Collaboration between supply chain and financial brings greater efficiency
From the August 2018 print edition
When I first started in supply chain over 10 years ago there was little if any contact with the finance department.
Finance was seen as a bookkeeping function as well as a strategic partner to the CEO. Supply chain was seen as a functional role and a cost centre. Supply chain has evolved to deliver significant and real value to customers and enhance shareholder value. I’ve learned the importance of presenting data in financial terms with a focus on being able to make the connection to revenue when communicating with finance.
Supply chain professionals need to be educated in their role within their organizations. Supply chain can influence 60 to 70 per cent of a company’s spend. By focusing on increasing the ability to report and identify key metrics to management you raise your visibility. Supply chain can also advise how each potential scenario may impact the corporate-wide KPI’s assisting with balancing supply, demand and finance.
Problems can arise if finance and supply chain don’t work together early in the planning process. For example, it could affect yearly planning as the data would be based on what happened in past years and not created based on what the operations team is forecasting will happen in the future.
Collaborating with finance helps provide insights into the performance of the business and operations can assist with regular input while realizing opportunities for cost reductions. With today’s focus on KPI’s we now share data such as fill rates, product availability, delivery times, inventory value, inventory turns and the cash-to-cash cycle. Finance can assist with a high-level view of when problems are starting to occur with KPI’s assisting as a dashboard. Collaborating enables an understanding of knowledge for better strategic decisions.
Supply chain has three major flows: material, information and financial flowing both downstream and upstream. On the demand side challenges include lack of understanding; resistance to change; costs and efforts; caution about mandated programs; release of data from banks; system integration costs and ability. Challenges on the supply side include development and support costs, security and credit constraints. Regarding technology, challenges include lack of automation, security and, out of the box solution packages and absence of legislation.
Finance’s KPI’s include days sales outstanding, days of inventory, days payable outstanding and fays of working capital. Finance has two major flows: invoices and payments and information transfer. Challenges in financial flow include: manual processes; lack of timely information; lack of employee empowerment and spend policy compliance; delays in invoice reconciliation and processes for setting optimal limits.
On the non-financial side there may be a need for sustainability reporting for which supply chain and finance will need to put processes in place for meeting these new demands as well.
Spreadsheets allow room for errors and present a challenge when trying to share data. By identifying and evaluating common causes such as uncertainties in inflow and outflows it is possible to gather detailed transaction information such as a date and time of receipt, supplier name, quantity received, PO number and so on to help find new integrated automation solutions for finance with new ways to streamline their processing.
Solutions to support a collaborative strategy could include automation and standardization such as e-payments, electronic invoices and electronic trade platforms.
Automation and standardization can facilitate benefits including cost savings; speed of settlement; improved cash forecasting; more efficient reconciliation; fraud control; better supplier/customer relations; straight- through processing to AP or AR and working capital improvement.
Integrated processes would facilitate advantages such as reduced costs; reduced bad debt; decreased costs; better allocation of human resources; better decision-making and fewer risks. Deciding to move to an integrated approach may involve a business case or may be required by your customers or suppliers. Best-in-class companies perform gap analysis and take corrective actions, improve inventory management capabilities and consider issues during supply or demand balancing.
By working together, supply chain and finance are able to react, anticipate, integrate, collaborate and execute strategies into daily operations while facilitating a cross-functional, end-to-end approach within their companies overall strategic goals.
An integrated approach can result in scalability, flexibility and process integration. Finance can then grow to add value activities and become a business partner with operations.