For most manufacturers, retailers, and distributors the performance of the supply chain drives the significant costs impacting upon the performance of the business.
Despite this, we regularly see examples of where finance and supply chain management could work more effectively together – in partnership, in order to drive additional value for the business. Leading Chief Financial Officers (CFOs) and finance teams do this well.
One of the difficulties in managing the supply chain is that to get an ‘end-to-end’ view of total costs and performance can be difficult. Where a business has multiple brands and/or business units and geographies this challenge gets larger.
Further, it is sometimes difficult to assess whether the level of cost incurred or planned is good or bad. What should be the benchmark? What internal/external drivers are impacting upon our costs? Is using last year as the baseline right for budgeting?
In addition, in recent years many companies have built a substantial online business. For many, this is a challenging business as the costs to manage and deliver often outweigh the incremental sales (especially where sales are below 10% of total sales). In these situations, there is a much clearer requirement for the CFO and supply chain executive to work together to optimize performance.
What are some key questions that a CFO should consider?
Perhaps to provide some pointers you could ask yourself the following questions. Depending on the answers there is possible value at looking further:
|What KPIs and reports do we have that measure and manage our supply chain? Are they sufficient? Do they provide insight for management and help drive decisions?||Customer service levels / DIFOT|
Inventory turns and analysisCosts of expediting (air freight, branch transfers etc)
|What role does finance play in key strategic initiatives for the supply chain?||Could finance skills be leveraged for strategic projects?|
|Does the activity cost information support key supply chain decisions?||Do we know cost-to-serve for key channels, customer groups, and products? Is this used to optimize trade-off decisions?|
|Does our cost center structure allow us to compare operations across different products, geographies, facilities, and channels? What are the insights?|
Cost comparisons for key metrics often provide insight for performance improvement.
|Market offers/customer value proposition||Has the finance department done appropriate analysis of margins and costs of different market offers (lead times, inventory costs, product cost)?|
|If you have an online product offering do you know whether the range is too broad/narrow? What is the cost of our service offer and is it optimized (same day / next day etc). Should we charge for freight?||In each of these areas, there are key implications for the cost of running the supply chain. Whilst certain offers may benefit the customer are we making money given the incremental costs?|
|Are there particular products/channels that appear marginal?||How can finance work with supply chain to understand the key cost drivers? Should these be rationalized?|
|Do key costs that indicate inefficiency such as expediting, unplanned air freight, container detention get properly reported? Are controls in place? Can they be reduced?||Often we find these key issues are not highlighted in reporting and sometimes the information can be hard to find. Regularly controls/accountability are not clear.|
|How did we build up our budget for the supply chain?||Was it a decrease/increase on last year or was it based on proper costing of planned activities?|
What should you do next?
If the answer to any of these questions highlights a potential issue then it is important to engage with the head of supply chain and agree a process to address the issue. It may also indicate that there is an opportunity to partner more closely with supply chain/operations to leverage the knowledge and skills of the finance team to enable better decision making in the business.