Understanding the connection between supply chains, finance and business strategy is increasingly vital for CFOs as recession looms.
By Rebecca Spong
Chief financial officers must place supply chains at the heart of their business strategy, urges Bram Desmet, professor of operations and supply chain at Vlerick Business School in Belgium.
With the aftermath of Covid, the energy crisis and the war in Ukraine all contributing to a looming recession, companies need to have a clearer idea of how their supply chains support their wider company goals, he says, ahead of his keynote address at the Working Capital Forum Europe to be held in Amsterdam in December.
“Many supply chains were designed in the pre-covid period when markets were relatively stable, and they were able to operate on cruise control,” he says. “We are now trying to navigate through two crises in a row on cruise control, which is completely ridiculous.” Many CFOs have taken a reactive approach to overcoming the challenges of the past few years, Desmet argues.
During the pandemic, there were not enough components and raw materials available which led to companies holding low inventories. With consumers panicking to stock up on goods in case supplies ran out, sellers could demand any price they wanted for their products.
However, with current inflation rates and a recession in sight, there is a risk that corporates have now over-ordered and created an excess of inventory.
“Everyone is sitting on expensive inventories while demand is decreasing,” he says.
What CFOs need to do, he argues, is to more carefully consider how decisions related to inventory can impact the company’s long-term business strategy, its financial metrics, and the sustainability of its supply chain.
This idea is at the heart of Desmet’s ‘Supply Chain Triangle’ concept that he uses when working with clients via his company Solventure to help them better manage their businesses.
The concept is based around the idea that companies have three interlinked priorities. They provide a service to customers, which comes at a cost – for instance warehousing or logistical costs - and which requires inventory.
Any decision made will have an impact on these three ‘corners’ – service, cost and inventory or cash.
“The ‘Triangle’ captures the struggle I see in many companies. On one hand you want to deliver a good service to customers, yet at same time we want to keep our costs under control.
“Finance is concerned with inventory because inventory is working capital, and working capital is linked to cash flow which important metric to them,” he explains.
Through talks and workshops, Desmet uses the triangle to help companies understand the three elements are linked. For instance, sales teams are more focused on customer service, operations teams might prioritise cost and efficiency and finance departments can be quite aggressive on working capital reduction without necessarily understanding the impact on other sides of the triangle, he explains.
Last-minute cuts to inventory in times of crisis may help a finance team hit certain goals for that year, but it may not be the right decision for the company in the long-term, he says.
Managing inventory is always a challenge due to lead times, Desmet adds, noting that companies don’t always know what the market conditions will be like six to nine months down the line when the stock turns up.
By considering the impact of decisions on different sides of the theoretical triangle, companies can avoid taking a “panic and improvisation” approach to supply chain management.
“During Covid I hoped more CFOs and CEOs would have understood that if supply chains are not running well, then the business is not running well,” he says.
The current economic problems are “another reminder if you don’t balance that triangle - you are always in a reactive mode or an improvisation mode and that is simply not professional or optimal from a value generation perspective”.
Desmet argues that greater investment in supply chains is needed, as well as getting the supply chain experts in the same room as the CFO and the finance teams.
“Finance has credibility and impact but lacks operational knowledge, while with supply chain it is the other way round, they often don’t have clout in a company to make things happen,” he says.
By bringing together the right people, companies will be able to redesign their supply chains to be more resilient.
“Supply chains are outdated and what we can do is help companies rethink supply chains to better connected to strategic needs and provide more clarity on the impact on financial performance and financial metrics,” he says.
Bram Desmet, with his client Danfoss, will speak at the Working Capital Forum in Amsterdam in December. Places are free of charge for corporate treasurers and procurement directors. To reserve your place, Click here.