The Talk The Supply Chain Leader Needs To Have With Their CFO

Supply chain disruption continues. While many might point to the improvements in ocean freight and declare that supply chains are back to normal, nothing could be further from the truth.

Suppose the normal reference is the demand and supply disruption level before March 2020. In that case, as shown in the Global Supply Chain Pressure Index published at the end of each month, we are experiencing the thirty-fifth month of disruption higher than at the end of the 2007 recession.

While the first mile of the supply chain is more reliable today than five months ago (transportation is both more available and lower in cost), disruption issues shifted. Today, leaders face slowing growth coupled with twenty-four months of inflationary pressure. Supply shortages due to both war and unprecedented demand patterns abound. Companies struggle with disposing of the wrong inventories while demand patterns shift. Warehouses are full, while customer order fill rates remain low.

The Global Supply Chain Pressure Index

The Global Supply Pressure Index supports the concept that disruption is the new normal for supply chain leaders.

Discussion With the CFO

For many supply chain leaders today, the boardroom experience is challenging. Executive teams struggle to understand why supply chain reliability remains an issue. My recommendation is to print off The Supply Chain Global Pressure Index and book an appointment to speak to the CFO on five actions to take to improve balance sheet results:

1. The Efficient Supply Chain Is Not The Most Effective. The efficient supply chain is the lowest variable cost configuration. However, with increased demand and supply variability, what appears to be the lowest variable cost option on a spreadsheet can actually be a higher total cost option. The reason? The modeling is not simple. To see the total cost of options, use network design simulation technologies to factor the impact of demand and supply variability into a complete cost analysis that includes the inventory cost and plan feasibility (based on constraints).
2. Spreadsheets Do Not Yield The Best Decisions. During the pandemic, 94% of supply chain decisions were made based on spreadsheet analysis. The issue? A spreadsheet cannot adequately model supply chain complexity.
3. Functional Metrics Throw The Supply Chain Out Of Balance. Bonus incentives based on functional achievements — metrics like the lowest cost of manufacturing or transportation, purchase price variance, or OEE (Operational Equipment Efficiency), throw the supply chain out of balance increasing inventory and reducing order reliability. Focus on building bonus incentives based on a balanced scorecard of growth, inventory turns (or days), operating margin, and asset utilization. The shift from a focus on cost to margin enables the analysis of waste of shifting demand from period to period based on failed marketing incentives. (Shaping demand raises market potential while shifting demand from period to period increases costs and reduces reliability.)
4. Governance Matters. Focus on how the organization should make decisions. Regional decision-making includes sandbagging (the regional groups set a low bar to beat for bonus payout), while global decision-making reduces ownership. Focus on achieving the right balance to reduce gaming.
5. Marketing-Driven Needs To Move To Market-Driven Decisions. Marketing-driven initiatives need a check and balance: focus on complexity reduction with a focus on the customer. Use modeling tools to rationalize product complexity and analyze the impact of the long tail of the supply chain on profitability during this time of unprecedented variability. Continually evaluate the impact of marketing-driven activities on the supply chain while asking the question of, “Is this of importance to the customer?”

The longer the tail of the supply chain (products with low volume and high variability), the greater the impact on cost and reliability. Without complexity management, the long tail of the supply chain whips the organization everyday on customer order reliability.

Summary

The talking points in this article are not new, but action today is more critical. Unfortunately, too few finance teams understand the impact of variability on balance sheet results.