by Dr. David Paynter & Beatrice Hulde
From Strangers...
Prior to 2020, Supply Chain Management (SCM) was a niche topic to Finance Managers.
It was overall not very well known or popular beyond the circle of people who worked in that area. The last three years has not only brought Supply Chain to the media and everyday spotlight, but also elevated the visibility and importance inside companies. Disruptions and shortages effected customer service levels, which in turn effected cash flow, keeping financial planners busy. The intertwining of the two departments has therefore become much more obvious and more important. Furthermore, after the COVID years, many companies have built up stock to protect themselves against uncertainty and now find that they have too much inventory investment tied up. Having lost some control over stock levels – how much inventory should they have?
This has elevated the need to break down silos and bring the finance and supply chain disciplines closer together to improve the return on investment in working capital.
... a distant acquaintance…
Communication between Finance and Supply Chain has typically been in one direction – setting targets that are pushed down to the operations area. Traditionally the two groups didn’t really talk to each other. It sometimes felt like they don’t even speak the same language!
They often sit in different buildings (or in their home office) and work with different tools that try to help them address different issues. This makes their goals at times seem contradictory.
Plant managers may be incentivized to decrease stock levels (financial goal) but actually need to increase stock levels to meet customer service levels and increase revenue.
The supply planner is looking for another supplier that can provide parts in a shorter lead time, but that supplier or the mode of transport required to deliver the goods may of course be a bit more costly.
When the Sales Reps “pad” their forecast in order to reach their Sales Targets, it may create a bull whip effect with supply managers producing more than required. Or the other way round – Sales under forecast to not be held accountable for reaching targets, resulting in the Supply Chain being under-primed and under delivering.
…via better communication…
What does Finance want to achieve? How can we translate Financial goals into feasible Supply Plans? How can Finance be better engaged in the Sales & Operations Plan (S&OP)?
Data transparency is the key to resolve these issues between departments. This requires input from Finance (e.g. the target Annual Operating Plan (AOP)) and a cross-functional review of what products, over which channels, in what regions… etc. are required to reach those targets. Starting with a consensus demand plan, that is reviewed by supply for feasibility, e.g. procurement of raw material and components and available capacity inhouse to produce, the Supply Chain Planning has previously been based on quantities – in units.
… over a community of convenience…
Analysts have coined the term extended Planning and Analysis (xP&A) as the process of taking financial planning beyond the Finance department (also with other departments, not only supply chain). Many companies struggle with business process interoperability to bring together people, processes and tools to create a virtual roundtable, ideally with one common user experience for an easy and consolidated view that enables collaboration and alignment across and between business areas. What can help them moving close are:
- Value based planning instead of quantity-based planning provides the basis for a tight alignment. To speak the same language, we need to determine what a demand, inventory or supply plan mean in dollars? What is the cost?
- Scenario planning – enabling what if analysis based on values, so decisions can be made based on monitory values. For example, is it more profitable to run an additional shift to fulfill a customer orders or will the higher cost have too much negative impact on our margin?
Do we go for a new supplier with a shorter lead time but higher delivery cost?
The capability to do scenario planning has been critical for Supply Chain planning over the last couple of years, as they managed global disruption. With unforeseen demand spikes, continuing supply shortages and high volatility the need to create different versions of plans and compare them to find the one that matches a companies’ goals best has become even more important. Therefore, different plans can be evaluated in order to choose the one with the highest profitability or highest cash flow contrary to the one with the highest delivery rate.
- Integrated Financial analysis with Supply Chain Planning - With a global view on both supply chain and finance, it is possible to find the overall corporate optimum as opposed to the local optima that is sub-optimal for the corporation as a whole (like the mentioned example of profitability vs. Fulfilment)
This can be provided by dashboards and graphs to compare data and to dig into situations requiring evaluation, providing a shared understanding to all teams involved.
…to real friends!
Using the same consistent numbers within the one SAP technology allows the CFO and CSCO to come closer together and to achieve the optimal outcome for the business. It enables them to leverage state of the art technology and easy to use capabilities for all users to transparently collaborate across the business, avoiding technology FOMO – the fear of missing out – not only on the latest technology, but also on employees that don’t want to work on legacy tools with limited visibility and siloed processes, as the labor market also gets tighter and more demanding. But that is a story for another day.
