Six Actions to Create Supply Chain Driven Shareholder Value
An inextricable link between shareholder value and supply chain performance points to a growing role for the CFO in supply chain leadership, optimization and management, which transitions the CFO’s role beyond traditional reporting of financial data and controlling costs, to a more active role in strategy and execution.
In a hyperconnected global supply chain with unexpected risks, including the coronavirus outbreak, the CFO must also examine geopolitical risk factors and the impact on the supply chain, and take action to prepare for the short-term impact the coronavirus will bring as well as assess the long-term risks. Supply chain management affects cost, cash flow, growth, and ultimately shareholder value, as was demonstrated in a recent University of Tennessee white paper titled “Driving shareholder value with your supply chain.”
Supply Chain Revisited
Traditional thinking looks at the supply chain as a tactical tool primarily for procurement and transportation, with a goal of achieving the best delivered price for purchased goods and raw materials, as well as customer shipments. This leaves the question of how the supply chain, as the largest internal value creation tool, impacts earnings unanswered.
With supply chains coming under greater scrutiny, transforming the supply chain into a tool for creating shareholder value requires redefining the supply chain into an art form of converting complexity into simplicity, extending its scope and transforming it digitally. Even larger organizations often make limited use of the supply chain due to a lack of understanding its digital aspects, a true end-to-end strategy or clarity in the complexity it encompasses, too many internal and external functional silos, and a lack of discipline in considering the entire supply chain from the supplier’s supplier to the customer’s customer.
- Work in partnership. When supply chain leaders work more closely in partnership with finance executives, sales, marketing, operations and the network of suppliers, the true value-creation potential becomes clearer and a vision of the value they want to create is better able to drive the end-to-end integration needed to achieve their goals.
- Digital supply chain. This strategic approach also brings the digital supply chain into full play. The CFO can drive greater visibility and deeper insights, unleashing economic value and greater performance. One example is the ability to generate more cash for all participants in an end-to-end ecosystem.
- Establish a common language and culture. This transformation is driven by creation of common understanding of what the supply chain is about including all functional areas, data, analytics and technology. This requires a transformation in how to think about profitability, cash, growth, and a common language across the organization and the whole ecosystem. CFOs are in a unique position to help create more collaboration, integration and transparency.
- Use data to drive deeper insights. Digitally enabled supply chains must be supported as processes are improved and altered, and an overwhelming volume of data drives deeper insights and sustains performance from process and behavioral changes. This combines many functions and integrates processes, visibility and talent, to make better decisions and ratchet the economic value creation of the organization beyond anyone’s imagination. Investing in the right technology is part of the digital transformation. The C-suite must commit to creating an enhanced strategic role for value creation by bringing the CFO out of the shadows to address cross-functional internal challenges and the whole ecosystem.
- Total Value Optimization (TVO). A Total Value Optimization (TVO) framework enables this engine of supply chain-driven economic value growth, focusing on finding value drivers for cost, cash, and growth internally and externally, achieving cross-functional integration to produce the highest level of value. Through a foundation of data analytics, TVO focuses equally on procurement, logistics and operations, leader and organizational improvement, sales and operations planning plus new product introduction to achieve sustainable, multi-year growth in the economic value provided to shareholders and stakeholders.
- Understand geopolitical risk factors in the end-to-end supply chain. Risk factors including the coronavirus outbreak, along with China’s economic slowdown, the U.S.-China trade war and Brexit have intensified the need for risk assessment, continuous monitoring of the supply chain, and a strong disaster preparedness and disaster recovery plan. The coronavirus underscores the volatility of the global supply chain and may expose the business to short-term disruptions.
The impact of the coronavirus should not be underestimated, and the decrease in economic activity in China will have serious repercussions throughout the world for companies that have either a direct or indirect connection to Chinese manufacturers. CFOs should actively review inventory levels and identify their exposure, as many companies may have a hidden connection to the Hubei province (and other hard-hit geographic areas) somewhere downstream in their supply chain.
The University of Tennessee white paper illustrated an example of a manufacturing firm’s CFO leveraging the supply chain to increase shareholder value. The CFO used the supply chain as a catalyst to counter disappointing cash flow and economic profits by driving down working capital. As a lever for improvement in cash flow, the CFO took $600 million out of working capital, dramatically increasing economic profit, while delivering significant benefits to suppliers and customers in a sustainable fashion year after year.
Best Practices, Best Results
The CFO office often functions in a virtual silo. In top-performing companies the siloed approach yields what appears to be acceptable results. The most successful CFOs no longer operate in a vacuum and work with other C-level executives to go beyond traditional reporting and quantitative KPIs, to define new metrics such as how the company is penetrating the marketplace, servicing the customer, and achieving other strategic priorities. Modern data analytics, not only from an ERP system, along with the right KPIs are an art as well as a science. The CFO uses them not just to illustrate the bottom-line numbers, but to shed light on shareholder value creation and performance outside of the financial arena.
Combining the strength of end-to-end supply chain leaders with the C-suite of the organization can be a powerful tool for improving economic value for the company and the whole ecosystem. To achieve such outcomes, the CFO must work across end-to-end supply chains to create true integration. Attention to system dynamics and a data-driven foundation, working with the supply chain internally and externally, maximizes upside and minimizes downside of the business cycle so that the supply chain becomes both reliable and flexible.
Forward-thinking CFOs are taking bold steps to use the supply chain as a lever to create value and economic profit. Best practices start with improved visibility and understanding and identifying risk. You can’t improve what you can’t see, and the complex network of suppliers and customers making up the digital supply chain requires a cross-functional team approach to insure the right product, in the right quantity and condition, arrives at the right place on time, for the right customer at the right price.
Visualizing the supply chain requires linking decisions to every facet of the organization and the supplier ecosystem, then managing decisions towards these uniquely enhanced metrics which help drive new levels of performance and significantly improved customer satisfaction.
Steven Bowen is the Chairman and CEO of Maine Pointe, a firm specializing in driving EBITDA and cash improvements across the areas of procurement, operations, and logistics to enable growth.