Executive Briefings

Give the Supply Chain Some Credit

Increased linkage between material and financial flows requires supply chain managers to learn more about topics like working capital optimization, margin and asset utilization, valuation and risk, managerial accounting and cash flows, taxes and transfer prices.

Supply chains have long been described as a combination of material, information and financial flows. But financial flows have received the least attention in the supply chain community. This has been changing in recent years as globalization has increased the complexity of financial flows across trading partners. Changes in trade financing mean that operations managers need to understand more about the timing and risk of payments across the chain. The ability to optimize working capital is being enhanced with increased capabilities to monitor transactions and plan cash requirements with greater certainty and precision.

However, the interest in linking finance and supply chain goes beyond Treasury operations. CFOs continue to seek better understanding of how operations generate cash at various locations around the world...and not only for Sarbanes-Oxley compliance. Deeper understanding of margins and cash flows throughout the extended supply chain can provide critical information in predicting financial performance for the next quarter. The current economic crisis and tightening of credit markets further focuses the spotlight on improved operations as a means to generate critical cash.

Given this backdrop, we see three trends in the supply chain community regarding the topic of finance.

First, the economic crisis combined with increased volatility in commodity prices puts risk management at the front on all minds in 2009. Supply chain managers need to be more aware of strategies such as financial hedging for commodity and/or exchange rate risks and incorporate the impact of any such strategies into operational decision-making. In addition, they can propose operational hedging opportunities to create a portfolio of supply chain investments around the world that is more robust in the face of volatility. Finally, the supply chain needs to be preparing for future risks as concepts like a "carbon beta" being developed by Innovest take hold with the investment community.

Second, 2009 will show continued growth in technology and services related to international financial flows. As mentioned above, the focus on working capital optimization in international buyer-seller relationships is bringing new service providers into the supply chain community. To capitalize on opportunities, buyers will develop closer relationships with suppliers to understand their financial positions and to track their performance to better quantify risk. Also, being conversant with trade finance mechanisms such as credit insurance will help supply chain managers to evaluate supplier risk and ensure that delivery contracts are met.

Third, in 2009 and coming years we anticipate growing interest in education about finance, the lingua franca of business, among supply chain professionals so they can better articulate the value they are creating within the company. New skill sets include:

• Understanding how the supply chain impacts the bottom line-margin, asset utilization, and revenue growth-and where it hits the income statement and balance sheet.
• Turning various supply chain initiatives into quantifiable cash flows to properly position them alongside other investment options.
• Applying activity-based costing to improve decision-making.
• Breaking down the various components of a firm's "holding cost" to better align inventory decisions with the firm's value creation goals.
• Communicating across the organization from procurement to accounting how to manage the cash-to-cash cycle.

Conversely, supply chain expertise will be attractive in the finance and investment community. For example, consulting firms are hiring supply chain graduates to participate in activities such as private equity due diligence where assessing the real potential of operational improvements and tied-up working capital can be critical in determining valuation and risk.

The Outlook

Given the global economic crisis, risk will dominate finance discussions in 2009. Supply chain managers will have new opportunities to work alongside financial managers in mitigating credit, commodity price and exchange rate risks. In this time of uncertainty, better understanding of the supply chain and the operating conditions of trading partners can help to provide needed stability of capital flows across global markets.

Supply chains have long been described as a combination of material, information and financial flows. But financial flows have received the least attention in the supply chain community. This has been changing in recent years as globalization has increased the complexity of financial flows across trading partners. Changes in trade financing mean that operations managers need to understand more about the timing and risk of payments across the chain. The ability to optimize working capital is being enhanced with increased capabilities to monitor transactions and plan cash requirements with greater certainty and precision.

However, the interest in linking finance and supply chain goes beyond Treasury operations. CFOs continue to seek better understanding of how operations generate cash at various locations around the world...and not only for Sarbanes-Oxley compliance. Deeper understanding of margins and cash flows throughout the extended supply chain can provide critical information in predicting financial performance for the next quarter. The current economic crisis and tightening of credit markets further focuses the spotlight on improved operations as a means to generate critical cash.

Given this backdrop, we see three trends in the supply chain community regarding the topic of finance.

First, the economic crisis combined with increased volatility in commodity prices puts risk management at the front on all minds in 2009. Supply chain managers need to be more aware of strategies such as financial hedging for commodity and/or exchange rate risks and incorporate the impact of any such strategies into operational decision-making. In addition, they can propose operational hedging opportunities to create a portfolio of supply chain investments around the world that is more robust in the face of volatility. Finally, the supply chain needs to be preparing for future risks as concepts like a "carbon beta" being developed by Innovest take hold with the investment community.

Second, 2009 will show continued growth in technology and services related to international financial flows. As mentioned above, the focus on working capital optimization in international buyer-seller relationships is bringing new service providers into the supply chain community. To capitalize on opportunities, buyers will develop closer relationships with suppliers to understand their financial positions and to track their performance to better quantify risk. Also, being conversant with trade finance mechanisms such as credit insurance will help supply chain managers to evaluate supplier risk and ensure that delivery contracts are met.

Third, in 2009 and coming years we anticipate growing interest in education about finance, the lingua franca of business, among supply chain professionals so they can better articulate the value they are creating within the company. New skill sets include:

• Understanding how the supply chain impacts the bottom line-margin, asset utilization, and revenue growth-and where it hits the income statement and balance sheet.
• Turning various supply chain initiatives into quantifiable cash flows to properly position them alongside other investment options.
• Applying activity-based costing to improve decision-making.
• Breaking down the various components of a firm's "holding cost" to better align inventory decisions with the firm's value creation goals.
• Communicating across the organization from procurement to accounting how to manage the cash-to-cash cycle.

Conversely, supply chain expertise will be attractive in the finance and investment community. For example, consulting firms are hiring supply chain graduates to participate in activities such as private equity due diligence where assessing the real potential of operational improvements and tied-up working capital can be critical in determining valuation and risk.

The Outlook

Given the global economic crisis, risk will dominate finance discussions in 2009. Supply chain managers will have new opportunities to work alongside financial managers in mitigating credit, commodity price and exchange rate risks. In this time of uncertainty, better understanding of the supply chain and the operating conditions of trading partners can help to provide needed stability of capital flows across global markets.