Successful Financial Supply Chain Strategy: the CFO Connection

In a truly global environment, an enterprise operation extends beyond the confines of its business premises to encompass the operations of its suppliers, partners and customers. But while most organizations have learned to fine-tune their enterprise resource planning (ERP) systems, few have yet to experience the promise of their supply chain management (SCM) systems.

SCM systems have the potential to improve the three key drivers of financial performance -- growth, profitability and capital utilization. Many of today's enterprises fail to achieve these benefits because many C-level executives view SCM as a tactical back-room cost-center activity. Most SCM professionals fail to link SCM to key financial metrics because they do not speak the language of finance and are therefore unable to articulate how SCM drives financial performance. For SCM to drive performance throughout the organization, strategic and tactical decisions must be made with an enterprise-wide perspective.

"In an age of intense competition, supply chain efficiency and adaptability are not just requirements for success. They are necessities for survival," said Patricia Cheong, Regional Director, Asia at Sterling Commerce. "A recent study conducted by Accenture, Stanford, and INSEAD found that senior executives at leading companies view supply chains as critical or very important to their company and industry, and most also agreed that investments in supply chain capabilities have increased in the last three years."

Central to achieving such a transformation is the Chief Financial Officer (CFO). The CFO must take a leadership position in educating key personnel on the financial connection as he is well equipped with the financial acumen to link business processes, activities and tasks to key financial metrics achieving an enterprise-wide view.

Cheong concurs, "Driven by cost-cutting needs and general dissatisfaction with supply chain performance, CFOs are adding supply-chain management to the financial levers they already control. In the past, they have had a feeling that they have spent too much -- with too little to show for it. 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 organization. These applications provide end-to-end visibility into critical supply chain events and exceptions, together with the tools to proactively balance supply and demand in real time."

Buck Devashish, SVP of Strategic Initiatives and Business Development at Sterling Commerce, looks at it differently. "In the late 80s/early 90s the CFO became all-powerful because he/she became the voice of the shareholder driving corporate returns through improved efficiency of operations and better control of the entire cash flow cycle. This was enabled in part by the entire ERP wave that came up then and helped the CFO track every item of expense incurred, and also track every asset actually owned by the corporation."

The supply chain management wave of the late 90s continuing through today is focused on maximizing value in the extended enterprise space, or multi-enterprise processes. Here, the challenge for the CFO is that several of the expenses are incurred by third parties and that inventory is often not on the books of the organization and thus out of the direct "control" of the finance executive.

The added complexity of an extended enterprise has not changed the demands on the company to deliver shareholder return. Devashish concludes that it is considered best practice for CFO to be involved in supply chain management. Best practice companies including Wal-mart and Dell have realized that the supply chain is their true sustainable differentiator today.

Dr. Stephen G. Timme, president of Finlistics Solutions and an adjunct professor at the Georgia Institute of Technology, suggests that CFOs take a top-down approach to making the financial-SCM connection. This comprises three elements:

Step 1: Calculate the Value of Gaps in Key Financial Metrics

Gaps exist between revenue, costs of goods sold and days in inventory (DII). The value of the gaps can be based on historical data, industry aggregates, benchmarks from competitors and aspirations derived from business intelligence tools. Whatever metric is used, these should be a correlation to shareholder value, should be used to reward senior managers, and are easily understood throughout the organization.

Step 2: Link Gaps in Financial Metrics to SCM Business Processes and Strategies

Each process within an organization bears a direct impact on a company's financial operation. Resulting gaps in financial metrics should be identified in specific areas of the operation to provide a better understanding of the cause-and-effect relationships between SCM activities and financial performance. For example, a gap in profitability related to percentage cost of goods sold can be mapped to an SCM-related process such as distribution and logistics. This in turn is linked to a key activity such as warehouse management, which itself is related to tasks such as receiving, putting away, pick-pack-ship operations, and to key performance indictors such as labor costs, average time per pick, and pick accuracy. A misalignment within any element of the process creates opportunities for gaps to proliferate and impact the organization's overall performance and profitability.

Step 3: Map SCM Initiatives to Financial Performance Gaps

The information obtained in the first two steps becomes the foundation for exploring SCM solutions that improve the SCM-related business processes and strategies underlying the gaps in the key financial metrics. A logical methodology for identifying specific areas of opportunities can thus be created, and a disciplined approach for estimating monetary benefits can be built.

SCM has the potential to help improve higher returns to shareholders. Improvements in SCM business processes and strategies cannot completely close financial performance gaps. But for many organizations, the improvements have a significant impact on the bottom line.