CFOs & Supply Chain Management

CFOs and Supply Chain Management: Perfect Together

"In contradiction and paradox, the truth can be found."

So says Denis Villeneuve (Film Director and Writer).

The role of the Chief Financial Officer (CFO) is marked by contradiction and paradox. He or she is expected to be not only a “big picture” strategic-thinking advisor to the Chief Executive Officer (CEO) and the Board of Directors, but also to ensure that a plethora of detailed financial matters are addressed, managed and complied with. In addition to being a strategic thinker as well as detail oriented, the CFO is expected to be both collaborative and decisive in defining accountability while exercising authority.

However, in a world of increasing uncertainty and volatility, including the risk of global disruptions of all kinds, organizations are demanding more than mere “accounting and reporting” from their CFOs. CFOs are expected to fully and actively participate in the strategic function of identifying and managing risk.

In What CFOs (and Future CFOs) Need to Know About Supply Chain Transactions, noted author X. Paul Humbert, Esq., addresses the common pitfalls of supply chain contracting as well as cloud computing, cyber security, blockchain and so called “smart contracts”. The book has been described as a survival manual for any executive who deals directly or indirectly with the financial aspects of contracts. It provides CFOs and future C-suite executives with the knowledge to ask the right questions before approving, reviewing or commenting on supply chain management (SCM) transactions. As such, the book fills a serious potential knowledge gap for many CFOs.

As “financial steward” the CFO “owns” and is accountable for the organization’s finances, financial data and the financial aspects of business decisions. This means, in effect, that the CFO must understand and, when appropriate, constructively challenge the business decisions being made in order to avoid, manage or mitigate financial risks as well as drive business innovation. Moreover, an organization’s financial results are intertwined with the performance of the purchasing function. Purchasing and purchased inventory affects the balance sheet and capital allocation. In addition, few purchasing professionals understand the many nuances of financing, especially for example, third party financing. These factors  warrant an elevated level of CFO participation in supply chain  strategy and decisions as well as their subsequent execution and management. Indeed, in many organizations, the purchasing function reports to the CFO. However, very few CFOs studied or have experience in supply chain matters.

The most common and arguably most important risk avoidance, management and mitigation tools are the contracts the organization signs. Ironically, many CFOs know little about contracts and how they work to support the organization’s goals. Instead, many CFOs choose to delegate the responsibility for identifying and managing those risks to others often with few, if any, questions asked.

The inability to ask the right questions in correct timing about the supply chain contracts CFOs are asked to comment on or approve has consequences. It can be a career-altering event for CFOs. Typically, the responsibility for putting together sound contracts that correctly support the transactions an organization enters into is the purview of the procurement/supply chain management (SCM) department. Increasingly, CFOs are asked to “approve” or even sign such contracts. It is not uncommon for the procurement/supply chain management function to report to the CFO, but even in those instances, many CFOs are not fully capable of asking the right questions in correct timing about SCM transactions. The danger of this knowledge gap is clear. As Peter F. Drucker has noted:

“The most serious mistakes are not being made as a result of wrong answers. The true dangerous thing is asking the wrong question.” 

The whole purpose of a contract is to create certainty and predictability by clearly articulating the parties’ respective rights, roles and responsibilities. Each party assumes certain risks and liabilities according to its ability to bear these risks and its tolerance for those risks. The purchase of goods or services are not only expenditures of capital, but inevitably affect the organizations’ revenue, cost structure and risk profile. Moreover, many such transactions involve complex internal financial considerations regarding whether to perform or provide “in-house” or on an “outsourced basis”.

Of course, failed transactions, whether large or small, can have both direct (losses/ lost profits) and indirect (reputational risk/ missed opportunities) financial or other consequences. Moreover, these risks and concerns do not stop just because a contract has been signed. Hard-won (and paid-for) rights and remedies can be lost by the failure to properly manage the transaction. Fundamentally, the CFO needs to be convinced that the contract is not simply a “good deal” with clearly defined respective rights, roles and responsibilities, but that there is a Contract Management Plan (CMP) in place in order to ensure that the contract is correctly managed to final conclusion.

Clearly, CFOs cannot responsibly “prepare budgets and financial statements”, monitor “expenditure and liquidity”, manage “investment and taxation” issues, report on “financial performance” and provide “timely and accurate financial data” unless they understand what purchasing is doing and how. In addition, the CFO and  financial staff typically enjoy greater status in an organization. In fact, “low status” is one of the chief complaints  heard from purchasing professionals and supply chain managers. Thus, it’s up to the CFO to make it work. In order to do this, he or she must learn about and understand why purchasing does what it does and how. SCM professionals will appreciate the CFO’s interest, provided it is knowledgeable.

How does a CFO most efficiently perform due diligence and learn about the organization’s purchasing function and the associated transaction risks? Given the time constraints CFOs operate under, perhaps the best (and only practical) method is to ask the right questions in correct timing. This book provides the CFO with the information necessary to ask the right questions and in this manner, help the purchasing function achieve its objectives while protecting the organization’s financial interests and integrity.

X. Paul Humbert, Esq. has over twenty years of legal experience in negotiating and structuring complex commercial transactions of all types. Mr. Humbert heads The Humbert Group, LLC (“THG”), specializing in assisting management professionals in all phases of execution and process improvement. In addition to full-time consulting for both public and private clients, Paul lecturers at Rutgers University where he teaches Contract Management to MBA candidates. Paul’s other books include: Contract and Risk Management for Supply Chain Professionals; Model Contract Terms and Conditions with Annotations and Case Summaries; Build Your Playbook for Managing Supply Chain Transactions; and How to Analyze and Negotiate Warranties for Goods and Services