Supply Chain Issues: How the CFO Can Help

What do Home Depot, Sun Microsystems and Delta Airlines have in common? According to Mahesh Rajasekharan of supply chain software firm i2 Technologies, the CFOs of these three American giants oversee supply chain management in their respective companies. 

 
“More and more companies are recognizing that the CFO’s skill set is a competitive asset in its own right and well-suited to employing the supply chain to strategically cut costs and increase profits,” writes Rajasekharan in Supply & Demand Chain Executive. “Many profound changes in a company’s supply chain management processes require strategic financial bets that a CFO is in the best position to make.”
 
As if today’s finance chiefs do not have enough to do. Then again, it makes sense in the post-recession environment for a CFO to look at a major cost centre like the supply chain. As companies ease out of the financial crisis and restart procurement, production and inventory-building in a big way, there is an opportunity for finance to rationalize, coordinate and integrate towards the end of promoting efficiency, slashing costs and boosting profits.
 
Fruits of Visibility
No one is suggesting that finance professionals should take over supply chain management (SCM). Everyone knows it’s a specialized field whose nuts-and-bolts processes are best left to the head of supply chain (who typically now reports directly to the CFO, CEO or the board), procurement specialists and others in operations.
 
What CFOs can do is get more involved in analysis and decision-making around SCM. “They serve as an unbiased entity with no emotional affiliation to the current set of processes, and their top responsibility lies with the financial success of a company,” says Rajasekharan. “Their financial training gives them a solid financial foundation from which to evaluate the effect of system-wide changes on the bottom line.”  
 
It’s a change from, say, five years ago, when the influence of CFOs on the supply chain was not recognised as some contend that working across functions would slow down decision-making and cause disharmony. The arrival of new technologies is increasingly changing that traditional picture.
 
“CFOs are adding SCM to the financial levers they already control,” explains Patricia Cheong, who is regional director, Asia, at Sterling Commerce, an IBM company that offers integration services. “New technologies and architectures have emerged to make the CFO’s quest for visibility and control over complex supply chain processes both possible and practical. Today, applications are available for managing the flow of orders, inventory and shipments both inside and outside an organisation.”
 
Case Studies
Rajasekharan cites several real-life examples to make his case. One semiconductor company decided to reduce production at a high-volume factory after peak Christmas shipments had been completed, something it had never done before. Supply chain managers had always followed the recommendations of the factory, which naturally always wanted to maximise throughput and utilisation, given the risk of not having enough stocks on hand during peak demand.
 
Not this time. The company had integrated sales and operations planning, which allowed closer links between the supply chain and financial management. Analysis by the finance function indicated that additional shipments would result in excess inventory at distributor- and supplier-managed hubs that could cause future price erosion and inventory write-offs. The conclusion was reached after finance matched forward-looking demand-supply data with financial ratio projections.
  

In the mobile phone space, companies typically introduce up to 40 new models every six months. These new phones usually have a 3-5-1 lifecycle – it takes three months to design a model, five months to launch and sell it, and one month to liquidate. Cash flow is, of course, negative during the design phase, only turning positive during the selling phase. The challenge is to keep the cash flow positive by managing such issues as the cost of components across the lifecycle, price protection and disposal costs.

 
As in the case of the semiconductor company, Rajasekharan says integrating the supply chain with financial management is helping cell phone makers take supply-chain actions that benefit the bottom line. “Through proactive lifecycle cash-flow analysis, companies can implement timely decisions that lead to ore products finishing in the black and fewer products dragged back into the red at the end of their lifecycles,” he writes.
 
“Supply chain management can make a difference in these businesses by coordinating product transitions and new production introductions aligned with end-to-end supply chain capabilities and financial indicators of demand, such as point-of-sale information from retail channels.”
 
Touting Technologies
To effectively control costs with supply chains, CFOs will need to tighten the integration of financial and supply chain management to positively impact the bottom line. This means finance people need to become more involved with supply chain management and work more closely with supply chain staff. Fortunately, technology has also evolved to support the increasing need for integration between finance and the supply chain.
 
According to the eSourcing Wiki, for a company to enjoy the ultimate benefit of an integrated finance and supply chain infrastructure, the appropriate software must be in place, such as e-Procurement and e-Payment to send purchase orders, track good receipts, receive invoices, and automate the settlement processes to the greatest extent possible.
 
Inventory management and tracking software are also important to appropriately track and manage inventory throughout the supply chain. Another must is collaboration and event tracking software to track supply chain events and permit early detection and resolution of potential problems. More importantly, cash flow management and modelling tools are needed to make sure the right financial decisions are being made at each stage of the chain.
 
And all of these technologies need to be integrated. For example, information relating to transactions and payments needs to flow from the company's e-Procurement and e-Payment systems automatically into a company's accounts receivable (A/R) and accounts payable (A/P) systems and then, ultimately, into its cash flow modelling and working capital optimisation tools.
 
Technology vendors offering solutions that integrate finance with the supply chain include i2, SAP, Oracle, Sterling Commerce, and Microsoft, to name a few.
 
Meanwhile, an increasing numbers of companies are turning to the Internet for web-based applications as part of the SCM solution. A number of major Web sites offer e-procurement marketplaces where manufacturers can trade and even make auction bids with suppliers.
  

Citing market research firm Forrester, Bob Violino of CIO Zone says software that help companies run their supply chains more efficiently as a whole have not yet reached the stage of notable SaaS adoption. “But within the SCM category certain areas such as supplier relationship management, global trade management and supply chain event management have started to show movement toward adopting SaaS,” he writes.

 
Long-Term, Strategic Goals
But while cost control will be the main issue for CFOs, the global recession has refocused supply chain managers on the trade-off between cost and resilience, according to “Resilient Supply Chains in a Time of Uncertainty,” a new research paper from the Economist Intelligence Unit. Based on interviews with supply chain executives from Lenovo, USG, Fedex, Coca-Cola, Unipart, Whirlpool and other companies, the paper highlights supply chain problems in the aftermath of the extraordinary swings in demand over the past two years.
 
“Volatile demand and credit availability can easily break a traditional supply chain,” says Dan Armstrong, the Economist Intelligence Unit senior editor who managed the study. “Customers are unlikely to have much patience with companies that can’t supply products when needed, even if those companies have always been low-cost providers.”
 
Rather than take a short-term approach to managing their supply chains, a number of the executives have turned their attention to more long-term, strategic goals. These objectives include:
 
  • Strengthening relationships with partners. Many companies have developed stronger ties to suppliers – in some cases taking ownership stakes in them – while continuing to police them closely for signs of financial distress and making any necessary contingency plans. For instance, last year PepsiCo announced plans to acquire its two major bottlers, and Coca-Cola purchased the North American operations of Coca-Cola Enterprises in the first quarter of 2010.

 

  • Improving forecasts and planning. Companies are striving to improve the accuracy of demand forecasting in order to manage inventories more precisely and to better respond to customer demands. For instance, USG Corp, a US-based maker of construction materials, exploited its advanced forecasting capabilities to cut capacity when the bottom dropped out of the housing market. “Now we are looking at long-term forecasts and running models five to 10 years into the future to help us determine when and what we will need to bring back online first,” says Timothy McVittie, senior director of logistics for USG Building Systems.

 

  • Finding ways to increase both efficiency and resilience.These two objectives do not always represent a trade-off. It may be possible to increase both. For instance, Whirlpool was able to boost both efficiency and resilience by consolidating its brands and increasing the use of standardized components.
 
About the Author
Melba-Jean Bernad is a contributing editor at CFO Innovation.

 

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