Chief financial officers (CFOs) know that supply chain performance has a direct impact on the bottom line. From balancing supply with demand to managing availability of inventory to managing a global distribution network, even the slightest miscalculation or interruption can be the deciding factor in announcing a profitable or unprofitable quarter.
Supply chain management, and specifically, supply chain risk management, is a strategic imperative for CFOs due to new and complex challenges in today’s global marketplace. For example, suppliers and third parties, both on and off shore, have an increasingly significant influence on supply continuity, company performance and brand image. As CFOs continue to drive efforts to reduce costs and manage working capital more effectively, supply chains continue to expand globally and inventories are becoming leaner, providing less margin for error.
We continue to find that the true value and financial impact of the supply chain is rarely viewed holistically to gain an understanding of the breadth and depth of the exposure. Rather, it is often viewed in silos, with issues and problems addressed as they arise.
But in today’s world, simply responding to issues with a “firefighting” mindset no longer suffices—this is not an effective approach to risk management. Consider the tragedy in Japan, which had a noticeable impact on the supply chains of many companies, including those in the steel, automotive, electronics and chemical industries. Immediately following the catastrophic tsunami, the resulting slowdowns and cessation of operations by so many companies raised questions regarding supply chain disruption risk and how to manage it.
Another example is the ongoing turmoil in the Middle East, which has the potential to adversely affect global supply chains, specifically with regard to possible disruption to oil supplies, and managing costs of hydrocarbon-based commodities and products.
Understanding Supply Chain Strategies and Risks
Supply strategies are complex by nature. There are many instances in which a single-source supply strategy is the right course of action, even when alternative options exist. The CFO, in collaboration with management, typically makes decisions to decrease inventory levels, rely on a single-source strategic supplier, and adopt just-in-time manufacturing and delivery techniques. These decisions involve trade-offs wherein quality, time and cost considerations often win out over business continuity considerations.
But supply chain disruptions are a reminder to CFOs that these trade-offs are not without risk. If the focus on supplier rationalization leads to extreme concentration, dependency and heavy emphasis on lean manufacturing leads to minimal buffers and tightly interconnected systems, disruption risk is further increased.
In today’s highly connected world, an end-to-end holistic or enterprise-wide view of the value chain is vital to understanding and managing operational risk. Supply chain risks can manifest themselves across a wide range of sources, including internal planning and operations, and those that impact a specific product, supplier, an entire category of spend and even those that are macro-economic in nature. This view requires the CFO to consider upstream supplier relationships, including the second- and possibly third-tier suppliers for strategic suppliers and categories, not to mention the logistics in linking these vital elements of the supply base with the company’s operations. The enterprise’s supplier relationships and the supporting supply network are just as important as its internal processes, personnel and systems because they are inextricably linked to what makes the business model work, albeit with less visibility. Therefore, any assessment of operational risk should be directed to understanding the risk of loss of any critical link in the supply chain.