A Stronger Structure

One of the effects of globalisation is longer and more complex supply chains, and multinationals are realizing that they have to manage these more carefully. In particular, they are learning that the supply chain must be better linked to the finance function.

Supply chain management (SCM) is an increasingly important discipline within large companies. It is no longer simply viewed as an issue of logistics, but as an essential component of good customer service and a significant determinant of an organisation’s ability to deliver on its strategic goals. However, many companies are struggling to integrate SCM with other parts of their business.

One company that has made notable progress in linking SCM and finance is Sara Lee Corporation, a leader in the global household, body care, food and beverage markets. The company, which has some of the world’s leading brands in its portfolio, including Ambi Pur, Ball Park, Douwe Egberts, Sanex and Senseo, as well as the eponymous bakery brand, has recently undergone a major corporate transformation. This included examination of its processes for managing the interaction of supply chain performance.

Andreas Kaschner, Sara Lee's CFO for retail in Germany and Austria, says: "There is always a close relationship between the supply chain and finance, especially in the FMCG sector. The supply chain takes care of a lot of costs in the value chain, bearing in mind that we view procurement as a separate function from the supply chain, which brings the goods to the customer. There is a lot of money tied up in those processes."

BRINGING IT TOGETHER

The transformation of Sara Lee, which has taken two years to achieve, involved major changes to the company structure. In Europe, it has numerous separate and locally based companies, each operating its own supply chain and finance functions. There were, for instance, five Sara Lee companies in Germany alone. The wastage involved in having multiple supply chains across Europe – or even globally – prompted a rethink and led to the build-up of country shared service centres for HR, finance and supply chain.

Kaschner explains: "Sara Lee was transformed into a leaner company. A regional finance function was created within supply chain, specialising in logistics functions. Our supply chain director can access that resource, which helps him put together his budget."

The company has its headquarters for its international business in Utrecht, the Netherlands, and now has the same local management structures in each country or region, but its focus after the transformation process, which began in early 2005, is on integrating its global food, beverage and household and body care businesses. This enables it to move away from being a diversified holding company towards becoming an integrated operating company.

Such a shift is not without its challenges, but the effort has already yielded benefits, particularly in terms of strengthening the bond between SCM and finance. Kaschner says: "Their interaction is more in focus now. However, you do need good change management processes, as there are a lot of obstacles in a reorganisation of that scale."

The move included creating shared service centres for supply chain and finance, enabling them to inform and improve each other's performance. This goes a long way to addressing their conflicting goals

Armin Köller, Sara Lee's regional supply chain director for Germany, Austria and the UK, says: "The mentality of people on the supply chain and finance sides are not that different, though their skills differ. And they both differ from sales and marketing. These skill sets need to complement each other.

"Marketing and sales want more stock keeping units [SKUs] and warehouses full of stock while operations wants less inventory and finance highlights the expense having inventory sitting there. We are a kind of broker in the middle."

METRICS MATTER

Communication between the disciplines is determined by the metrics used to monitor interaction and set performance targets. At Sara Lee, where KPIs are determined at corporate headquarters in Utrecht, these metrics have been designed to reflect the values of both the finance and supply chain teams.

There are 12 main KPIs, and although some have more detailed subsets, there are no more than 20 in all. These metrics were put together two years ago at the start of the corporate transformation process when the firm adopted the shared service model. They have remained the same ever since, which is testament to their value and effectiveness.

Köller explains: "We use harmonised metrics and a single SAP system. The KPIs are standardised for each country in Europe and include financial components as well as some related to the supply chain, such as storage costs, and they all are contained in one report. We can always change them, but they have been stable.

"Our cash flow analysis includes total inventory turnover, for which finance and the supply chain use the same metrics. They give us the transparency we need to improve our performance." Such cash flow metrics are analysed alongside financial metrics, such as days sales outstanding (DSO) and days payable outstanding (DPO), and output KPIs, such as cost per palette.

In addition, Sara Lee uses out-of-stocks to balance the conflicting inventory demands between sales and marketing and finance and operations. Kaschner explains that this basically means starting with seven weeks of stock, for instance, and then gradually reducing this until some out-of-stocks start to occur. At that point, the company can check to see if these are really leading to lost sales and then decide whether to maintain stocks at that level or reduce them further.

COUNTING THE REWARD

The right metrics can help a company achieve far greater transparency in its supply chain performance and its impact on financial measures. As long as the managers of these functions use the KPIs to make the right decisions, they can deliver substantial benefits.

Sara Lee has already made huge savings in its supply chain operations, improving its inventory management and reducing warehousing and distribution costs.

Köller says: "Our quarter-to-quarter financial results have really improved. Over the last two years we have had to do a lot of reorganising, but now we are really seeing the results of that effort."

The figures do, indeed, support Köller's claim. In May, the company announced net sales of $3bn for Q3 of the fiscal year 2007, up 9% on Q3 2006. Sales grew in all of its business segments, with its international beverage sales up over 17%, household and body care up 14% and bakery sales growing by 11% year-on-year.

Kaschner explains: "The common ground is customer service. It is now clear who is in charge of what. If DSO is high, we can identify who is paying late or we can check if it is an accounting issue."

Köller agrees: "We want to avoid doing the same work twice, and that is easy to do when it is clear who takes care of which processes."

THE RIGHT KPIs

It is essential to define the right KPIs to drive the business, and different industries will require different ones. For example, Sara Lee has developed a set that works in the FMCG sector, but the construction industry, for instance, would require metrics that fit large, ongoing projects.

In addition, Kaschner believes that KPIs should all be automated. "For each department, pick KPIs for factors that they can actually influence. That is where management should focus its attention. Managers must understand why those KPIs are used and they must become standard tools."

Kaschner continues: "When you choose the metrics you should have representatives from finance, the supply chain and sales and marketing. All these people must be involved so you can ensure that your KPIs cover the whole of your business.

"Getting everyone onboard also means that they will feel their ideas are being reflected in the finance function. You’re not cooking something up in secret: with transparency and openness you will have a good recipe for success."

Sara Lee has learned that devising the right metrics and implementing them in the correct fashion can bring finance and the supply chain together, helping managers to achieve the company’s goals and drive profitability. However, the KPIs have to be defined by all affected parties and must be prioritised to ensure that everyone understands what they mean and how they interact. The onus is then on managers to collaborate effectively in the decision-making.