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Strategy and innovation

The success of a good combination between finance and supply chain.

Inflation, market volatility, the new consumers and the global crisis in semiconductors and transport have put the vulnerability of the supply chain on the table.
El éxito de una buena combinación entre las finanzas y la cadena de suministro
Category
Strategy and innovation
Content type
News
Written by
Redacción
Reading time
10 minutes
Published
09 Feb 2022
Inflation, market volatility, the buying intelligence of the new consumer and, above all, the global crisis in semiconductors and transport in these two years of pandemic have highlighted supply chain vulnerability, beyond the traditional risks that until now threatened its stability.

Chief Financial Officer's, already with so many open fronts, have had to take the reins and intervene in this area, which until now was more secondary in their managerial priorities. CFOs and COOs, or Supply Chain Managers, have formed teams and have been compelled to join forces and try to unify languages and strategies. They also managed to do this in record time, just like everything that has been happening in the world in the last two years.

The supply chain was financially perceived as a cost centre and the place to go when a customer complained of non-compliance. Two functional silos without excessive communication. It has not been consolidated as a strategic element for the company, to be handled in an integral way.

McKinsey consultant Knut Alicke couldn't put it better: “Until not long ago it was simply a function that was only paid attention to when something went wrong. For example, faced with a product availability problem, customers called and enquired about their orders. So everyone looked at the supply chain and the question was: Why was it not delivered on time?”

As a simple cost centre, the chain's objectives were focused on making operations cheaper and ensuring supply and delivery to the customer without major setbacks. Offshoring and long-term contracts seemed to vigorously respond to this objective. Until everything was blown up in March 2020.

The success of a good combination between finance and supply chain.

During the pandemic, the supply chain has been shown to be one of the weak points of companies. Especially in industry and, in particular, in the technological, health and automotive fields. But, as we have seen recently, the crisis affects all sectors.

The strong recovery in demand throughout 2021 has destabilised global flows to the point of suffocating many industries and economies. A bottleneck that continues to be a new version of that old axiom that we colloquially call“ die of success”.

Communication between the Finance Area and the Supply Chain

If we look back to that pre-pandemic world where everything seemed to work like a precision clock, supply chains operated independently from the rest of the organisation and, in particular, from the Finance Area. Their financial impact was evident, but those responsible operated with long-term vision and they successfully managed to reduce costs in operations. Their perfect gearing did not predict a crisis like the one we are experiencing.

While other areas digitised and began a deep transformation process, the supply chain did not appear in the plans. The pandemic and the global supply crisis have turned everything upside down. And it forces financial directors to focus on this chapter with a strategic vision.

As the technological SAGE suggests to us when analysing this Finance-Supply relationship, the CFO should ask themselves whether they have six clear concepts to assess their leadership capacity and promotion of a more agile and resilient supply chain:

  • The KPIs and reports needed to manage and measure the supply chain.
  • The role of finance in the strategy of the supply chain.
  • Information about the cost of activities and their support of key chain decisions.
  • The possibility of comparing operations for different channels, products, transactions and installations.
  • The company's market offer and its value proposal for the customer.
  • The online offer of the company.
If a CFO can answer these six questions, they are surely in a position to integrate the supply chain in their management role.

In a recent report on this matter, Forbes magazine advocated that finance collaborate and communicate with those responsible for the supply chain from the beginning, participating in the supplier approval process and even guiding supplier selection criteria.

Once all the facts are known, the CFO may advocate reducing exposure to additional unplanned costs and be willing to pay a higher price for a domestic product, giving up offshoring and resorting to a local supplier. An option that would have been ruled out by the supply chain years ago.

As Cherene Powell, Chief Strategy Officer at Accenture, reminds us, this is because in general, finance is traditionally concerned with the cost of goods sold, while the supply chain is in charge of getting things, manufacturing them and delivering them to customers. Finance is limited to budget variances, while Supplies tries to secure materials and get them to the points of sale. A division in silos that has become obsolete.

Using new technologies in a common way and unifying languages

Finance and Supply Chain, as we have highlighted, usually speak different languages and operate on different timelines. Their technology platforms and information sources are often different. Not to mention their goals and KPIs, as SAGE warned us.

According to Accenture, the problem is the excessive amount of time companies spend reconciling information between the two functions. For their systems to translate and integrate this data and make it intelligible. According to the consultancy, the solution begins with the use of the cloud and the new data management and processing systems centralised by the Finance department. Almost as important as the processing of this data is its visualisation, so that the entire organisation can understand and react quickly to incidents and cost overruns in the chain, from sales to marketing or human resources.

Modern supply chain management (SCM) systems offer information that is not only exhaustive of the entire process, which are customer-focused, but also predictive, thanks to Artificial Intelligence. The same predict consumer behaviour than a possible failure in a machine or in the transport of a supplier. This is data that will allow Finance to better plan with greater precision and intervene with more complete information to renegotiate contracts and rethink the use of local suppliers, as has been happening in recent months.

Using new technologies in a common way and unifying languages

Classical theorists warned us that, if America sneezes, the world catches a cold. Today, thanks to AI predictive systems, any symptom or slight itch before sneezing is detected in real time before its consequences reach our chain. And those responsible for supplies already know that the attending medical team must be multidisciplinary.

