Lexmark developed and implemented to reduce receivables.

Credit Policies
The key to Lexmarks success was the implementation of a single worldwide credit
policy. Lexmarks executive management team supported the policy. Prior to the adoption of
this single policy, financial controllers utilized different credit and credit-hold guidelines. A
single worldwide credit policy addressed the following questions:

Which customers would be extended credit?

What was the maximum credit term allowed without executive review?

What were the circumstances under which credit would be suspended?

Within the policy, specific trigger points and actions are defined and strictly adhered

to. The policy also defines key A/R metrics and how they will be used by executive
management.

Invoicing
A common business practice at Lexmark is to promptly invoice for goods shipped to
customers. However, prior to adopting best practices in receivables management, the DSO
metric was moving in the wrong direction and negatively impacting the cash cycle. A
thorough internal review determined that one of the major reasons for this deterioration was
payment delays due to inaccurate invoices.
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Situation
In an effort to better understand the root cause of the high number of inaccurate
invoices, a cross-functional team was assembled from the various operational areas.
Representatives from the customer management and fulfillment teams spent time
decomposing all internal processes related to order fulfillment. The entire process from
receiving the customers PO to Lexmark receiving payment was analyzed. After the internal
review, the team also visited customers who had high levels of invoice inaccuracies. (See
example of customer visit on the next page). It was hoped that by better understanding our
customers operations Lexmark could resolve discrepancies more quickly.
Issues
From these internal workshops and customer visits, Lexmark identified the following
issues:

Some level of pick error was occurring within the distribution operation.

Customer receiving personnel/systems were mistakenly reporting discrepancies.

Customers were notifying Lexmark about the invoice discrepancies at the end of their
credit terms rather than at occurrence.

Lexmarks front line customer service personnel were not adequately equipped to
provide timely disposition of claims.

Action
Lexmark moved quickly to increase the number and frequency of the outbound
shipment quality audits. The documented errors captured from the audits determined that a
redesign of the warehouse could help reduce distribution fulfillment error. Like many
companies, Lexmark has many similar part numbers. By rearranging the locations of the

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similarly numbered parts within the warehouse, picking error was reduced. Also, a simple
change to the pallet sizing rules for mixed pallet shipments help to reduce customer
confusion.

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Example of outcome from a customer visit

From customer visits Lexmark learned that one of its large customers was not utilizing
the shipment documentation provided during their physical receiving processes. For example,
Lexmarks pallet labels detailing the customers purchase order information were
systemically overlooked. In this situation, the customer was commingling their various
purchased orders on the receiving docks thus rendering an accurate receipt was very difficult,
or nearly impossible. As a result, Lexmark collaborated with the customer to develop revised
receiving processes. These processes were successfully documented and implemented which
contributed to sizeable reductions in the number of error claims this customer filed.

Action Continued
Along with internal and external process reviews and changes, a policy change was
made that required customers to notify Lexmark of shipping discrepancies at the time of
receipt rather than at the end of the customers credit term. This allowed customer service
teams to research and solve the issue before the invoice due date.
In addition to requiring customers to notify Lexmark about claims in a more timely
fashion, Lexmark redesigned the internal claim processes to reduce the amount of time
required to process and close claims. The company accomplished this by forming a crossfunctional team consisting of personnel from the order management and distribution
departments. The teams responsibilities are to provide timely claim disposition and to act as
an effective feedback loop to other areas of the operation. This team has become the central

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contact for customer reported discrepancies. Due to the above-mentioned initiatives, Lexmark
reduced the average length of time to resolve claims by 300% over the past five years, thus
reducing the receivables.

Receivables Management
Lexmark shifted the focus from past due to pre-collection. A comprehensive review of
customer pay trends was compared to the actual customer credit/contract terms. The review
showed that a number of customers were systematically paying outside of their contacted
payment terms. The operations and sales teams worked together to bring those customers
back into compliance. To further align the sales team, this group now has a portion of their
bonuses tied to their customers payment history. Bonuses are now partially linked to on-time
payment and not just sales revenues.
Furthermore, new reports were introduced to identify unfavorable payment trends
prior to a collection situation. These reports are prepared and monitored regularly. A few of
our larger customers have made visibility into their payable systems available to the A/R
team. Lexmark has the ability to identify its invoices as they age in the customers payable
systems and take actions in a more timely fashion.
Finally, the impact and importance of the accounts receivable element to Lexmarks
total cash-to-cash cycle was explained to all employees, not just to those involved in
receivables management.

