A Winning Combination: Finance and Supply Chain
November 10, 2020
Different shortfalls and stress points characteristic of modern business operations have come to light over the past eight months. While economic conditions may improve and stabilize, some of these problems are likely to linger unless addressed. One of the most significant issues I’ve noticed is the disconnect between Finance and Supply Chain operations.
Functional silos such as those separating Finance and Supply Chain lead to them taking different approaches to formulate their plans and adjust their forecasts in response to changing business conditions. With companies scrambling to meet new demands, alter their business models on the run, and deal with extraordinary operating conditions, this divergence can create serious vulnerabilities.
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We saw some of the potential weaknesses in the supply chain in companies’ response to the Japanese tsunami of 2011. Back then, extremely complex supply chain models broke down when key suppliers were unable to deliver. I’m seeing parallels to 2020 as companies now try to tailor their manufacturing and distribution systems to respond to wildly volatile external circumstances.
What is the core problem? Finance typically worries about the cost of goods sold, while Supply Chain worries about obtaining things, manufacturing things and delivering those things to customers. As a result, Finance is looking at variations from budget while Supply Chain is trying to secure materials, manufacture products and get those products to various points of sale around the world.
The two functions speak in different languages and operate on different timelines, and they frequently rely upon different sources of data and different technology platforms. They often use different key performance indicators (KPIs) to measure success against predetermined objectives.
Many organizations spend an inordinate amount of time reconciling information between the two functions, getting stakeholders to use common terminologies and taxonomies and enabling systems to translate and integrate this information so they can make sense of the data they receive.
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Although Finance and Supply Chain usually work on different systems, they can be integrated, and they can communicate with each other.
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Making systems communicate
But these problems are not insoluble. Although Finance and Supply Chain usually work on different systems, they can be integrated, and they can communicate with each other. Even with disparate legacy source systems, new technologies – especially cloud – can make shared data accessible and consumable for both functions.
The first step in making this work is ensuring alignment between stakeholders in both Finance and Supply Chain to ensure there is a connection in the way they view and run the business to enable the translation between the functions.
Following this, the use of subledgers adaptable to different ERP platforms can help aggregate data, while other technologies help both Finance and Supply Chain analyze and visualize the data to make better forecasts and better decisions. Ultimately, the financial plan is derived from unified production and shipment plans, leading to greater accuracy and certainty.
As our colleagues Paul Prendergast and Patrick Picha recently noted in CFODive, the pandemic has demonstrated how Finance needs a better handle on the external drivers affecting the business on a near-real time basis. Supply Chain needs the same information. With an integrated approach, the two functions can use data visualization, machine learning and artificial intelligence (AI) to spot correlations between changes in demand and variations in external factors ranging from unemployment to regional economic growth.
The integrated approach can yield major benefits including:
- Improved scenario planning. With integrated data, companies can test variables and model data at high speed. Scenario planning incorporates elements such as forecast sales and production levels, R&D costs, inventory carrying costs, and production and transportation costs, then combines it with financial components such as risk and cash flow.
- Greater flexibility. Integrated planning provides a “single source of truth” that allows the organization to pivot quickly and respond to changes that affect supply, demand or financial results. With a comprehensive forecast, the organization can pursue opportunities while understanding their likely impact on financial statements.
- More efficient overall planning. Integrating Finance and Supply Chain planning can lower overall planning costs, but it can also lower logistics costs by making demand planning more flexible. There are many other benefits including reductions in the number of reports, shorter planning cycles and improved forecasting accuracy.
The case for integrating finance and supply chain planning is a strong one.
But implementing such an integration can be challenging. It requires a multi-disciplinary team or “pod” with representation from Strategy, Supply Management, Demand Management, and Commercial planning as well as Finance. It means re-configuring enterprise workflows to combine strategic, top-down planning with a more digitally agile, data-rich, bottoms-up operating plan. And it calls for new skills in areas such as advanced problem solving, analytics, data management, collaboration, and risk management.
The challenges are significant, but the ultimate objective – unified and integrated data leading to better collaboration between Finance and Supply Chain – is well worth the effort. The pandemic has forced us all to figure out ways to outmaneuver uncertainty. Post-pandemic, I believe companies with integrated planning models will be better positioned to adapt to an environment characterized by volatility and a rapid pace of change.
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