Global manufacturers are rethinking their sourcing strategies, and for that exercise the chief procurement officer occupies center stage. But there’s another executive in the C-suite who’s playing an equally vital role. Hint: Follow the money. 

Enter the chief financial officer. The supply chain disruptions of the past four years have underscored the value of the CFO in determining where to source raw materials, components and finished goods. Businesses today are grappling with issues arising from the need to shift at least some manufacturing away from traditional sources, especially China, for multiple reasons. They include worries about the continuity of product flow in light of growing geopolitical tensions between the U.S. and China, and the wisdom of diversifying sourcing in order to mitigate the risk of supply chain disruptions in any one country or region. 

Among the questions that CFOs are asking: How much production capacity should we move? Where should we move it to? What are the advantages and disadvantages of bringing manufacturing all the way back to the U.S., versus “nearshoring” it in Mexico or other parts of Latin America? And what, of course, are the financial ramifications of each decision? 

When it comes to devising new sourcing strategies, CFOs’ priorities and concerns are highlighted in a recent survey by Taulia, a provider of technology for working capital management. Based on feedback from 550 CFOs, it looks back at how they fared in 2023, as well what they expect to encounter this year and beyond.

One of the biggest drags on corporate balance sheets, and therefore a prime concern of the finance department, is inventory. As companies work to reduce the risk posed by single-sourcing and the “just-in-time” supply model, they start thinking about beefing up safety stock, which was sorely lacking at the height of the COVID-19 pandemic. It becomes especially valuable when distribution pipelines become clogged due to occurrences like missile attacks on ships in the Red Sea, and low water levels at the Panama Canal. Supply chains acquire a “built-in redundancy,” says Erik Wanberg, Taulia’s managing director of inventory management. “You sleep better at night having it.”

Building up a buffer, of course, costs money, and one way to offset the extra expense is to shove inventory upstream to suppliers. Through the technique of vendor-managed inventory (VMI), original equipment manufacturers delay taking title to goods and components until they’re needed on the production line or for distribution. The items in question remain on suppliers’ books, held in a vendor-managed warehouse, until that time. 

VMI has risen and fallen in popularity over the years. The advantages of having quick access to inventory without having it burden the OEM’s balance sheet are obvious. At the same time, over-reliance on that model can jeopardize the financial stability of suppliers, many of which are surviving on thin margins and often struggle to acquire adequate working capital. 

The missing component in a VMI arrangement is “liquidity and financing,” Wanberg acknowledges. “You don’t want to put pressure on suppliers.” Many such programs failed in the past, he adds, because they weren’t accompanied by working capital solutions for financing supplier operations.

A popular technique today, he notes, is speeding up payment to vendors, either in return for a discount off the invoice or through a third party stepping in to complete the transaction. In addition, suppliers can sometimes access funds under buyers’ financing terms, which are often more attractive than those they can obtain on their own. 

It's all about achieving a delicate balance between cost and resilience. A VMI-run warehouse “needs to be a shock absorber for companies to be able to source [reliably],” Wanberg says. “But even if you enable that, you don’t want to build up more inventory than needs to be there.”

“I’m not here to say that VMI is the way to go,” he adds. “It’s just one option.”

The CFO’s voice has grown stronger with increasing pressure on working capital caused by the pandemic and subsequent supply chain disruptions. Behind every decision to nearshore manufacturing is an expert carefully weighing the financial considerations, and their impact on the larger organization. Issues on the table include infrastructure, technology, taxation, insurance and legal environments in various target countries.

It’s more than a question of standing guard over the company’s money, Wanberg says. “CFOs are trying to move to more resilience and agility. They’re saying we can’t have a miss on revenue because of stock outages.”

As manufacturers make critical decisions about where to source their goods, CFOs “will definitely have a seat at the table, and a voice,” he says.