Aligning supply chain and finance around inventory management

Aligning supply chain and finance around inventory management

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Supply chain and finance are measured differently when it comes to performance, which often means they have opposing goals that ultimately undermine each other’s effectiveness. For example, supply chain ensures a product is available at the right place and the right time. But when supply chain leaders work to safeguard supply at the expense of efficiency, inventory stockpiles can occur that tie up working capital—and that loss of working capital prevents finance from meeting its cash flow targets.

Below clearly shows how inventory levels can create conflict between supply chain and finance.

From the supply chain perspective:

  • Excess inventory = Buffer for supply chain
  • Excess inventory = Shock absorber between demand and supply volatility

From the finance perspective:

  • Excess inventory = Low working capital
  • Excess inventory (DOI) = High costs
  • Excess inventory = Negative impact on operating margins
  • Excess inventory = Imbalance in supply chain network
  • Excess inventory = Negative impact on market capitalization

To help resolve this conflict, Finance needs real-time visibility into the impact that inventory will have on their P&L. For instance, the total cost of inventory will change with the amount of variable cost components. Variable costs include weighted average cost of capital (WACC), which can be some percentage of purchase price. The other element is taxes, which is some percentage of inventory value. Then there’s insurance, which is also a percentage of inventory value. Finally, there’s the obsolescence reserve.

Fixed cost components do not change. Fixed cost components include, for example, cost of space, cost of equipment, and cost of personnel (inventory managers, stock keepers, material handlers, etc.).

Financial planning hierarchies and supply chain planning hierarchies should be aligned from a product, geo, supply, and market standpoint so that the impact on the variable, fixed, and ad-hoc costs tied to inventory is visible at all levels across all planning hierarchies. The KPIs and metrics that are relevant for both finance and supply chain should be tracked with alerts, exceptions, and workflows so that proactive measures can be taken as opposed to reacting to losses due to excessive obsolete inventory or empty shelves due to under stocked stores.

As you can see, poorly managed inventory can make or break a company—no matter how large it is. The Anaplan platform is very well integrated and purpose built for enterprise business planning, which means supply chain and finance are connected in real time. For example, there are several key areas between inventory management and financial planning that are linked, which will allow you to analyze the impact of variable costs, fixed costs, and ad hoc inventory costs.

Some key areas where Anaplan will help you orchestrate financial performance by connecting supply chain planning with financial planning are:

  • Integrate unit or volume planning with financial and profitability planning
  • Identify and respond more effectively to supply risk
  • Factor capacity and inventory constraints into decisions about promotional strategies and optimal price points using pricing elasticity
  • Incorporate a deeper operational and financial perspective through scenario-based modeling
  • Improve product lifecycle decisions, and asset and product utilization
  • Assess and refine profit and volume trade-offs across products, channels and geographies

Want to learn more? Take a look at our white paper, “Connecting supply chain planning to profitability.”

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