There is a very interesting post at Supply Chain Management Review entitled “CFOs: Survival trumps profits, supply chain growing in popularity” that highlights a number of issues related to supply chain management, the first being that supply chain management is almost always related to reducing direct costs, though I have to admit to being surprised that in the current economic climate as many as 37% of the respondents are focussed on increasing profit. While it is hardly a surprise that the majority are focussed on cost reduction, nevertheless this post illustrates a primary reason why so few companies have gone from using supply chain management as a defensive weapon (cutting costs) to an offensive weapon (revenue and margin attainment), namely the mutual lack of understanding between Finance and Supply Chain. While the authors state that “Finance departments … don’t understand supply chain management enough”, I think this is a 2-way lack of understanding.
I can count on two hands the number of times, in 20 years of working in supply chain, that the results of a supply chain plan were truly evaluated in both operational and financial terms. Similarly, I have yet to meet a CFO who truly understands the operational consequences of mandating a 5% reduction in inventory, for example, including that there will likely be customer service consequences and, therefore, revenue consequences.
The consequence of this lack of understanding is reflected in the observation that “about two-thirds of the respondents don’t yet see the strategic value in supply chain management.” Encouragingly the post goes on the state that “The solution … is integration … then the suspicion disappears.”
There is nothing better to promote integration between Finance and Supply Chain than a common set of numbers in the same tool so that the operational consequences of any changes made by Finance are visible immediately to both Finance and Operations. Similarly, all operational decisions should be evaluated in financial terms too, and made visible to Finance. All too often I see Finance working off of complex spreadsheets with models that do not incorporate any aspects of the supply chain, and supply chain planning tools that do not evaluate the supply chain in financial terms. Without these capabilities, it is very difficult to promote and sustain the level of integration necessary to achieve collaboration, not simply enforced cooperation.