The Supply Chain Council recently conducted a survey among supply chain managers and financial directors to evaluate the level of maturity of the supply chain function in numerous companies and to determine how well it has been aligned with other corporate functions.1 The survey also strove to verify whether the alignment of supply chain and finance functions has led to greater consensus between these disciplines on performance measures and the perceived correlation between operational and financial metrics.
The council based the survey on a number of external interviews with supply chain executives from organisations including Borealis Group, Heineken, Holcim, Siemens, Innersoft and Reckitt Benckiser. The majority of interviewees were in middle-management roles or at higher levels such as vice presidents of procurement or supply chain management corporate process executives. Most of the companies chosen for the survey were keen to improve their processes, operations and the linkages between operational metrics and financial performance. Furthermore, they were all manufacturing companies, although from a range of different industries, whose supply chain accounted for a considerable proportion of their operations.
The telephone interviews that formed part of the survey covered a range of topics, including: the level of agreement among functions such as finance and logistics regarding performance measures; the strength of the linkages between supply chain and finance; the economic impact of supply chain decisions; where within the organisation the responsibility lies for setting and monitoring supply chain targets; and the reward systems in place for supply chain executives.
Whether or not comprehensive supply chain measurement systems are used depends heavily on board-level perception of the supply chain function and, so far, there has been very little academic research into this subject. A study carried out by Gooch and Menachof2 examined the differences in perception between board members and supply chain executives to identify how they could be resolved. The results indicate that the supply chain function is generally appreciated as an important factor in achieving sustainable competitive advantage. Some 60% of respondents believed knowledge of supply chain issues at board level to be ‘good’, while 56% stated that they felt the supply chain function had a significant impact on a company’s economic performance.
In most circumstances it is managing directors, vice presidents, financial directors and members of the board of directors who define the objectives of the supply chain, and the survey highlighted their main objectives when doing so:
- Profit/cost control (31%).
- Supplier and contract responsibilities (31%).
- Stock control/inventory management (21%).
In contrast, the responsibilities identified by supply chain managers are much more specific:
- Delivery and service level provision (35%).
- Cost control and product pricing (29%).
- Stock control/inventory management (25%).
- Forecasting (11%).
The Supply Chain Council survey also highlighted that the lack of a clear understanding of supply chain management in some company departments, such as sales and marketing, can create conflict between the objectives these functions set and the goals of supply chain professionals. As a result, supply chain managers are often forced to share decisions with managers of other departments, which may result in them being confined to a routine series of operational supervision tasks. To remedy this situation, supply chain managers must learn to communicate the results of their work in financial language that can be better understood by other departments.
CFOs are concerned with cash-to-cash cycle time, working capital and cash flow from operations. By contrast, supply chain managers are concerned with issues such as the reliability of forecasts, inventory returns and on-time delivery. One reason why the finance function does not use operational metrics is that they do not fit well with the language normally used in accounting and finance processes. The challenge, therefore, is to effectively translate the results from operations into financial measures.
A Big Gap to Bridge
Respondents had fairly similar views on all the topics that fell within the scope of the survey.3 For instance, on the matter of whether the finance function and supply chain executives agree on performance measures all except one respondent said there is no agreement.
There are many reasons why this is so. First, there are difficulties in translating qualitative (that is, ‘soft’ or ‘intangible’) measures – such as metrics on reliability, responsiveness and flexibility – into financial indicators. Second, there is no unique set of metrics or single measurement to monitor the performance and efficiency of the supply chain. Third, there is a lack of common definitions for metrics and for co-ordination between the two functions.
All the respondents stated that there are some signs in their organisations that the links between their supply chains and finance functions are becoming stronger. For instance, in some organisations supply chain metrics are included in their main and mandatory corporate targets. However, some issues have been identified as causes of inefficiency. These include the lack of a common language shared by supply chain managers and CFOs, the lack of a comprehensive framework, including financial metrics and supply chain aggregate measures, and contradictory goals set by different departments.
All the respondents concurred that they now recognise the economic impact of supply chain decisions and, furthermore, they believed that the supply chain is now perceived as a strategic element in the pursuit of competitive advantage. Nevertheless, some organisations still tend to focus simply on cutting costs in the supply chain rather than using it to generate value.
Regarding the level at which supply chain targets are defined, this seems to vary from company to company. In most cases, high-level metrics are set at corporate level while operational metrics are set and monitored at functional level. Supply chain targets are increasingly set at corporate level, translated into financial goals by chief financial officers and cascaded down. This approach – top-down versus bottom-up – seems to indicate that the supply chain has greater visibility at board level.
In some cases, the survey’s respondents perceive many reasons for the difficulties in setting and monitoring operational targets at functional level. These include:
- Lack of guidelines at corporate level.
