Aligning Finance and Supply Chain Goals

Why business as usual doesn't work anymore

The nature of managing a business on a global scale is undergoing fundamental change and it's up to the world's supply chains to keep up.

After the semi-awakening stage from Covid19, we are exposed to various customer centric, agile tools and strategies to sustain the businesses. Digital investments, supply network design with increasing regionalization, segmented processes, and services are part of these strategies.

In this article, I want to emphasize two other - currently undervalued factors:

1.How concurrent planning replaces sequential planning – as also is at the center of the new SCOR and Digital capabilities model

2.How to shape supply chain planning and design to reflect financial performance. Companies that consolidate Supply chain and financial planning will be the winners.

Aligning Finance and Supply Chain Goals

Finance departments focus terms on financial performance, may not be in line with the long-term drivers of Supply Chain Finance, such as supply resilience, regionalization, and diversification. IBP can help align these goals by providing a framework for collaboration between the finance and supply chain departments, enabling them to work together to achieve common objectives.

Concurrent planning replaces sequential planning?

Reality today is incompatible with techniques of yesterday

Today's fast-paced realities cannot be managed with the slow, sequential planning techniques of yesterday.

Managing your supply chain this way may make you feel you don't have all the information you need to make critical decisions. It's because the information you need to make decisions has to pass through many people, one at a time, before it finally reaches you. Furthermore, it's very likely that when you finally do find the information you need, it's no longer accurate.

Sequential planning is a vicious cycle.

1. Wait for the person ahead of you to generate a plan.

2. Create your plan using their results.

3. Realize once you're done you've affected someone else.

4. Argue over whose version of the data is right.

5. Start all over again since everyone's misaligned.

In the future, concurrent planning will be the norm

The concurrent planning process is revolutionizing business planning because it enables companies to produce reliable results right when they need them. It replaces outdated technologies like Excel and enables supply chains to be connected and synchronized.In addition, it provides real-time visibility across your end-to-end network, which leads to happier customers and lower costs.

Transformation of supply chain towards value planning

The traditional approach to supply chain planning has been volume-based, where the focus is on maximizing production and minimizing costs. However, there has been a shift towards value planning, where the focus is on creating value for the customer and improving financial performance. This shift is driven by the need for companies to stay competitive and meet the changing demands of customers. By adopting a value-based approach, supply chain executives can contribute to the cash flow and financial performance of the company by reducing working capital through supply chain segmentation and refreshed inventory planning parameters. This approach can also lead to improved customer satisfaction and loyalty, which can positively impact the company's financial performance.

In order to successfully implement value planning, supply chain executives must prioritize agility and flexibility in their operations. This means having the ability to quickly respond to changes in demand and supply chain disruptions. By repurposing assets, inventory, and capabilities to balance supply and demand, supply chain executives can improve the overall efficiency of their operations and contribute to the financial performance of the company.?

Accelerating the Adoption of Deep-Tier Supply Chain Finance—Action Points for Each Stakeholder

What Does Creating Value Mean? How Does it Relate to Profitability vs Cash Flow?

Our company is a collection of processes that creates or loses cash. If it creates cash, you as an owner can take cash from the company over time to use on what you value.

There are a couple of ways to measure the value of those cash flows:

1.Owner’s Equity:?Your balance sheet ends with a section titled “Owner’s Equity” and one of the standard financial statements is the “Statements of Owner’s Equity”. Owner’s equity is simply the difference between the value of your company’s assets (i.e. what you own) according to the accounting rules less the amount of your liabilities (i.e. what you owe). One of the main ways your owner’s equity goes up is though the profit as measured by your income statement.

2.Business Valuation:?The other way to measure value is to receive a business valuation analysis. This is often done when owners are considering selling their company. The valuation expert will look at both your earnings and cash flows to estimate what your company may be worth to a buyer.

Additionally, proactive communication with onsite teams and suppliers can help to mitigate disruptions and ensure smooth operations.

The Covid-19 pandemic has accelerated the transformation of supply chain towards value planning. The pandemic exposed vulnerabilities in supply chain operations and highlighted the need for increased resilience and agility. Companies have responded by increasing nearshoring of suppliers and investing in digital technologies to improve supply chain visibility and flexibility. The importance of flexible supply chains has been emphasized, as they can cut costs, improve cash flow, and increase inventory turns. Moving forward, supply chain executives must continue to prioritize value planning and agility to ensure the resilience and competitiveness of their operations.

Inhibitors to Deep-Tier Supply Chain Finance Adoption—Top Considerations from Each Stakeholder

Why Supply Chain Managers Should Understand Supply Chain Finance

The world is becoming more complex and volatile. In the VUCA world (Volatile, Uncertain, Complex, Ambiguous), supply chain managers are facing many challenges. The COVID pandemic has exposed the fragility of global supply chains.

It is now essential for supply chain managers to take a strategic view of their operations and implement measures that will make their supply chains resilient to future disruptions.

What Is Supply Chain Finance?

