By Dwight Cass
Building a more integrated relationship can yield a number of benefits.
Increasing the efficiency of vendor relationships has been an issue of mounting importance in recent years. In order to boost returns in a slow-growth economic environment that has not been conducive to large-scale product launches, companies have turned to other ways to affect their returns. One of these is how to improve their supply chain efficiency.
For treasury, this discussion often centers on supply chain financing (SCF) initiatives. (See “What has Your SCF Program Done for You Lately?” International Treasurer, October 2013.) While these are important, the realization that most of
a company’s costs are captured in the supply chain has prompted some finance executives to go farther and seek to build collaborative relationships with their supply chain executives.
This “business partnering” relationship between the CFO and the supply executives has a number of goals. It can release capital tied up in inventory or unneeded capacity, thereby improving returns on invested assets. But the main driver is the desire to have a more flexible and cost-efficient supply chain that responds to commercial challenges rapidly.
Ernst & Young set out to answer a question that has arisen repeatedly over the last several years from CFOs: “How do I get a more responsive supply chain?” The answer for many companies is to establish a closer alignment between finance and the supply chain.
EY released a study in October, “Partnership for performance: Supply Chain,” based on a survey of 423 CFOs and supply executives around the world. It showed that the business partnering approach is used by less than a third of the respondents, but that figure is growing. Only 26 percent of finance executives and 21 percent of supply chain executives said that the CFO’s contribution to the supply chain is primarily based around an enabling, collaborative, business-partnering role. However, 70 percent of CFOs and 63 percent of supply chain leaders said that their relationship has become more collaborative over the past three years.
Chained Together
Changes to the roles both of supply chain executives and finance executives have made this sort of partnership more essential, according to EY. The supply chain has been forced to new prominence in the organization as businesses have sought flexibility to respond to market volatility, rapid commercial changes and economic uncertainty. The CFO’s remit, meanwhile, now has a strategic and commercial focus beyond traditional finance, which makes partnering with the business essential.
EY’s report highlights four areas where such a partnership can enhance performance:
- Supporting and challenging investment choices: CFOs can support and challenge investment choices throughout the cycle, from idea formulation to managing an asset’s performance, to retiring it or reinvesting. CFOs help to set the right growth priorities and pace of growth; they support and challenge the rationale for new investment; and they apply data analytics to support and challenge business decisions.
- Aligning the supply chain with the business and corporate strategy: companies with a business partnering relationship report much stronger alignment between the supply chain and broader strategy across all key metrics. They also report better end-to-end visibility across the supply chain and the entire organization. Aligning the finance and operational strategies often reveals a host of inefficiencies—duplications of effort, excess capacity, irreconcilable accounts, etc.
- Monitoring and enhancing performance: The CFOs’ perspective across the whole organization, and their position as a trusted advisor, enable them to play a vital role in helping to standardize the language, measurement, tools and KPIs across the organization.
- Managing risk and ensuring business continuity: Business partner CFOs take a strategic, long-term approach to risk management, which involves not only direct suppliers, but secondary and tertiary suppliers. The CFO also has the opportunity to work with procurement and treasury to determine the extent to which risk is owned and managed by the company, and to what extent it is pushed further down the supply chain.
Chain Gangs
Implementing this type of partnership is not easy. First, there are institutional hurdles to overcome. Supply chain executives may be suspicious of finance executives’ greater involvement and dismiss it as micromanagement. CFOs have to build the relationships carefully, by leading rather than managing, in order to get buy-in.
Time is another issue. Among EY’s sample of CFOs, those who consider themselves business partners say that they spend 25 percent of their time with the head of supply chain, more traditional finance officials spend 12 percent. The first group thinks they should be spending a third of their time with the supply chain; the second group thinks it should be less.
Justifying the amount of time and effort required to establish and maintain a business partner relationship sounds like a tall order in the current slow-growth economic environment. But EY claims that business partnering is correlated with stronger financial performance. The report states: “Among the business partner respondents, 48 percent report EBITDA growth increases of more than 5 percent over the past year, compared with just 22 percent of those with a traditional relationship.”
That may be due to the fact that many of the business partnering companies are younger, and so may be on a steeper growth curve to begin with, and have CFOs who have been in that position for shorter periods of time. But in the current business climate, that extra earnings potential could be worth examining.