While Supply Chain and Finance have always been fundamentally linked, the way in which they engage has been altered by economic volatility, rising globalization, and the relentless pace of innovation driven by the informed consumer. These challenges have marked a tipping point for the supply chain function. First the Supply Chain has to further integrate its planning processes with other key business functions like Sales and Product Innovation. It also requires supply chain leaders to understand in real time the financial implications of their decisions on overall corporate strategy. Download our paper to learn more about the evolving dynamic between Supply Chain and Finance.
So why does Finance need visibility into Supply Chain?
Leading companies know that managing the financial risks associated with business volatility requires the supply chain strategy to stay in lockstep with their overall business and financial goals. The need for alignment across the business has put supply chain leaders in a front seat at the executive table. Top finance executives have moved beyond traditional transactional roles—by uncovering inefficiencies within the organization and championing effective business processes, they now also assume responsibility for bolstering financial performance.
As a result, Supply Chain and Finance now have the opportunity to collaborate on a level that surpasses traditional monitoring and reporting— particularly in four key areas highlighted in a Ernst & Young (EY) survey of supply chain executives.
- Creating consistency across the supply chain, the business, and corporate strategy
Consistency across functions means you can orchestrate corporate performance and move towards profitability by providing end to end financial alignment through core collaborative processes such as Integrated Business Planning or S&OP. Integrate functional plans from marketing, sales, new product development, manufacturing, procurement and finance to inform supply chain activities, and treat all these components as one end-to-end value chain. This broadens the involvement of key functions in the planning process, and with it increases the information used to result in a more informed plan.
- Supporting and challenging investment choices
The ability to input and/or upload production cost per unit against every product in each production unit and tie it to overall P&L allows planners to see impact of their forward-looking changes on margins in real time. This enables enterprises to focus on cost reduction and maximize contribution by optimizing the use of existing production facilities or other strategic investments. For growing organizations, demand versus available capacity analysis in different scenarios addresses the need for informed decision-making on strategic investments.
- Monitoring and enhancing performance
The key to choosing appropriate metrics lies in understanding which metrics really matter. For example, if the end goal is to improve customer service, a company should focus on order fulfillment rate and fulfillment lead time rather than forecast error. To ensure overall improvement in supply chain performance, it is important to align departmental and geographic goals with strategic enterprise-wide goals. For example, the goal of reducing supply costs may have a negative impact on desired product quality, lead time or the proximity of the supply base. Unless organizations do a good job of aligning these cross -departmental goals and ensuring that operational KPIs map to the enterprise’s strategic KPIs, they will continue to measure and reward against conflicting metrics.
- Managing risk and business continuity
Risk, opportunity and continuity are achieved by integrating demand and supply volume planning with medium and long-term financial planning in a consistent business rhythm, ideally on a monthly basis, to balance the demand and supply equation. The financial analysis should evaluate revenue, cost and profitability of monthly demand and supply plans, and be flexible and sophisticated enough to generate aggregate analyses on product, customer and time dimensions to optimize margins and reduce risks.
Companies that have adopted this new model of collaboration between Supply Chain and Finance reap the rewards. According to the EY survey, companies with established “business partnering” relationships between Finance and Supply Chain reported EBITDA growth of more than 5 percent during the prior year. In contrast, only 22 percent of companies in which finance leaders have a more traditional, detached relationship with supply chain executives achieve similar results.
These findings show that leading companies now know the supply chain strategy needs to stay in lockstep with overall business and financial goals in order to properly manage the financial risks associated with high demand volatility.
Want to read more about aligning Supply chain and Finance now? Read the white paper.