Supply chain finance is an emerging discipline that deals with the financial management of a company's entire value chain, from suppliers to customers. It involves optimizing cash flow by leveraging relationships between buyers and suppliers in order to improve working capital efficiency.

In other words, it's about using financial tools such as factoring or reverse factoring to help suppliers access cheap financing so they can provide better payment terms on invoices issued by buyers.

Understanding supply chain finance is essential for anyone involved in managing complex global value chains. It enables firms not only manage risks but also optimize working capital efficiency while reducing costs along value chains through better coordination between buyers and suppliers via innovative financing options like dynamic discounting platforms or blockchain-enabled smart contracts for invoice factoring among others.

In combination with AI-based technologies like predictive analytics tools or machine learning algorithms that enable fast decision-making based on real-time data analysis make it possible to enhance risk management capabilities further by providing insights into supplier financial health assessing credit risks associated with different financing options available through factoring or reverse-factoring methods etc., which helps firms adapt successfully amidst uncertainty arising from VUCA world challenges post COVID-19 pandemic and beyond.

Aligning Finance and Supply Chain Goals

Finance departments often focus on short-term financial performance, which may not be in line with the long-term drivers of SCF, such as supply resilience, regionalization, and diversification. IBP can help align these goals by providing a framework for collaboration between the finance and supply chain departments, enabling them to work together to achieve common objectives.

AI-Enabled Supply Chain and its Impact on Finance

Artificial Intelligence (AI) is transforming the way supply chains operate, driving insights into patterns and enabling faster optimization of plans. However, implementing AI-driven algorithms and digital platforms in a supply chain can be overwhelming in terms of the need for talent and financial resources. SCF can help businesses overcome these challenges by providing access to the necessary capital for investing in AI technologies and attracting skilled talent. Blockchain integration will boost the Supply Chain Finance solutions.

The Role of Integrated Business Planning (IBP) in Supply Chain Finance

Integrated Business Planning (IBP) is a holistic approach to supply chain planning that aligns strategic, financial, and operational goals across the organization. It plays a crucial role in bridging the gap between finance departments and the drivers of Supply Chain Finance. IBP enables greater supply chain visibility by connecting processes, people, and digital platforms across the organization. This enhanced visibility facilitates better collaboration among different departments, including finance and supply chain, leading to more efficient and effective management of SCF. This integration does not mean to postpone/cancel production orders at the end of the year for the sake of hitting the financial inventory targets. Cash conversion cycle management should be a focal point to be considered during the routine planning?cycle.

There are three main sources and uses of cash. Think of each as a tank of cash:

1.Investments:?The investing tank is the amount of money your current and potential owners have available to invest in the company.

2.Operations:?The operations tank is your business’s checking account. The amount of cash in the tank rises and falls with the cash conversion cycle.

3.Financing:?The financing tank is the money you can borrow from banks.

Show me the money: Liquidity, cash flow, and the cash conversion cycle

What’s the secret to tapping potential liquidity? The answer can be found in a powerful but underappreciated financial metric — the cash conversion cycle.

Businesses that emerged from the pandemic are leaner and meaner. They’ve reduced costs, embraced work-from-home strategies, raised prices, restructured their real estate lease and debt obligations, and implemented other cost reductions — strategies that allowed them to conserve precious cash. And many may still have untapped liquidity generation opportunities that will be needed in a downturn. What’s the secret to tapping that potential liquidity? The answer can be found in a less well-understood and underappreciated financial metric — the cash conversion cycle (CCC).

In financial terms, the CCC is the length of time that a company needs to finance operations to run the business.

The CCC comprises three subcomponents:

?Days sales outstanding (DSO): The average number of days required to collect receivables.

?Inventory days on hand (DOH): The average number of days that inventory, including raw materials, WIP, and finished goods, is held on the balance sheet before it’s sold and converted into receivables.

?Days payable outstanding (DPO): The average number of days a company can defer payments to trade creditors for goods and services received.

Combining the three together in a simple equation gives a full picture of your CCC: DSO + DOH – DPO = CCC.

A negative cash conversion cycle is great. It means the company doesn’t require external financing to fund its working capital and growth, a highly favorable (but extremely rare) situation. Ultimately, the lower the cash conversion cycle, the better for the organization. Companies with a short cash conversion cycle have greater liquidity, resilience against unexpected economic turbulence, and are better insulated from ripple effects of weaker peers in their ecosystem falling into insolvency.

Ultimately, the lower the cash conversion cycle, the better for the organization.

Conclusion:

Global competition requires companies to manage their working capital effectively.

We talk a lot about SCM skills around artificial intelligence and data analytics, as well as the re-understood soft skills. We need to shift our planning mindset from sequential to concurrent. SCM talent should, however, also know how to influence financial goals proactively, and the planning process should also be tailored accordingly.

This means that SCM teams should be agile and able to adjust plans quickly in response to customer demand, market changes, and other external factors. They should also be able to anticipate potential issues and be proactive in addressing them. Finally, they should be able to provide real-time insights to help the organization make strategic decisions. By actively monitoring and benchmarking your Cash Conversion Cycle, you may be able to identify trends early and anticipate strategic pivots.