Published: June 16, 2011
According to Jim Owens, former Chairman and CEO of construction equipment manufacturer Caterpillar, “the competitor that’s best at managing the supply chain is probably going to be the most successful competitor over time. It’s a condition of success.”[1] While optimising the physical supply chain to anticipate and respond to changing conditions is an essential element of success, the financial supply chain deserves equal attention.
A common perception is that the supply chain drives a company’s success, while the financial supply chain is a by-product, in that it deals with the financial inputs and outputs to the physical supply chain such as payments and collections. In fact, the two must be considered hand in hand. Without a highly efficient and responsive physical supply chain, customer demand would not be satisfied, costs would spiral and revenues would be compromised. However, investors do not invest because the company is good at making semiconductors (or providing consultancy, producing oil, or manufacturing chemicals) they invest because the company makes money from doing so. Financial efficiency must therefore be a key driver in all companies’ strategic decision-making, alongside or even in precedent to supply chain efficiency.
As we move into the next stage of the economic cycle, the supply chain risks to which companies of all types are exposed are also changing. According to the McKinsey research outlined in the accompanying article, “The challenges ahead for supply chains”, two thirds of respondents see supply chain risk continuing to grow, despite the fact that many firms have invested millions into developing highly automated, sophisticated processes. This is reflected in the priorities identified by respondents in the McKinsey research referenced above. Reducing costs is less immediate a consideration than it has been in recent years, as many firms have achieved the greatest efficiency they can. However, improving product or service quality (29%) improving customer service (36%) and getting products and services to market faster (34%)2 are greater priorities than they have been in the past. While treasurers and finance managers with responsibility for financial supply chain management may find it difficult to influence the first of these issues, they can directly contribute to the second and third.
While optimising the physical supply chain to anticipate asnd respond to changing conditions is an essential element of success, the financial supply chain deserves equal attention.
Customer service, for example, is enhanced if the collection process is efficient and appropriate to the customer. Telephoning three times for different invoices, ignoring credit notes that may have been issued to offset all or part of an invoice, failing to take into account a bilateral agreement where invoices to each other may be offset, or chasing invoices that have already been paid, but not yet reconciled, can all damage customer relations. Consequently, optimising the credit and collections process can be of direct commercial as well as financial benefit.
The third of these priorities, i.e., getting products and services to market quickly, is also an issue where treasurers and finance managers can assist. Delays and errors in trade documentation, for example, can leave consignments stuck on vessels for days, incurring costs and delaying production or shipment to customers. Optimising trade processes is therefore critical to accelerating the supply of goods and services, enhancing cash management and improving forecasting. Reducing working capital requirements by accelerating the cash conversion cycle and aligning payment and collection processes is also a vital consideration, enabling more cash to be made available for investment in research and development, new production facilities and sales and marketing.
The McKinsey research also discusses how prepared companies are to address some of the supply chain challenges ahead. Looking at Exhibit 4, respondents expressed concern that they are insufficiently prepared to deal with increasing financial volatility (36%) increasing volatility of commodity prices (37%) and increasingly global markets (37%). While this may be the view of respondents in this survey, who were engaged in the physical supply chain, many treasurers may beg to differ. Over the past few years, when market volatility has been at its highest, treasurers have reassessed and revised risk management policies and procedures, so in many cases, companies are better positioned to manage the impact of financial and commodity volatility than at any point in the past. What is less clear, perhaps, is whether those responsible for the physical supply chain are fully aware of treasury’s activities. On the other hand, treasury’s ability to manage the company’s financial and commodity risk is directly proportionate to how much knowledge it has of the company’s exposures and its ongoing global strategy. This raises the question of effective communication.[[[PAGE]]]
The research indicates that up to 40% of companies do not have active communication between operations and sales & marketing. Similarly, many treasurers will be familiar with the problem that not only is no single department responsible for all of the elements that comprise the financial supply chain, such as purchasing, accounts payable and accounts receivable, but there is also insufficient communication across these functions. Consequently, many treasurers have sought to take an oversight role to co-ordinate the activities of each area in order to align their activities more closely. In the same way, the concerns raised in this survey suggest that better communication between those responsible for the physical and financial supply chains would also reap benefits.
One of the conclusions of the survey is that the CEO will need to take a more proactive role in the supply chains of the future. While this is undoubtedly the case, particularly to ensure that communication across different functions in the physical supply chain becomes part of the company’s culture, this needs to be a partnership between the CFO and CEO so that there is adequate communication between each of the functions that comprise the physical and financial supply chains, and alignment between the two.
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