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How CFOs and supply-chain leaders can boost earnings


By Sabine Vollmer

Global supply chains tend to deliver better results at lower costs when CFOs and supply-chain leaders work closely together, EY research suggests. The same research also found that these business partnerships between finance and supply-chain executives existed at only about one-quarter of companies surveyed.

The majority of the 423 finance and supply-chain executives polled in about 20 countries said their relationship has become closer in the past three years. But only 26% of the finance executives and 21% of the supply-chain executives said CFOs’ contributions to the supply chain are primarily based on an enabling and collaborative business partnership.

Companies where finance and supply-chain executives collaborate closely reported better results, the EY survey found.

Forty-eight per cent of respondents at companies in which finance and supply-chain executives had close business partnerships reported a more than 5% increase in earnings before interest, taxes, depreciation and amortisation (EBITDA) in the past year. Just 22% of respondents at companies with a more traditional relationship between finance and supply-chain executives reported similar increases in EBIDTA.

Traditionally, CFOs monitored supply-chain matters but tended to work more closely with COOs than with supply-chain executives. But rising internal and external costs, emerging new markets, shorter product life cycles and ongoing economic uncertainties are elevating the role of the supply chain and the supply-chain leaders within a company.

“Finance should never be a policeman just throwing a report over the fence and telling the business it’s their problem,” Mutlaq Al-Morished, executive vice president for corporate finance at Saudi Arabia-based petrochemicals manufacturer SABIC, said in the EY report. “We should be helping the supply chain to work toward a solution, not just identifying problems.”
 
Business partnering between the CFO and supply-chain leaders is most established in the US, Singapore and South Korea, according to the survey. CFOs and supply-chain leaders are most likely to work collaboratively in technology companies (34%), followed by consumer products companies (33%).

Finance and supply-chain executives who work together are better at “unlocking hidden value within the organization and strengthening financial performance,” according to the EY research.

Benefits of business partnering include:

Creating consistency across the supply chain, the business and corporate strategy. Finance and supply-chain executives in the EY survey said working together closely breaks down barriers, improves communication and transparency, eliminates information silos and allows CFOs to better align finance, the supply chain and overall strategy.

The free flow of data between supply-chain and finance executives is key, Simon Dingemans, CFO at British drugmaker GlaxoSmithKline, told EY.

“An integrated supply chain depends on data standardisation, data comparability and simplification,” Dingemans said. When supply-chain and finance executives have a business partnership, “this means that people can see a total cost picture, which is what drives commercial behaviour.”
 
Supporting and challenging investment choices. CFOs who work closely with supply-chain leaders are more than traditional gatekeepers for investment and resource allocation. They get involved early on in the investment cycle, when ideas are formulated, and stay all the way to the end, managing the asset, retiring it or reinvesting in it.

Allowing supply-chain leaders to gain an understanding of how they fit into the corporate strategy tends to make discussions around investment and capital expenditures more productive, according to Andrew Caveney, global supply-chain and operations leader at EY.

For CFOs, it’s an opportunity to “apply the same rigour, control and analytical capability across all of the data that the organisation produces and view your role as somebody who … pushes value from that data into the rest of the organisation,” Andy Rusnak, Americas enterprise intelligence practice leader at EY, said in the report.

Monitoring and enhancing performance. Business partner CFOs act as bridge builders between different parts of the organisation by helping standardise the language, measurement, tools and key performance indicators.

In that role, they can set KPIs and targets to drive the right behaviours in the supply chain. In the EY survey, 57% of finance executives and 27% of supply-chain leaders said they need to do more to drive growth in the business.

About half of the survey respondents saw opportunities to optimise excise and trade incentives and gain a better understanding of working capital. About one-third felt they could better understand the cost of inventory.

Helping manage risk and business continuity. Mitigating risk is one of the biggest contributions CFOs can make to the supply chain. Key risks survey respondents identified included lack of visibility into outsourcing relationships (51% of supply-chain executives), currency risk (41% of finance executives), potential for unexpected disruption of the supply chain from natural disasters (38% of supply-chain executives) and labour disputes (37% of finance executives).

The risk exposure should align with risk appetite, a goal the CFO can pursue at the board level.

“The balance between lean and resilient is a difficult one to strike,” Alistair Davidson, IKEA’s head of staff, told EY. “When you over-focus on keeping costs low, then you might not invest enough in making sure you have a stable environment in which to work. And if you go completely over the top on stabilising the environment, you are probably going to be giving up on part of the cost feature.”

Here are ten steps EY suggests CFOs can take to enter into a business partnership with supply-chain executives:

  • Spend one day a week working with supply-chain issues.
  • Allocate finance resources to the supply chain, maybe even including embedding finance executives in the supply-chain function.
  • Review alignment of commercial and operational sides of the business.
  • Ensure data-driven business decisions and position finance as the owners of the data.
  • Get involved in the entire life cycle of an investment, from choosing an asset for investment to managing its performance and retiring or reinvesting in it.
  • Ensure that direct and indirect taxes, transfer pricing and the legal entity are integrated in operating models.
  • Key supply-chain performance indicators should encourage behaviours and outcomes that drive value.
  • Identify performance incentives that are not aligned with the overall business strategy.
  • Consider centralising business functions to reduce costs, enhance risk management and increase tax efficiency.
  • Look carefully for risks that lurk in secondary or tertiary layers of the supply chain.

Related CGMA Magazine content:

Cutting Costs in Supply-Chain Management”: The finance department has a key role to play in areas such as capturing good financial data and setting up strong relations with partners in the supply chain.

What Opportunities Are Hidden in Your Supply Chain?”: Supply chains present opportunities for manufacturers to identify efficiencies and innovations that can create a competitive advantage.

Unlocking Performance”: We asked Albert Birck, the head of performance management for Maersk Oil, and Roger Blanken, CPA, the vice president of finance–supply chain, for International Flavors & Fragrances (IFF), to explain how technology, better planning and communication about performance can unlock hidden potential.

Three Lessons in Managing Supply-Chain Data”: Aidan Goddard, FCMA, CGMA, the CFO and COO of L’Occitane en Provence’s Asia-Pacific operations, explains how Big Data, when harnessed, can help a company cut costs and inform sales and marketing strategies, and how finance figures in.

Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.

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