The rapidly increasing pace of business requires tight alignment between financial and supply chain management decisions. Short product life cycles and changing consumer demand – particularly characteristic of the high-tech industry – mean companies whose supply chains aren't in sync with their financial planning are less likely to make their numbers.
For example, a semiconductor company recently implemented solutions to manage integrated sales and operations planning, thus tying the supply chain with financial management. This company has world-class supply chain management processes and centralized supply chain management governance, and its SCM team is financially savvy and engages in regular meetings with the CFO and controller. Team members are prepared to make management decisions based on forward-looking demand-supply (capacity) data matched with financial ratio projections.
Accordingly, the SCM team members decided to ramp down factory output at one of the company's high-volume factories after peak Christmas shipments had been completed. S&OP planning intelligence had indicated that additional shipments would lead to excess inventory at distributor- and supplier-managed hubs, which could create future price erosion and inventory write-offs. Previously, they could not have made such a timely decision because the factory wanted to maximize throughput and utilization, and supply chain managers did not want to risk reduced supply during the peak Christmas season. Integrated financial and supply chain management gave them the ability to determine the risk level and positively impact the bottom line.
Short-lifecycle product companies serving volatile markets such as high tech and consumer electronics have difficulty meeting revenue projections without the ability to generate forward-looking financials based on product demand-supply fluctuations. Yet many of these companies still have not taken the step to bring together the CFO's office and SCM.
For example, in the cell phone industry, leading companies like Nokia, Samsung, Motorola, LG Electronics and others collectively introduce 20-40 new cell phone models (including technology variants) every six months. These products typically have a 3-5-1 product lifecycle, taking about three months to design the product, five months to launch and sell, and one month to liquidate. The exact duration in each lifecycle phase varies across different product types, but the relative ratio stays fairly constant.
Cash flow is initially negative during the design phase and starts turning positive during the selling phase, and most companies become cumulatively positive in cash flow only when they get to the end of the selling phase. (Many companies slip back to a cash-flow-negative position due to issues such as price protection and disposal costs, but this can be avoided if managed correctly.)
With short lifecycles and volatile markets, effectively managing product margins by considering various cost components across the product lifecycle can lead to sustained operating profitability and positive cash flow. Through proactive lifecycle cash-flow analysis, companies can implement timely decisions that lead to more products finishing in the black and fewer products dragged back into red at the end of their lifecycles. Supply chain management can make a difference in these businesses by coordinating product transitions and new product introductions aligned with end-to-end supply chain capabilities and financial indicators of demand, such as point-of-sale information from retail channels.
How Effective Supply Chain Management Benefits the CFO
Effective supply chain management addresses the four key issues that follow:
1. Reducing cash-to-cash cycle times
Through perfect orders and accurate customer invoicing, companies can optimize cash collection and shorten cash-to-cash cycle times on the accounts receivable side.
On the other side of the cash cycle, proactive use of accounts payable to manage uncertain international lead times helps minimize growing cash cycle time. By basing invoicing on proof of delivery and making payments to suppliers at the last possible moment, CFOs can maximize the cash assets in the company.
2. Reducing the company's risk profile