- Lack of a common language with which to communicate supply chain measures to the CFO or the board.
- Lack of proven links between certain supply chain metrics, such as flexibility, and financial measures.
- Difficulties associated with incorporating uncertainty and risk into targets.
- Lack of standard metrics.
- Lack of supply chain representation at board level, resulting in the board failing to appreciate the trade-offs involved in supply chain decisions.
There are also discrepancies between companies in respect of the supply chain executives’ reward systems and incentives. Generally, their incentives are linked to both financial and operational targets. However, from middle management downwards, rewards seem to be linked either to solely operational metrics or partly to customer service levels – that is, based on factors such as product availability, pack fill rate or order fill rate – and partly to financial performance, where factors such as networking capital have an impact.
The Supply Chain Council survey’s respondents acknowledged the pressing need for a framework correlating supply chain measures with financial performance that could facilitate better communication between supply chain managers and CFOs. In short, they recognise the need to translate the effectiveness of supply chain management into monetary terms and reflect this data in an organisation’s financial statements.
The Next Stage of Evolution for CFOs
To assess the relevance of the financial officer in the overall ecosystem of supply chain management, we need to look at the pressures and trends in the officer’s role and reach.
In the light of the survey results, it emerges that supply chain managers need to take a new stance in relation to the CFO. They must become more like advisers, counsellors or coaches instead of remaining as cost-accounting gatekeepers and pass/fail rulers of budget proposals. The role of the CFO is also changing in light of the pressure of market dynamics and newly emerging industry trends. The finance function must have a holistic and horizontal view of the enterprise, but to maintain this it must know precisely where the enterprise is and where it is headed. This kind of control is achieved through data and, if data is largely collected manually, the principal role of the finance department is that of controller and gatekeeper, ensuring that procedures are properly executed. Little time is left to perform more value-adding activities.
As levels of automation increase, systems become better integrated – which is why finance is often in control of IT – and there is more empowerment of both people and functions become more empowered within the organisation. The finance department then has more time to play the role of counsellor and provider of knowledge to other corporate functions. Standardisation of processes enables the handover of accountability in a controlled fashion, as is highlighted in research by IBM, which states:
In the past, practical limitations forced finance organisations to focus primarily on only one of these [corporate] focus areas (for example, performance, growth or risk), but process and technology improvements make it possible to do more. Indeed, by applying financial management discipline to the enterprise-wide delivery of predictive business insight, CFOs seek to strengthen their roles as trusted advisers and become true business partners with their CEOs and business unit leaders.4
The transition to this more high-tech environment is far from complete. In fact, IBM’s research suggests that finance organisations are often still struggling to standardise and improve processes and data structures and to implement the technology that underpins enhanced decision support. The study further warns that, if common processes and standards are not adopted across an enterprise, then intuition alone becomes the main tool for financial management and an organisation may find itself exposed to greater risk by relying solely on the manual effort of a small number of smart individuals to maintain the accuracy and integrity of its financial information. The study notes that:
‘This reliance embeds unique knowledge in individuals versus institutionalising it into repeatable, controlled processes and technology that can be shared more widely… Without a strategy to mitigate structural complexity and a strictly enforced adherence policy, finance will struggle constantly to provide insights, primarily relying on time-consuming manual consolidation of static spreadsheets. A common result is time wasted discussing the veracity of the data instead of focusing on the information provided and analysing it to provide predictive insights … Not surprisingly, process simplification also helps drive integration. With less to consolidate and information captured at the source, it becomes easier to integrate the information and processes to provide key insights.’5
In a more streamlined and highly automated environment, CFOs can look beyond their traditional role as guardians of the accuracy and transparency of financial statements. The control and compliance functions for which they are responsible become more standardised tasks, reliant on embedded alerts, dashboard analytics and workflow systems. When risk analysis is embedded in the day-to-day routine of managing a business, CFOs can be more proactive, focusing more on governance and planning as opposed to data collection and reporting.
Tomorrow’s successful CFOs will spend more time and energy building insight capabilities across all departments within their organisations in a bid to achieve the agility they need to respond quickly to changes in their business environment. This is why many finance departments are making greater efforts to map processes and clarify the structure of process ownership, taking responsibility for key data away from separate business units and recognising that data as a corporate asset that can deliver value throughout the enterprise.
This will profoundly change the CFO’s role. Responsibility for data accuracy will remain with the source of the data, but finance will become accountable for its overall integrity. The CFO, therefore, has complete control over corporate assets and information.
This new definition of the role that CFOs play within an organisation lays the foundation for them to better understand and engage more fully with the supply chain. To do so, they need a clear set of metrics and a shared language through which the two disciplines can interact in a more meaningful way. Indeed, CFOs need to improve communication with all parts of their enterprises.
