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Supply Chain: The New Risk Management Focus for CFOs

CFOs need to address the risk in their supply chains.

CFOs are always under pressure to make their corporations better, faster, leaner and stronger. This has often required attacking the balance sheet with a red pencil or scanning through contracts and files to spotlight liabilities and risks.

Yet as Rajeev Menon writes for BusinessFinance magazine, the supply chain could be the long-ignored secret weapon that can provide visibility into a company's risk, its operations, cash flow and working capital. He says this aspect of the business has a wealth of data that can be mined to give a clearer picture of the revenue forecast.

When treated this way, the supply chain can almost become a "crystal ball" in terms of knowing what components will have a later effect on customer satisfaction, pricing and other market factors, Menon says. He admits that it's difficult to get a full sense of the supply chain, as it often stretches around the globe and is also "prone to controllership risks" simply because so many people oversea the "physical and transactional hand offs."

But CFOs still need to try. "The CFO who clearly understands the entire procurement and fulfillment process and the workings of the physical supply chain is much better positioned to understand the cascading effect of risk faced by an organization," Menon insists.

During a panel discussion at the recent The Economist CFO Summit, 4C Associate's managing director, Ed Ainsworth, talked about the events that can create risk for a company. He noted that the last year of major supply chain disruptions - stemming from events such as the flooding in Thailand or the political upheaval in the Middle East - and localized ones (think fires at a supplier factor) meant CFOs would have to pay greater attention to how their businesses are exposed to risk.

"One of the discussions I think businesses need to be having more is about the risks associated with working with other companies working in their supply base," he said, as quoted by Supply Management. "Typically most organizations have 60 percent of their spend with suppliers."

Another speaker at the event, Kraft Food Europe's senior vice president of finance, Luca Zaramella, said when a CFO is crafting a business strategy that is insulated from risk, it's necessary to go over many factors - coverage, commodities strategies, the competition, pricing ability and more.

"We try to come up with a strategy that is flexible on all sides and minimizes the risk," she added, according to the source.

Risk in Growth, Too

It's not only well-established, multinational companies that can be exposed to risk. As CFO magazine reports, XBRL provider EDGAR Online very rapidly grew from 90 full-time workers to more than 400 employees and $30 million in revenue.

That speed of growth is its greatest risk, as so many quickly expanding companies end up going out of business because their cash flow can't keep pace with their accounts receivable, according to EDGAR chief operating officer David Price, as quoted by the news source. To reduce the risk, Price says he spends on AR and collections and invests in having employees constantly tracking down payments.

Risk is also a concern for CFOs in Asia. A survey of Asian CFOs conducted by Bank of America Merrill Lynch found that, excluding the Japanese respondents, most finance chiefs felt positive about the regional economy and were reducing their vulnerability to economic threats by expanding their business at home rather than abroad.