Five steps to a value-added supply chain
1. Map the supply chain: Identify all suppliers through all tiers.
2. Meet suppliers: Sit down with executives of suppliers that account for a majority of procurement (80/20 rule); understand their objectives.
3. Assess suppliers: Identify key metrics and analyze vendor performances (monthly, quarterly, annually); incorporate metrics into contracts and executive dashboards.
4. Rank suppliers: Based on metrics and intangibles (e.g., intellectual property), identify best, middle and worst performers.
5. Improve the supply chain: Develop a plan to cull underperformers and improve overall performance.You might call it a chain reaction. Many of today’s CFOs are struggling with the question of how to minimize risks, control costs, and optimize the efficiency of their supply chains — despite the fact that their oversight with regard to supply-chain management is often limited at best.
In Grant Thornton’s recent Value-Adding Strategies Survey, we learned that 85% of manufacturing executives rated supply-chain management as important (or very important) to their companies. But while most respondents have some involvement with supplier management, the supply chain generally falls outside the CFO’s purview.
This puts CFOs in a difficult position when it comes to assessing risks associated with the supply chain. Too often CFOs aren’t privy to vital insights that would come from a deeper understanding of how the chain works — or doesn’t.
The invisible supply chain
“CFOs who add value to their organization create relationships and communicate openly with colleagues in operations and procurement to learn more about the strengths and weaknesses of their suppliers,” says Jeff French, Grant Thornton national managing partner for the Manufacturing practice. “They also ensure that fellow executives really understand their suppliers as well. Many manufacturing leaders have never set foot inside their suppliers’ facilities.”
Greater familiarity with supply chain issues puts a CFO in a better position to evaluate supply chain performance and suggest alternatives. Unfortunately, this is often not the case.
“By the time most CFOs find out that there’s a supply chain problem, it’s often too late,” says Brian Larsh, Grant Thornton advisory services director. “They’re cleaning up the mess and directing corrective actions. I don’t see a lot of cases where CFOs are proactive and taking action to mitigate risks, such as ensuring a sufficient number of suppliers, or use of backup suppliers to prevent disruptions. That requires a more thorough understanding of their supply chain, which starts with an analysis of the supply chain presented to the CFO in an understandable way.”
Managing supplier opportunities — and risks
Mapping the supply chain is a must for modern successful companies. Who better to require enterprise-wide data analysis and quantify impacts on overall risk and profitability than the CFO? For example, although procurement may focus on minimizing per-unit pricing, the CFO is in the best position to ask for a total acquisition cost approach, which include shipping, freight, taxes, impact on transfer pricing, etc.
Unfortunately, only 29% of manufacturers use business analytics to identify new supplier opportunities and potential supply savings. Even when supply-chain data is available, executives are often skeptical of its quality — leaving them to manage based on little more than intuition. This is disturbing — but offers tremendous opportunities for forward-thinking CFOs.
Why? Because today’s supply chains are complex global amalgamations of many historical decisions, some made generations ago. With the guidance of an engaged CFO and dependable data, manufacturers can evaluate why their supply chains are structured as they are, including:
Suppliers: Why these vendors? How difficult would it be to find alternative sources? Which types of analysis are conducted, and by whom? Where do we go if these suppliers fail?
- Goods (materials/components/parts): Why are particular goods or technologies sourced from specific vendors? Do suppliers present us with materials and components valuable to not just our companies, but also our customers (with better pricing and/or technologies)?
- Movement of product: Why are our logistics and distribution processes utilized? What is the potential for disruptions, and where are they most likely to occur? Who is responsible for analyzing and improving this process?
A value-adding CFO is well positioned to forewarn of supply chain problems. In examining the balance sheet or financial statements, for example, he or she will be the first to identify red flags — and to recommend strategies to correct course.
Supply chain red flags
• Unexplained rise or fall in inventory levels
• Unusual purchase price variances
• Rise in warranty costs
• Excessive inventory variances
• Inventory aging and write-off requests
• Production’s failure to meet revenue plansIt’s important, too, that these red flags be “automated” to reach the CFO’s attention via dashboards and other tools. CFOs can then offer analysis and options regarding suppliers and the supply chain.
Building for the future
It’s clear that many CFOs are already making an impact: Nearly 40% of executives report that suppliers have contributed to their companies’ supply-chain improvement efforts. And half indicate that their companies have reduced supply chain costs over the past five years by more than 5%.
Most of these gains have been earned by planning ahead — by CFOs driving supply chain optimization before problems can occur. These executives strategically design tomorrow’s supply chain today by:
- Prioritizing supply-chain performances and metrics: Developing a long-term supply chain vision; immediately addressing supply chain risk areas; focusing on suppliers and issues with the greatest impact; and transitioning to a new supply chain consistent with the long-term vision (which vendors are in, which vendors are out).
- Managing the supply base through the transition and redesign: Rewarding high performers with more volume; motivating mid-range performers by finding alternative suppliers and encouraging competition; and penalizing or replacing poor performers.
Big goals for big supply chain gains
Executives say that their top supply-chain objectives are to improve costs, delivery, and quality. Yet few seek to minimize supply-chain risks by improving compliance with government or industry standards and to customers’ specifications.
Value-adding CFOs know that a supply-chain plan must address all aspects of the vendor base to optimize performance — and boost the bottom line. How comprehensive is your supply-chain strategy?
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