Managers of individual business units now expect CFOs to become highly adept at gathering, interpreting and distributing information – both financial and non-financial – across an organisation. The finance function must be in a position to explain any problems that arise and to take a proactive approach to solving those problems before they spiral out of control. Finance will play an increasingly important part in alerting managers of various business lines to potential pitfalls and helping them gear up for forthcoming challenges. To achieve this, CFOs will be more reliant on technology. Many business-critical IT systems have their roots in the finance function, often stemming from internal transaction and data processing needs. It seems, therefore, that CFOs will also need to take more responsibility for their organisations’ key systems.
Technology and the CFO
The widespread implementation of business performance management in the day-to-day operations of many companies is one example of a system that falls under the CFO’s control. It demonstrates that the finance function is expected to manage a growing amount of non-financial data, which is then used to influence decisions that affect every area of a business. The goal is to increase the use of enterprise resource planning (ERP) systems and analytical tools in order to achieve more detailed analysis and predictive modelling, on the basis of which strategic decisions will be made. This pursuit of enhanced performance management frameworks inevitably leads to a cascading of metrics down to all business units and all functions. Currently, however, there has been slower progress in delivering these metrics than there has been with the development and implementation of executive scorecards, and this gap needs to be bridged.
Traditionally, the responsibilities of CFOs have centred on issues of control and treasury, with tasks like budgeting at their core. Today, CFOs must ensure not only that the most appropriate IT systems are in place to measure corporate and departmental goals, but also that these systems enable them to move the organisation towards attaining these goals. What today’s CFOs are trying to achieve is enhanced insight across their entire organisations, which they hope will deliver greater agility and, consequently, increased profitability in rapidly evolving markets. Those who achieve the best results do so by defining quantifiable relationships between the drivers of their business and the metrics used in executive scorecards and dashboards, which enable them to improve the effectiveness and accuracy of their predictive analysis and performance outcome forecasts. Their most important goals are to manage enterprise performance more efficiently, foster growth by partnering with all of the elements of their enterprise, improve their organisation’s business processes and ensure that they meet their regulatory and fiduciary requirements. Central to achieving these goals is the ability to work more closely and effectively with senior management, including the CEO and the leaders of individual business units, to ensure that all possible synergies are identified and all opportunities for performance improvement are acted upon.
CFOs still need to remain focused on the important financial controls, such as effective cash flow and expenses management, customer credit policies for customers, establishing favourable payment terms with important vendors and optimising the measurement and management of inventory levels. They will also need to handle projects where significant quantitative and qualitative analysis is required if they are to have a clear view of all their options. In developing an annual budget, for instance, finance officers will need to communicate with all department managers within their organisation to ensure that their budgets are accurate, in line with strategic goals and reflect the true state of the business. Vital to this is their ability to implement effective means for ongoing communication with all sources of financial data. They must, therefore, develop strong working relationships with financial institutions, which may significantly influence an enterprise’s capacity to finance its operations. As one CFO says:
“A crucial aspect of [treasury] activity involves ongoing communication with these financial sources. Investors and debt holders must be kept apprised of the goals and performance of the company, in order to keep these channels open. They must understand how the pursuit of these goals impacts the risks and returns on their investments. An uninformed investment community will not be a ready source of funds.”6
Bringing together information from all internal departments and external providers of financial services enables CFOs to offer vital insight to CEOs about the financial resources their companies will need in order to achieve their strategic goals. They provide a vital bridge between banks, business units and the board, thanks to the detailed and sensitive information and analysis they co-ordinate. Successful financial managers will play a vital part in keeping senior executives informed and in guiding their businesses, provided that they can make a strong and tangible connection between operations and financial performance, and couple this with their own business acumen and finance skills.
This article is an excerpt from Enrico Camerinelli’s book ‘Measuring the Value of the Supply Chain’ available from Gower Publishing. Global Treasury Briefing subscribers can receive a 25% discount on the book when ordering online here, using promotion code G1CXF25.
1 E. Camerinelli, ‘Measuring the Value of the Supply Chain: Linking Financial Decisions with Supply Chain Performance’.
2 S. Gooch and D. Menachof, Board Perception of the Supply Chain Function, London: Cass Business School, 2003.
3 Camerinelli, ‘Measuring the Value of the Supply Chain’, op. cit. at fn. 3.
4 IBM Business Consulting Services, The Agile CFO: Acting on Business Insight, IBM, 2005, p. 7.
5 Ibid., pp. 10, 13, 14.
6 Ken Colabella, ‘The Role of the CFO’, 24 January 2006.
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