Take the pulse of your relationship with the supply chain. How collaborative is it? Is finance perceived as a gatekeeper and policeman?
WHAT MARKET LEADERS ARE DOING
A recent EY survey (Partnering for Performance: CFO and the Supply Chain, 2013) on partnering for performance reveals that, while 55 per cent of finance executives surveyed say their relationship with the supply chain is still based around a more traditional finance role, suggesting that the shift to a more collaborative relationship may be difficult, 48 per cent of the remainder report EBITDA growth increases of more than 5 per cent over the past year, compared with just 22 per cent of those with a traditional relationship.
The executive vice-president for corporate finance at a petrochemicals manufacturer agrees. “A collaborative relationship between finance and the supply chain is of paramount importance,” he says. “Finance should never be a policeman, just throwing a report over the fence and telling the business it’s their problem. We should be helping the supply chain to work towards a solution, not just identifying problems.”
This collaboration can help to ensure that business decisions are driven by a measurable single version of the truth. The chief financial officer (CFO) of a multinational pharmaceuticals company comments: “If every part of the supply chain has its own data, then you have lots of debate over comparability. An integrated supply chain depends on data standardisation, data comparability and simplification. This means that people can see a total cost picture, which is what drives commercial behaviour.”
The CFO of a building supplies company agrees: “Once we have a good idea of how much product we are going to sell, we can build a strategy around that and optimise our manufacturing footprint to deliver it. As a CFO, it gives me comfort to know we’ve got some science behind this and that the recommendations being put forward are analytical, fact based and not based on someone’s theory or emotional view of the industry. Finance can establish that working capital is important and ensure there are consistent definitions in place, along with objective measures to show whether or not we are achieving our goals. But it is then up to the supply chain to figure out what they can do to meet those objectives.”
A large multinational drinks consortium, for example, has taken steps to centralise procurement to drive economies of scale and consistency across the business. Its president for global supply and procurement says: “Although we have local procurement teams, they now form part of a centralised group. We have category managers at the centre who set strategies and manage contracts globally. So if an executive wants to buy a flight locally, they can do that through a portal, but it rolls up into the central procurement model.”
The centralisation of procurement can also have important tax benefits, in terms of reduced direct and indirect tax costs, and improved free cash flow. Companies need to factor tax into the decision-making process. Tax-effective procurement operating models have a proven track record of being flexible, business-driven solutions. They can also lead to reductions in the effective tax rate that may be as high as 2 per cent. In line with this, a growing number of companies are rethinking their approach to shared services, moving from a narrow, function-specific approach to a multifunctional model.
This convergence brings the issue of risk to the forefront. “It helps that finance and supply chain executives are thinking about risk in different ways because it ensures there is better coverage of the key exposures that the company is likely to face,” says Philip Davies, executive director, supply chain, EY. “By executing more quickly, these companies can reduce their financial loss, minimise the impact and perhaps come out of some of the situations in a stronger position than their competitors.”
Regulatory risks will be high on the CFO’s agenda. In 2012, for example, the US Securities and Exchange Commission (SEC) issued a rule to implement disclosure requirements regarding “conflict minerals” as part of the Dodd-Frank Act. Conflict minerals refer to those that originate from the Democratic Republic of the Congo, where armed groups are using the proceeds of the sale of these minerals to finance regional conflicts. This affects any SEC issuer, including foreign issuers, that manufactures or contracts to manufacture products where conflict minerals are used. Industries likely to be affected include electronics and communications, aerospace, automotive, jewellery and industrial products.
CONCLUSION
To drive growth, high-performing companies abandon structures that are defined by narrow business functions, such as finance and IT. “Breakthroughs in business performance occur when looking at the business or supply chains from an end-to-end perspective,” says Mr Davies. “In an environment where the global recovery from financial crisis and recession continues to be slow, no business can afford to pass up the opportunity to boost performance.”
TEN STEPS FOR EFFECTIVE PARTNERING
1. Make time for the supply chain. Business partner chief financial officers (CFOs) and spend an average of one day a week working with the supply chain or on supply chain issues.
2. Allocate finance resources to the supply chain. Determine whether the right finance resources are in the right places to enable a business partnering relationship. This may require a combination of “embedding” finance executives within the supply chain function and closer collaboration with the main finance function.
3. Review the sales and operations planning process. Your involvement can help to build stronger bridges between the commercial and operational sides of the business, and ensure that their objectives are aligned.
4. Ensure business decisions are driven by a data-based single version of the truth. Discourage multiple interpretations of master data by different functional areas. Position finance as the owners of the data.
5. Support investment decisions. Business partner CFOs are involved throughout the investment life cycle, from choosing an asset for investment through to managing its performance, retiring it or reinvesting in it.
6. Help drive supply chain performance through an integrated operating model. Ensure that direct taxes, indirect taxes, transfer pricing and the legal entity are integrated to the model.
7. Focus the supply chain on the metrics that matter. Key performance indicators should consistently encourage the behaviours and outcomes that drive value.
8. Identify performance incentive misalignment. Performance incentives across functional areas should be consistent and should support the broader business strategy.
9. Consider centralising business functions. Centralisation of functions, such as procurement, can reduce costs, enhance risk management, streamline processes and increase tax efficiency.
10. Look deep in the supply chain for risks. Risks that lie in secondary or tertiary layers are more difficult to manage, but they can be just as damaging.
For more information contact Philip Davies, executive director, EY
Tel: 020 7951 3540; e-mail: pdavies4@uk.ey.com
