When I was asked to write a piece for officeoffinance.com I wanted to make sure that it would be relevant to the audience, but also personal to my area of expertise within supply chain.
So the best way for me to explain why having a real time supply chain is important to the CFO is to look back at my 18 years within the supply chain area and use my often painful experiences.
It is common knowledge that the role of the CFO has changed dramatically in the last few years. Cost Control is now taken for granted but is not necessarily any easier and most of the time to take costs out requires some form of capital expenditure that causes eyes to water when assessing the business case. The added responsibility for the modern CFO is to be a business partner able to generate revenue with the assets available within the company.
The above case could be used as an analogy to the supply chain. In the past supply chains were all about service but making them lean and cost effective. Now the modern supply chain has the challenge of becoming a revenue and profit generator. The good news is that this is one area the modern CFO can get involved in because of the amount of working capital, asset utilization and operational expenses which traditionally are important in any financial statement and health of a company. The bad news is that how does the CFO know what is best to change to drive the increased revenue and profit? In order to assess this maybe looking from an outsider’s perspective such as the customers might give a better insight.
The supply chain has 3 main components Quality, Speed and Cost. These components are what customers consider as part of any service you offer them. You may have seen the following doing the rounds on social media such as LinkedIn
Joking aside it has always proved difficult for companies that want to move out of the commodity arena to improve quality. Costs invariably go up due to quality controls, supplier performance and extended timelines associated for this improved quality. Over the years I have seen that this move impacts the supply chain by:
1) Extending the supply chain. More scrutiny is needed with existing and new suppliers of this improved product.
2) Increased operational costs needed to maintain the improved quality standards by having more checks, more initial rejection of sub standard items etc
3) More work and costs to maintain customer service. The effect of customer service as a driver on business has been on the increase. The use of social media has made it much easier to reach many more influencers and buyers when there is negative service. The cost of switching from once a loyal customer is much easier to do in a commodity product situation and one that all companies want to avoid.
Given the above is it no wonder that the modern CFO faces some stiff challenges to make the supply chain a revenue / profit generator. The business change needed for the perceived benefit can seem daunting. But what is this business benefit made up of? Normally a business case based on expected increased sales and best case cost reduction. But what if in real time a CFO could model different scenarios within the supply chain to represent profit margins of items within the supply chain? This in itself is not new and I am sure some of you reading this are saying that you are already doing this. But what if I told you that you could model your supply chain scenarios quickly and multiple times in minutes using data and reports that show real time information as of this very minute as well as historical data? What if that means now that you do not need to collate all relevant data at the end of the month to get a complete picture of the month? What if you could get trend analysis on a rolling day by day basis without running queries and reports from different departments? Would that make a difference? Imagine being able to know what would make the supply chain more profitable and capable of revenue generation and then being able to identify with certainty what parts of the supply chain operation need to change and by how much?
Let me give you an example to illustrate the point. Bus stations, train stations and some retail outlets have control boards that tells you when the next train / bus / customer order is ready. This used to be based on expected time based on statistical historical data and then adjusted when the relevant train / bus / customer order had arrived. There is nothing more frustrating telling you that something is late once the bus / train / customer order has arrived late !!!! These control boards are not useful at all. modern control boards interact in real time with every part of the process rather like interactive Satellite navigation systems in cars to give updated information. Not that it helps but at least you know about an accident on your route and how late that will make you in arriving to your destination. It allows the individual to make a decision on whether on not continuing the journey is worth it and if any changes en route is required.
Modern supply chains are using these strategies as well. Let’s take the control board. Now if this was used in a warehouse environment all managers and indeed warehouse staff could see the status of orders in the warehouse, who is dealing with it and if were in danger of being delayed. In the past that would have required someone in an ops room running reports and queries on a regular basis. So called automatic alerts are actually reports / queries run at specific times. What I am talking about is when you see an order being timed in minutes of how late it is or a countdown to when it cannot be satisfied if no corrective action is taking place. Imagine a dashboard in the warehouse that shows the status of orders and items in colour coded statuses and being able to take an action that moves something from red (being bad) to green (being good)? Now think about this concept being across all operational elements of the supply chain regardless of suppliers, customers and third parties.
What it would mean for the CFO is that the company has the ability to base line its operation on any given day, hour and minute. Now this could be part of a simulation to model this day with a peak day or a reduction in volume. It would allow the CFO and the team to spot where the high cost, time consuming activities are and to allow them to drill down into causal effects. Once the casual effects are isolated these could be modeled to see what an improvement change would look like interms of working capital, operational costs and margins. Once this base line has been identified it can be used to input into increased profit margin strategies within the supply chain where high quality and high service may or may not impact on cost. But more importantly it allows the CFO to present what an increase on the current price would mean to the business from a supply chain perspective. It also allows them to understand the non profitable parts of the supply chain linked to a particular item / category for instance. Now, if the CFO could do that over and over again quickly for different price scenarios and new products wouldn’t that be something….?