Do You Value Your Supply Chain?

In today's open, global and dynamically changing marketplace, leading companies build their competitive advantage on supply chain management.

Although metrics have been proposed to measure supply chain performance, most high-level corporate metrics still focus on financial impact and outcomes. A literature review of supply chain performance measures reveals that most metrics are fragmented within and across organisations and are not linked with companies' financial success.

A major concern for supply chain professionals is, therefore, to link supply chain performance to financial decisions. Models of financial supply chains represent them as pure correspondences between supply chain-management processes and financial transactions, and they are still considered separate entities.

While supply chain processes represent the flow of goods and related information, and financial supply chain processes are used to map the flow of funds, there has been little effort to appreciate and measure how the two influence one another.

From the CFO's perspective, research reveals that there are large gaps between the importance placed on delivery insights and their ability to deliver it. This is mainly due to the lack of standardisation of common processes and fragmented information.

Traditional supply chain planning focuses on improving and integrating flows of goods with flows of information. Very little is done to appreciate the activities required to anticipate the needs of regulatory departments and/or customs as part of the planning process of the supply chain.

As highlighted by Gardner (2004), although the implications of supply chain management are fully understood, little research has been devoted to find the links between operational execution and financial improvements and to create consistent measures across fragmented business models.

LINKING SUPPLY CHAIN AND FINANCE

Supply chain processes and activities must be linked with financial performance by defining correlations between best practices and operational measures and between operational measures and top-level financial metrics.

Identifying these correlations would allow the C-suite (CEOs, COOs, CFOs) to translate financial targets into operational metrics and middle management to tie these metrics to operational processes to be implemented at lower levels of the organisation. The objectives of this study are to:

• Verify whether the supply chain and finance functions agree on performance measures and the correlation between operational and financial metrics
• Assess the need for a model linking supply chain measures with income statement and balance sheet items as well as with financial indicators (including cost of capital and ROI)
• Create a framework linking financial performance with operational metrics
• Validate this model with the finance function within organisations

This survey is important because it addresses:

• Perceived lack of board understanding of supply chain issues
• Lack of training / education on supply chain issues
• Involvement of the finance function in setting supply chain metrics and monitoring performance
• Alignment among functions on performance measures

INCREASINGLY VALUED

Compared with past research, board-level appreciation of the supply chain function is generally 'good', indicating that its value to long-term competitive advantage is increasingly well understood (see Figure 1). The supply chain function is achieving improved status within organisations, as witnessed by the increase in supply chain professionals achieving the level of senior executives and/or securing seats on organisational boards. In 64% of cases, supply chain professionals sit at senior executive / board level.

Communication between the finance and the supply chain functions seems to be improving as 73% rated their knowledge of supply chain function as 'good' or 'very good', while 76% are aware of supply chain metrics in use (see Figure 2). In fact, financial professionals appear to be aware of a wide range of metrics, both operational and financial.

Responses to the questions "are you involved in setting (SC) metrics?" and "are you involved in monitoring supply chain performance?" suggest that despite a lower involvement in setting supply chain metrics, 76% have an active role in monitoring supply chain performance. This might confirm a top-down cascade of performance measurement settings.

A few of the respondents who are not aware of supply chain metrics in use claim to be involved in monitoring supply chain performance, suggesting that indicators are decided at a high level and then cascaded down to monitor supply chain performance. The respondents could be unaware of operational supply chain metrics in use, but still monitor supply chain from a financial perspective (see Figure 3).

Figure 4 shows that feelings about alignment among functions, for example, supply chain and finance, with regard to performance measures, were mixed, with 50% rating it 'very poor' or 'poor' and the other half ranking it 'good' or above. While respondents feel that their awareness of supply chain issues is good, the methods of measurement seem to be contradictory. Past research on performance measurement suggests that metrics are often incompatible and that targets are set at functional rather than corporate level.

Lack of training does not appear to be a major issue, as 78% said they had received training / education on supply chain issues.

A good 50% said agreement between finance and supply chain on performance measures is almost nonexistent due to the difficulties of translating qualitative measures into financial indicators, the lack of a unique set of metrics to monitor supply chain performance, the absence of common definitions of measures and not enough coordination between functions.

Supply chain targets are increasingly set at corporate level, translated into financial goals by CFOs and then cascaded down. This approach (top-down vs bottom-up) indicates greater supply chain visibility at board level.

However, some respondents perceive difficulties in setting and monitoring operational targets at the functional level due to a lack of guidelines at the corporate level, the absence of a common language, no proven links between certain supply chain metrics (such as flexibility) and financial measures, the difficulty of incorporating uncertainty and risk into targets and the need for standard metrics.

The results suggest that despite advances in the perception of the value of the supply chain, there is still a misalignment. The different views expressed by supply chain professionals on board representation indicate a lack of communication between the supply chain and the finance department.

It is clear that there has to be more understanding between CFOs and supply chain managers and that links between operational execution and financial improvements need to be established to promote internal efficiencies and to avoid dysfunctional behaviours.

Notes

This research aims to construct a framework linking operational metrics with income statement, balance sheet items and shareholder value in the form of the economic value added and with supply chain processes. Metrics and processes defined by the supply chain operations reference model have been used for this framework.

Two methodologies have been adopted: external interviews for supply chain executives and questionnaires for finance executives. Most of the interviewees are in middle management or higher roles. The survey collected answers from a numerous, yet not statistically significant, number of participants: 73% were practitioners (end users), 22% consultants and the remaining 5% academics and analysts.

The research was conducted in collaboration with Alessandra Cantu at Cass Business School (City University) and Finance Director Europe.