The Ingredients of Success

How important is supply chain management to financial performance?

It is absolutely critical to overall financial performance, and that is particularly true in FMCG. Our role as a business is to grow our profits in a sustainable fashion. We can only do that if we are offering our great brands and products at the lowest possible price. To be a brand leader, you must offer the best consumer experience at the best value.

What is the supply chain's role in delivering this?

To increase profits in the biscuit business you have to make your core products more efficient. We have a very simple rule: a packet of chocolate digestives should cost us less to make every single year. The supply chain needs to buy the raw materials, convert them and ship them to the customer for fewer pence per pack every single year.

If we are not supporting the brand through product quality and a better cost structure year on year, we will lose our branded leadership.

If you look at P&L, the second biggest line after revenue is the supply chain, and that is where the money is. The ability to invest in the brand and new products, and being able to afford to support customers, comes from increasing productivity in the supply chain.

The supply chain is where the majority of productivity should come from. And the supply chain can only deliver that if the metrics and data supporting those metrics are clear.

So it is how it impacts on the bottom line?

No. The important thing about productivity driven from the supply chain is not that the extra pounds and pence are brought down to the bottom line, but that this is the fuel that allows you to reinvest in your top line.

Brand companies have to keep evolving the product. They need to keep striving to understand the consumer and find new ways to address their needs. You can only do that if you find room in your P&L to invest in developing it. That is where supply chain management comes in.

Whose responsibility is it to make the link between supply chain management and financial performance: finance, supply chain or both?

Historically, supply chain managers thought their mission was more service related. They focused on making a certain amount of product at a certain time and got it to the customer at a particular location.

The primary metrics related to whether they serviced the customer. If the primary purpose is to deliver in the most cost-effective way possible without compromising service, it becomes more difficult.

In what way?

It is a balancing act. From a logistics point of view, massive warehouses filled with stock all over the country are ideal. However, from the finance perspective, this is terrible because you have all that working capital tied up in stock. But the supply chain person knows that if they were allowed to do this they could supply whatever a customer asked for.

The best way to achieve a balance is to be really smart with the forecasting and keep the minimum stock on hand. That is the good finance productivity answer, but it may make the supply chain person's job much harder. So, in general, supply chain managers have had to balance more things.

It is a partnership then?

Yes. It can only work if there is a really good partnership between the finance group and supply chain managers. Finance should never run supply chain. It's a mistake if the CFO runs the supply chain. But, by the same token, supply chain managers will only be as good as the data and the input they are given. So the supply chain people need to be really clear on what levers drive productivity and what small bricks of activity need to happen to deliver and track it because what gets measured gets done.

Generally speaking, do you think the people in SCM need to be more familiar with the language of finance?

They do need to be more familiar with the financial language. And they need to be more familiar with the systems and the data. Operations basically involves trying to get a series of moving parts to move the right way and then figuring out ways to make them move faster and more efficiently, so operations people tend to be mechanically oriented. Financial KPIs and metrics are often easier for supply chain people to understand than for the sales or marketing team, for example.

Having said that, it is easy to get swamped. Finance must step up and make sure the KPIs are simple, clear and measurable. When you convince the supply chain manager that a particular scoreboard will drive productivity by x amount they will go all out to deliver that productivity.

There is an issue over how you map what happens in the supply chain to financial performance. A good model allows you to map yourself against your universe, find out where you are and where the gaps are, and then link the gaps to your metrics so you know which ones to go after. Then you can measure how much progress you have made. I would like to benchmark our factories against other biscuit and snacks companies. Asking questions about your layers of management from the top to the floor operator, how you staff it and how much waste you have will indicate your position on the scale, helping you understand whether you are world-class or second tier. That is the hard bit.

The easy bit involves taking those areas and working out how to meet the benchmarks. For example, if my waste is 5%, but world-class companies only waste 2%, then how do I get mine down to 2%? I need to work out how long this is going to take and what investment I need.

The tough bit is working out whether waste, labour or the number of factories is the right target. At United Biscuits I am frustrated that we do not have a better sense of our gaps in this area.

So how do you make the connection at United Biscuits?

We have started producing league tables for our 15 factories in the UK and Europe. If you have a factory league table then everyone wants to be a leader. This enables you to rank the factories using key metrics such as waste, labour utilisation and throughput. Then we can compare the results and see what each factory does differently. We create an atmosphere where information can be shared in an open fashion, and factories can learn from each other's experiences.

Which measures do you look at?

Starting at the front end, you look at procurement, asking what the inflation or deflation is on raw materials. Then you look at your total labour bill for each of the factories, taking into account your overhead structure, targets for waste reduction and targets for reducing stock levels. The process runs all the way through, from raw materials to final delivery.

Moving forward, what would you like to do?

Well, there are two things I aspire to. One is benchmarking against peers, as I discussed, not just biscuit companies but fast-moving food companies.

The second thing is to get more of a focus on the brands. The operations people tend to have a running factories mindset. They don't tend to run brands. It would be good to get the factory managers thinking more along the lines of brand productivity. Yes, they have run the particular factory as efficiently as possible, but I also expect them to make it cheaper to make a Penguin bar every single year.

So at the moment we manage the factories. We don't manage the brands. Benchmarking in managing the brands is important. For example, I want my people to say: "Here is my performance in aggregate. Now let me tell you what we have done on Jaffa Cakes and the total value chain on Jaffa Cakes." I would love to instil that mentality.

How important is business intelligence in maximising the supply chain's impact on financial performance?

I may have a slightly different take on this than a lot of people. There is never a lack of data. Systems can always help you get more and better data.

I see business intelligence as taking the raw data and making it actionable. My finance team can get overwhelmed with data and if they pass this on to the supply chain people they are making a mistake because it prevents the supply chain people from performing effectively.

You take all that data and make sure that you pick out the three to ten most important things and translate that so the plant manager understands.

There are many different things you can measure on factory performance, but there are only a few things that really drive the economics. So finance takes the raw data and produces a hierarchy, presenting the five things a plant manager needs to watch and report on, on a weekly basis.

Using those limited number of KPIs I can tell you why the total performance for the plant is up or down. And if we use those KPIs to correct our course, I can tell you what difference that will make to future performance. Using raw data to explain the past doesn't do anything; condensing that information into a few KPIs that you can action to change the future – that is business intelligence.

And those few KPIs are?

First is throughput, or how many tonnes you produce on your lines, which measures breakdowns and incorrect staffing levels. Second is the amount of tonnes you put through over the labour, which indicates whether you have too many people. And third is waste. Those are the top three.

Has the link between supply chain management and financial performance been going on for a while or has it only recently gained momentum?

It has been going on for a while. But the level of sophistication is increasing and the opportunities available to maximise your supply chain have grown. That makes it more of a burden. It is no longer as simple as putting as many tonnes through the line as you can.

For example, trade is putting much more pressure on the supply chain. Customers want their inventory when they ask for it, not a minute before, not a minute later. They don't want any more than they absolutely need, and they want the supplier to tell them how much they need. If they have got too much, they penalise you.

The burden of customer service and the different ways you can drive productivity put much more pressure on the supply chain than there used to be.

What advice can you give other CFOs in their efforts to maximise the impact of the supply chain on financial performance?

Know where you are, and keep it simple.