Manufacturing Operations Finance

Supply Chain Management Best Practices and Pitfalls

Let’s talk supply chain management: what it is, why it matters, and how it impacts the office of the CFO. Just as importantly, let’s go over a few tips on sidestepping the most common pitfalls in the supply chain, as well as some best practices for effective management.

What is supply chain management?

Supply chain management is the entire process of moving materials from your source supplier to your end customer, in however many steps that takes. It also includes finding those sources and in some cases manufacturing the products, and it may include managing customer returns.

Effectively managing all of these components requires that you track a variety of data and maintain a series of complex, interwoven relationships within and without your organization. Purchasing, manufacturing, warehousing, transportation, supply and demand, customer service – the list goes on. Each of these elements is complex to manage individually, but optimizing them all at once is what really drives the value of this competency.

Why is supply chain management important in today’s economy?

Mastery of your supply chain can become one of your biggest differentiators from your competitors. If your leading competitor completes an order for X product in Y days at Z price – and your optimized supply chain allows you to deliver the same product faster and cheaper – you have a clear advantage.

That advantage has become vastly more important in the age of e-commerce. If you’re out of stock, or if your delivery times or prices can’t match up to your competitors’, you’re going to have a tough time selling online. On the other hand, fast shipping, consistent supply and low prices on popular items will be a boon to your business. Amazon and Wal-Mart are classic examples of effective supply chain management, and their models will likely be replicated and improved upon global commerce expands even more.

Supply chain management also makes a major difference for companies that have large product portfolios, complex product lines or both. Consider a company that mixes custom paints, for instance, or a hardware store that sells thousands of brands, tools and consumables. These companies are subject to high demand volatility, and precise, predictive SCM is what allows them to purchase the right products, at the right times, in the right amounts. Traditional thinking says you should just build and shelf as much standardized product as you can, but in today’s environment of customization and short lead times, that logic doesn’t apply.

Why is supply chain management important specifically to the financial function and the CFO?

Supply chain management excellence leads to (and requires) solid interdepartmental collaboration, which in turn leads to optimized inventory management, cash flow forecasts, gross profits, EBITDA margins and overall enterprise value. Every dollar you can take out of your supply chain is also another dollar that the company can keep on hand or invest elsewhere throughout the enterprise. The supply chain itself may include a host of “non-financial” elements, but supply chain management as a whole is inseparable from the finance function.

Also important to note is that while accounting and finance are traditionally backwards-looking fields, this discipline is inherently forward-looking. It has to be, if you want effective ordering and distribution! You’ve got to use a wide variety of financial data to predict future demand, shipping times, product availability and everything else that contributes to effective sourcing and distribution strategies.

What are some of the greatest enablers of excellence in supply chain management?

First is the tone at the top of the organization. It may sound cliché, but effective supply chain management requires a company-wide focus, and that means more than just putting it into your mission statement or giving your teams a few numerical targets. The end-to-end strategic vision has to come from the top, and the C-suite needs to communicate the fact that improved SCM will have real value throughout the organization.

Second, you need to continually evaluate and redesign your supply chain in light of changing market dynamics. You can’t just establish the individual functions – purchasing, manufacturing, distribution, etc. – and leave them be. As prices change, demands shift and suppliers and competitors come and go, you need to update your policies and procedures accordingly.

Third, you need to find and track the metrics that will be most indicative of success in your supply chain given your business model. Key metrics usually revolve around your operating margins, inventory turns, customer service and revenue forecasts, but there may be others that are key to your company. These metrics need to be managed cross-functionally, so that every department and team can look at the same version of the truth before they make any changes.

What are some of the most common pitfalls or roadblocks to success?

One of the most common pitfalls is a “silo” mentality within an organization. Executives and management will think of purchasing, manufacturing, warehousing and other supply chain management functions as their own domains, which creates a great deal of friction in communicating between departments. Because this discipline relies so heavily on collaboration and cross-functionality, this mentality makes it almost impossible to be predict supply, demand and costs.

Another big problem is relying on assumptions based on purely historical data. Again, predictive data is paramount for effective supply chain management, and you need to use analytics tools to extract forward-looking information from available data. Likewise, when you do use historical data, you need to eliminate the noise. For instance, eliminating seasonality is common and obvious, however, when evaluating the data, you should take both an additive and extractive approach. In other words, what information is not included that should be and what information is included that should be eliminated. If you don’t take these elements into account, your inventory would be anything but lean!

Finally, a lack of bench talent limits many organizations’ supply chain efficiency. They often fail to develop or hire experts in the competencies that comprise the supply chain, and even if they understand the overall importance of supply chain management, their results are limited.

Anything else that CFOs and CEOs should know about supply chain management best practices?

There is no one-size-fits-all model! You can’t use a stock solution when you’re dealing with a diverse customer base, local and national suppliers and a unique set of internal resources. In the same vein, even if you have a model that works now, you have to continually monitor it as conditions change. Ultimately, if you put as much ongoing effort into your supply chain as you do your manufacturing processes, financial statements, marketing and other elements of your business plan, you’ll be well on your way to higher margins and profitability, increased cash flow and more satisfied customers.

Want to learn more?

If you’re interested in learning more about how supply chain management best practices can help your financial planning and analysis efforts, then please don’t hesitate to contact us.

And to get a more detailed look at the manufacturing finance consulting work we do for our clients, download our free service sheet.

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