Integrating financial metrics into day-to-day supply chain management

Published September 17th, 2008 by Randy Littleson 3 Comments

I found a very good article at CFO.com discussing the supply chain management challenges companies are facing today in light of the rising logistics and commodity prices.  I posted a comment, entitled “integrating financial metrics into day-to-day supply chain management processes” at the site and have included it here as well.

** My comment **

Great article covering the challenges that manufacturers in all verticals face today.  The increase in shipping and commodity prices is hitting everyone and forcing them to re-evaluate all aspects of their supply chain management strategies – from network design, to logistics, to sourcing, etc.

At the heart of the challenge is the reality that volatility is on the rise.  Whether it be customer demand expectations changing rapidly, supply disruptions or volatile costs, the fact is that things are changing at a faster pace.  And, the implications of not being able to adapt are significant.

Too many manufacturers have a disconnect between their business and sales and operations planning (S&OP) processes and day-to-day supply chain management processes.  Plans are put into place, metrics are passed down, but then people have to do their day jobs.

Given the rise in complexity and volatility, there are more and more high impact decisions that need to be made on the spot by your front-line responders.  Taken individually, these decisions may not have a material impact on your financial metrics, but in aggregate, it can be very material.

What manufacturers need are to develop supply chain management processes, supported by the right tools, that integrate financial metrics directly into the supply chain management processes.  The key is to ensure that the necessary high impact judgment calls are always aligned with the financial metrics of the company.  Without clear and immediate visibility to the impact a proposed action would have on these metrics at the point of action, your risk saying yes to the customer and dealing with the ramifications later.  The only way to ensure a profitable response to change, is by integrating financial metrics directly into the realities of today’s supply chain management processes.

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3 Responses to “Integrating financial metrics into day-to-day supply chain management”

  1. Paul Gooch

    I can’t disagree with the concept…but in many cases easier said than done. Many companies using ERP systems have developed their financial reporting from the agregated data of their local legal entities. Supply Chain decisions affect specific products (even SKU’s) in terms of freight, inventory, service levels etc..so in order to see the impact of these decisions there has to be a well honed Activity Based Costing system in place, down to the lowest level of product detail. As we all know, much of ABC is all about allocation, and unless the data is credible, this soon falls into disrepute. It would be interesting to see examples of best practice in place. This topic is worth further exploration. Paul

  2. Trevor Miles

    Paul, you hit the nail on the head: ERP systems are not architected to perform this type of analysis, especially in a multi-tier environment in which several companies operate within the same supply chain.

    I am not sure that an ABC solution is quite the right fit, but you are correct that cost elements need to be captured at a detailed level, even maybe at the SKU level. How detailed this needs to be is situation dependent. Undoubtedly a cost contribution or ABC analysis needs to be performed as part of the implementation of such a system, and an 80/20 rule should be applied. There may be very little difference in the transportation costs for an entire family of products because the packaging is all the same size and there is very little difference in weight between the SKU’s making up the product family. The question then becomes from where should the product be sourced and/or what mode of transport should be used? These decisions need to be made in the context of order delivery dates, product availability, pricing, etc., and of course the corporate KPI’s such as revenue and gross margin.

    In the global outsourced business environment we find ourselves in, many of the detailed cost elements will be included in the price. In the example above, it may be that the preferred source is APAC because of item price. In a shortage situation an alternative may be to source from eastern Europe. In this case the item price will include any inventory holding costs, and other cost elements, incurred by the supplier. Therefore the only costs elements that need to be included are the item price and the transportation costs.

    Once the cost elements are in place, it is necessary to be able to roll up the results in terms of both corporate level financial and operational KPI’s. These can then be compared with the corporate targets in a balanced scorecard. Scenarios should be compared side-by-side for an objective comparison. Of course human judgement should always be allowed to prevail in determining a compromise between the scenario the best at balancing the hard issues (as represented by the balanced scorecards) and the soft issues, such as customer satisfaction.

    In summary, I agree with your statement that the cost elements need to be sufficiently detailed to capture the effects of the decisions, and that ERP systems do not capture this level of detail. One needs to look outside of the ERP environment for these solutions.

  3. Paul Gooch

    Trevor, thanks for your thoughtful response. I agree that in a largely outsourced environment, item price and transportation costs are key cost elements, but we shouldn’t overlook working capital, customs duties, and taxes in the context of financial metrics. However, the moment you get into alternative sourcing for internally manufactured products, produced in different countries…then it becomes a real challenge!! As you say, in the end there has to be room for human judgement, and the ability to make a fast call.

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