An inextricable link between shareholder value and supply chain performance points to a growing role for the CFO in supply chain leadership, optimization and management. This transitions the CFO’s role beyond traditional reporting of financial data and controlling costs to an active role in strategy and execution. In a hyperconnected global supply chain with unexpected risks like the current global pandemic, the CFO must also examine geopolitical risk factors and the impact on the supply chain, and take action to prepare for the short-term impact this emergency will bring as well as assess long-term risks.
Supply chain management affects cash flow, growth and, ultimately, shareholder value. Traditional thinking looks at the supply chain as a tactical tool primarily for procurement and transportation, with a goal of achieving the best-delivered price for purchased goods and raw materials, as well as customer shipments. This leaves the question of how the supply chain, as the largest internal value creation tool, impacts earnings unanswered.
With supply chains coming under greater scrutiny, transforming the supply chain into a tool for creating shareholder value is an art form that extends its scope and transforms it digitally. Even larger organizations lack understanding of its digital aspects, clarity in the complexity it encompasses, and discipline in considering the entire supply chain from the supplier’s supplier to the customer’s customer.
Here are six ways CFOs can create supply-chain-driven shareholder value even when facing unexpected risk.
1. Work in partnership.
When supply chain leaders work more closely in partnership with finance executives, sales, marketing, operations and the network of suppliers, the true value creation potential becomes clearer and leaders are better able to drive end-to-end integration.
2. Move to a digital supply chain.
This strategic approach also brings the digital supply chain into full play. The CFO can drive greater visibility and deeper insights, unleashing economic value and greater performance, and can generate more cash for all participants in an end-to-end ecosystem.
3. Establish a common language and culture.
This transformation creates a common understanding of all functional areas, data, analytics and technology. This requires a transformation in how to think about profitability, cash and growth, and a common language across the ecosystem. CFOs are in a unique position to help create collaboration, integration and transparency.
4. Use data to drive deeper insights.
Digitally enabled supply chains must be supported as an overwhelming volume of data drives deeper insights, performance improvements and better decisions, and ratchets the economic value creation of the organization. The C-suite must commit to investing in the right technology, creating a strategic role for value creation and bringing the CFO out of the shadows to address cross-functional challenges.
5. Use Total Value Optimization (TVO).
A Total Value Optimization (TVO) framework enables this engine of supply chain-driven economic value growth, focusing on finding drivers for cost, cash and growth internally and externally and achieving cross-functional integration. Through data analytics, TVO focuses equally on procurement, logistics and operations, leader and organizational improvement, sales and operations planning plus new product introduction to achieve sustainable growth.
6. Understand geopolitical risk factors in the end-to-end supply chain. Risk factors including the pandemic, China’s economic slowdown, the U.S.-China trade war and Brexit have intensified the need for risk assessment, continuous monitoring of the supply chain and a strong disaster preparedness and recovery plan. The pandemic underscores the volatility of the global supply chain and has exposed the business to short-term disruptions.
The impact of the pandemic should not be underestimated, and the decrease in economic activity in China will have serious repercussions throughout the world for companies that have either a direct or indirect — and often hidden — connection to Chinese manufacturers in their supply chain, with those vulnerabilities only just now coming to light. CFOs should actively review inventory levels and identify their exposure.
A good example is a manufacturing firm’s CFO who leveraged the supply chain to increase shareholder value. The CFO used the supply chain as a catalyst to counter disappointing cash flow and economic profits by driving down working capital, and as a lever for improvement in cash flow, taking $600 million out of working capital and dramatically increasing economic profit while delivering significant benefits to suppliers and customers year after year.
The CFO’s office often functions in a virtual silo. The most successful CFOs no longer operate in a vacuum; they work with other C-level executives to go beyond traditional reporting and quantitative KPIs to define new metrics such as how the company is penetrating the marketplace, servicing the customer and achieving strategic priorities. Data analytics along with the right KPIs are an art as well as a science, and the CFO uses them not just to illustrate the bottom-line numbers, but to shed light on shareholder value creation and performance outside of the financial arena.
Combining the strength of end-to-end supply chain leaders with the C-suite of the organization can be a powerful tool for improving economic value. To achieve such outcomes, the CFO must work across end-to-end supply chains to create true integration. Attention to system dynamics and a data-driven foundation, working with the supply chain internally and externally maximizes upside and minimizes downside of the business cycle so that the supply chain becomes both reliable and flexible.
CFOs must take bold steps to use the supply chain as a lever to create value and economic profit. This crucial role is more important now than ever, and best practices start with improved visibility and understanding and identifying risk with the goal of stabilizing, recovering and rebalancing the supply chain. You can’t improve what you can’t see, and the complex network of suppliers and customers making up the digital supply chain requires a cross-functional team approach to ensure the right product, in the right quantity and condition, arrives at the right place on time, for the right customer at the right price. Visualizing the supply chain requires linking decisions to every facet of the organization and the supplier ecosystem, then managing decisions to drive new levels of performance and improved customer satisfaction.