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SUPPLY BASE MANAGEMENT AND ACCOUNTS PAYABLE

One of the supply chain initiatives involved the reorganization of Lexmarks
purchasing department. The purchasing department was renamed Supply Base Management
and the organizations overarching goal was to present one face to the supplier. Previously,
Lexmark had dedicated procurement individuals for each division, who were trying to get the
best terms for their respective divisions and not for Lexmark as a whole.
The corporate policy was revised to require longer payment terms and a focused effort
ensued to drive improvement. The supply base was segmented to identify those suppliers with
the opportunities for the highest return. Lead buyers were assigned to top tier global
suppliers and were responsible for negotiating payment term extensions.
Lexmark is also trying to increase competition among suppliers for certain commodity
type items. This kind of competition means that Lexmark can obtain more favorable terms
such as longer accounts payable periods and supplier managed inventory (SMI). As a result of
the renewed focus on supply base management, Lexmark improved average payment terms by
approximately 51% since focusing resources on the task.

INVENTORY MANAGEMENT AND PLANNING

Since 2001, Lexmark, through several key inventory management initiatives, has
decreased inventory levels by 32%. These key initiatives include improved planning
processes, inventory visibility improvement, supplier managed inventory (SMI) and direct
shipments to customers.

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The finished goods and components planning process have changed from a monthly to
a weekly planning process. Improving inventory visibility also increased the efficiency and
efficacy of the weekly planning process. A weekly planning process has the following
benefits:

Ability to react quickly to changes in demand patterns.

Reduction in inventory due to smaller lot and shipment quantities.

Supplier Managed Inventory

Lexmark also implemented Supplier Managed Inventory (SMI) with some of its major
suppliers. SMI is designed to increase integration throughout the entire supply chain by giving
vendors greater visibility in the fulfillment process resulting in increased responsiveness. In
addition, better demand information is used as an incentive for suppliers to streamline their
processes to allow shorter frozen production zones and more flexibility in terms of product
mix. These suppliers in turn utilize the increased visibility to drive improvement with their
suppliers. The end result is increased flexibility and reduction in total inventory throughout
the extended supply chain.

CUSTOMER CENTRIC TEAMS

Lexmark initiated an effort to improve processes and communication with key
customers. Historically, there had not been a consistent view of customers across all
functional areas or departments that touch customers order management, sales operations,
transportation and distribution. Lexmark wanted to change this and begin managing these
customers at the individual account level. This meant prioritizing and segmenting customers;

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planning and executing at the customer level; and realigning metrics and objectives to
accurately reflect the customers objectives.
This resulted in reorganizing the customer service representatives and supply chain
personnel as a STAR Strategic Teams Aligned with Retail. The team included customer
representatives (or champions) and Lexmark personnel from sales & marketing, order
management, and supply chain/operations. The responsibilities of the STAR team were: communicating with the customer both internally and externally; planning & execution;
supply chain performance improvement; and performance tracking. All of this would allow
improved performance, which would lead to improving customer relationships, eventually
resulting in increased sales.
Days Sales Outstanding decreased as a result of the formation of the new group due to
the tight integration of accounts receivable with the STAR team. Collaborative planning,
forecasting and replenishment (CPFR) and integrated SKUs helped to mitigate SKU
proliferation along with a reduction in inventory in the system.

METRICS TO GUIDE ORGANIZATIONAL BEHAVIOR

One cannot overlook the importance of using appropriate metrics to guide
organizational behavior. Some of the ways in which Lexmark has used metrics to emphasize
the importance of improving the cash to cash cycle days are:

Improving cash - to - cash cycle time was made part of the overall corporate strategy
and Lexmark has worked to ensure that all business operations are aligned with the
cash - to - cash cycle goal and incentives were given accordingly.

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Elevating the critical key performance indicators (KPI), which drive cash - to - cash
cycle, to the executive level.
o PFO metrics
o Flexibility
o NPI process

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CONCLUSION
Cash to cash cycle time is an effective metric to diagnose the quality of a firms
supply chain. It certainly accomplished that for Lexmark. Focusing on the components that
determine the cash cycle helps a company address customer relationship, supplier
relationship, and inventory management. Optimization of product flows, effective NPI and
EOL management, and increased manufacturing and assembly flexibility has helped Lexmark
improve its customer service levels while reducing overall inventory levels and supply chain
related costs. As a result, Lexmark has been able to reduce its cash cycle days by
approximately 45 % over the last four years.
As a result of the different initiatives Lexmark undertook to improve its cash-to-cash cycle
time, the company has seen the following results:
Quantitative Results
A 45% decline in cash-to-cash days
A 300% increase in the cash flow from operations, during a four-year period
A 32% reduction in inventory (days)
A 975% increase for factory direct shipments
A 15% improvement in service delivery
Qualitative Results
Improved relationship with customers
Better working relationship with vendors / partners
Better utilization of Lexmarks resources

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