Measuring the Value of the Supply Chain

Large enterprises typically operate dozens of different business units and extensive production or service operations, each with hundreds of managers and thousands of employees. These corporate divisions, business units, departments, executives, managers and employees have specific and identified roles within the organization and all business units and employees typically have concrete qualitative and quantitative objectives that are based on the corporate strategic and operational plans.

Quantitative operational and financial objectives are difficult to manage and difficult to predict. Thousands of different parameters and financial variables, including production or service costs, dynamic inventory levels, targeted sales levels, pricing changes, inflation rates, exchange rates, taxation rules, dynamic competitive pressures, new threats in the marketplace, changes in raw material costs, macro economic implications and any changes in them, thereof, eventually affect the corporate financial performance and the corporate consolidated financial statement.

THE SUPPLY CHAIN MANAGER

In a company ecosystem the supply chain manager is seen as an operational expert. He is tasked with duties and objectives primarily aimed at controlling and reducing costs, while optimising the material flows. Such objectives are not different from what other company managers are measured against. After all, cost containment and control is not a prerogative of one functional department only.

What makes the difference, however, is that the supply chain manager works 'behind the curtains' of the scene to make everything run smooth and clean. No special merit is acknowledged when everything works fine. However, there is soon blame and accusations if something gets stuck in the cogs of the complex chain of supplies.

Moreover, even when the job is well done, the reward to the supply chain manager is most unlikely a seat in the boardroom.

In his duties, the supply chain manager is usually in contrast with sales and marketing managers due to opposing targets and objectives. While sales and marketing tend to privilege customer satisfaction by offering new solutions to be delivered in quick turnarounds at almost no cost, the supply chain manager has to make ends meet between time to delivery and cost to serve.

In his continuous effort to keep inventory levels low to contain costs, the supply chain manager becomes 'the problem' in the eyes of sales and marketing executives. Moreover, it is an uncomfortable role to say no to the board 'stars'. That is, those who are the usual candidates for future board-level positions.

To tell the truth – and this adds another nail to the poor supply chain manager’s coffin – organisations do not clearly define nor have yet found a common agreement on what 'supply chain management' is truly intended to be.

THE SCOPE OF SUPPLY CHAIN MANAGEMENT

Logistics, manufacturing, purchasing, marketing research, promotion, sales, research and development, product design and total systems / value analysis should all be included in the scope of supply chain management.

Still, common perception limits supply chain management to product logistics, materials handling and warehouse management. A few enlightened thinkers also include production planning and sales distribution in the supply chain management domain.

The consequence of such a lack of uniformity is that the supply chain manager is often forced to share decisions and responsibilities with a number of departmental managers who keep very tight control over their office. This confines the supply chain manager to a routine series of operational supervisions, practically impeding an overall high-level perspective and 'jurisdiction'.

BUSINESS IMPERATIVES - THAT IS, WHAT COMPANIES WANT TO SOLVE

In such a context, the supply chain manager has one way to elevate his position in the organisational hierarchy. He must communicate the results of his work and the impact of his decisions in the language of business. The language aligned with the one spoken by company decision makers. That is, the language of finance.

Current research shows that an ever-growing number of Chief Financial Officers (CFOs) are put in control of the results of the company supply chain operations. This is an acknowledgement of the increased strategic relevance and importance of supply chain management to the company’s economy. However, the responsibility for such operations – the supply chain manager indeed – is not the right interlocutor to the CFO, as the two speak on different 'wavelengths'.

The CFO measures the company performance in terms of cash-to-cash cycle time, or working capital, or cash flow of assets and of operations. Accounts payables and accounts receivables are part of his daily performance indicators.

The supply chain manager gauges results in terms of production throughput, on-time delivery, work in progress, inventory turns, forecast reliability and production efficiency.

Part of the reason why common supply chain metrics are not being used by finance and senior members of management is that these measures do not fit in with the normal accounting-financial language of the firm. Hence, the challenge is to provide the translations of operations outcomes to financial measures.

In developed capital markets where corporate market caps and corporate valuations are often based on future financial performance, minor deviations from expected financial results may have a dramatic impact on corporate valuation and as importantly on management’s credibility.

To avoid such eventualities and in order to operate efficiently and competitively, companies must define and execute quantitative performance ratios.

The reality is that the primary responsibility for the overall performance of the company, the Chief Executive Officer (CEO), is now sitting on a moving platform, where external – and often times uncontrollable – conditions impact the planned direction and deviate the company from the route decided in the board room.

The focus of future thinking CEOs is to be ready for dynamic change.

DECISION SUPPORT SYSTEMS

For that purpose, management must have at its disposal the proper decision support systems which will allow managers, at all levels, to continuously monitor performance and determine compliance, or deviation from pre-defined corporate operational and financial objectives.

The ability to control dynamic and unpredictable changing conditions and turn them into competitive advantage becomes possible only when the CEO can take command of optimal decisions that quickly bring business results.

Decision support system tools will enable the company CEO to:

• Continuously monitor performance of all corporate units
• Discover emerging problems in real-time
• Pinpoint the source of the problem
• Quantitatively assess the impact of the problem if allowed to continue unabated
• Formulate corrective action
• Quantitatively assess the impact of such action

Cost-saving efficiencies are not the major process benefits that stimulate the interest of C-level executives, especially CEOs and CFOs. It is the prospect of gaining a complete and unified perspective of all the financial and business activities, even those that take place outside the borders of the company.

Through the integration of heterogeneous systems internal and external to the company, the CEO / CFO and the management gain a unified perspective of all financial business activities and the ability to fully measure and manage risk, reward, opportunities and performance not only across internal functions, but also across the entire business ecosystem.

Finance must therefore be the conjunction where all business factors converge.

This becomes the company hub where information is turned into knowledge, which provides the basis to corrective and proactive action.