When it is annual review time, supply chain professionals can go on and on about all of the things that they’ve done in the past year because those of us in supply chain are often hyper-productive. It is when we are asked to explain exactly how what we did matters to the performance of the business that the silence ensues, sometimes even at senior levels.
Finding a system of analysis that connects supply chain and finance can help. For example, in 1914, Donaldson Brown, an explosives salesperson, developed the “DuPont formula, which changed the industry of finance forever.” Among the paths within that analysis, inventory and cost are not standalone metrics. By better managing inventory, supply chains improve asset turnover. When supply chain efficiency leads to better cost management, profit margin improves. Multiply improvements in asset turnover against increased profit margin and what results is a measurable impact on Return on Assets (ROA) and Return on Equity (ROE).
Supply chains can speak the CFO’s language
By integrating processes and systems, such as DuPont’s, supply chain leaders can translate what they always do into the CFO’s language. From there, with the CFO on their side, the supply chain can articulate the value that is created for the entire business while also building the capabilities needed to respond to disruption.
Entertainment and communication technology leader Technicolor explained its efforts to align finance and supply chain as a move “away from simplistic KPI management of the business.” Francois Allain, Technicolor’s Chief Operating Officer said in his presentation from Kinexions ’20, “Business is more subtle than one action plan on inventory and then an action plan on margin. With this system that we have now in place, I think we can analyze better alternatives of the business, fine-tune them and optimize them subtly, but structurally and continuously. This has really, really been foundational for us.”
Supply chain decisions drive financial value during disruption and business-as-usual
This is especially important because technology, global, economic and political dynamics are changing the ways that supply chain leaders need to think about strategies and decisions. That will mean articulating the risk implications of supply chain design and execution choices, as well as how digital transformation opportunities can impact income statements and balance sheets. By expanding the scope of the factors they consider, the metrics they track, and the time horizons they plan for, supply chain leaders can use the bigger picture in convincing their c-suites and their boards to justify investments in supply chain.
To hear more about what this means in 2021, join Professor Morgan Swink of Texas Christian University and me for an on-demand webinar in which we discuss how supply chains can capitalize on disruption to drive financial value.