The 3 keys to financial-operational cooperation

1. Digitisation and prediction

The world of communication has gone from a hierarchical sender-receiver model to an omnichannel networked system with billions of voices. The same has happened with the traditional linearity of the supply chain. Today's supply networks are increasingly sophisticated and global. As the Forbes report says, we are facing a multi-layered ecosystem with independent nodes and logistics partners acting as a network.

A scenario that would only have been and is possible thanks to digitisation, which cuts across all processes and provides transparency and real-time in the exchange of information. This data is available to the entire organisation and allows decisions to be made in real time as well. The CFO, as a catalyst for the company's Big Data, is responsible for that information flowing and becoming an understandable language for all, generating the right reaction, from sales to operations. A minimal incidence 15,000 kilometres away, as we have seen in recent months, has critical implications for the rest of the globe.

In addition to sharing information and monitoring the supply chain, technology has gone a step further with Artificial Intelligence, which is able to offer us predictive models and observe trends that, at first glance, would go unnoticed. Technology, in short, helps us to be more resilient.

And also to save that problem that McKinsey calls the Holy Grail of the supply chain: multilevel transparency. Companies are usually well informed and trust their direct suppliers, with whom they have signed contracts over the years. Problems occur with second or third level suppliers. According to the consultancy, this is where technology plays a critical role.

2. New supply models: micro chains

An expression that takes us back to the 80s and 90s, when the stereos we had in our homes were compacted. As we mentioned, the risks associated with large supply chains lead us to a more complex scenario, which requires agility and closeness to guarantee business continuity.

A more flexible and decentralised model, as KPMG maintains in its report on this new phenomenon. Standard low-value products will continue to be produced in offshored markets, but non-standard parts will be closer to the end market. This will make it possible to adapt to the customisation demanded by new consumers and will take advantage of 3D printing, an industrial technology that imploded during the pandemic and is here to stay.

Some features of this model, according to the KPMG report“ micro supply chains”, and its impact on the financial area:

  • Contracts will be made short term
  • Production will be modulated according to demand.
  • We went from a fixed cost model to a variable cost model.
  • Non-standard parts will be assembled locally.
  • Less vulnerability toward customs, climatic, fiscal and salary variables.

Whether they are micro or macro supply chains, there is a fundamental principle, which is the guarantee of supply. The key is to forge deep partnerships with the right suppliers, as the analysis recently published by Forbes maintains. We saw this during the first months of the pandemic: where companies and governments did not reach, non-healthcare companies did, which had been establishing relationships of trust with suppliers in the field for years.

3. Horizontality and co-governance

We are moving towards a world of alliances and co-governance. This is the example we have seen with vaccines, where competitor pharmaceutical companies have come together to find the remedy to Covid-19. And in Spain, very recently, with the large energy companies joining forces to develop green hydrogen or the electric and automobile companies joining together to co-manufacture batteries.

The PERTEs that will channel a large part of the European funds point in that direction: a more robust and horizontal industry. The financial injection seeks to lubricate the entire value chain of each economic sector and make the European Union more autonomous and less dependent on foreign supplies.

It is about drawing up common strategies with suppliers. This horizontality makes it possible to incorporate innovation and talent into the supply chain. In the short term we will most likely also begin to change the term "supplier" and replace it with "partner". The CFO will ensure that contracts include a monitoring of these advances, that partners are required to invest in research, and that a win win strategy is designed where everyone improves and grows with the association.

Future, forecasts and challenges in the face of the current supply crisis

In its annual ranking of the companies with the best supply chains, the consulting firm Gartner chose Johnson & Johnson in 2021. And it was not about praising the discovery, approval and commercialisation of its vaccine in record time, but its ability to innovate by 3D printing respirators that were needed to respond to the exponential multiplication of patients with pneumonia derived from COVID-19.

Agility, the creation of proximity micro-chains and resilience thanks to digitisation have been set as the keys to the new supply chain model in the post-Covid era. The containment of demand during the first year of the pandemic has given way to an unprecedented recovery scenario which paradoxically has been hampered by supply problems.

Traditional risk management associated with problems related to geopolitical crises, the exchange rate or natural catastrophes, for example, now adds up to a perfect storm of bad news that forces us to review everything learned in logistics. According to a report by the Bank of Spain, in the Euro zone 40% of manufacturing companies have suffered supply problems that threatened their production. A percentage that, in the case of Germany, exceeds 70%.

Future, forecasts and challenges in the face of the current supply crisis

We are talking about a domino effect with very disparate variables. To name just a few:

  • Rising prices of raw materials, particularly gas.
  • Collapse in ports and container shortage (90% of world trade moves by ship).
  • International transport crisis and lack of drivers.
  • Geopolitical crisis in the Ukraine and Russia.
  • Shortage of semiconductors which, above all, has affected the technology and automotive industry.

According to a recent KPMG survey, 64% of CEOs in Spain acknowledge that their supply chains have been stressed in the last 18 months. There has never been so much talk about supply chains in financial departments as in 2021. In 2022 it is time to lay the foundations for a new chain management model.