Driving growth and protecting margins during times of economic uncertainty requires smarter inventory management and a more holistic approach to finance, supply chains and sustainability, according to Professor Bram Desmet, Professor of Operations and Supply Chain at Vlerick Business School.
With firms now facing the challenges of conflict, economic slowdown and increasingly unpredictable demand, strengthening supply chains and right-sizing inventory to optimise working capital should become more urgent priorities for Supply Chain and Finance functions, he argues.
The COVID-19 pandemic “created a huge mess” for companies’ supply chains, with many paying inflated prices to build up huge inventory stocks that continued to weigh on cash flow as recently as six months ago, Desmet notes. “It was sheer panic and improvisation. It was the opposite of professional supply chain management.”
The upside is that such vulnerabilities have now been exposed, he says. The downside is that not enough companies are investing to fix them.
Any decision about inventory must factor in the realities and priorities of each function, believes Desmet, who will run two interactive workshops at this year’s Working Capital Forum on Tuesday, 28th November to explain why cross-functional integration is so important and to offer practical tools and strategies to help participants deliver it for their companies.
Inventory does not exist in isolation, and any change to it also impacts cost and service provision – a concept that Desmet calls the ‘supply chain triangle’. For example, while ‘hard discounter’ supermarkets can carry small assortments and hold minimal inventory due to their focus on low prices and maximum efficiency, cutting the inventory of a premium supermarket could threaten its strategy of charging higher prices in return for offering customers more choice.
Reducing inventory may sometimes be necessary, but “you need to do it in a smart way and not in a blunt way, otherwise you just pay it in EBIT or lost sales, or you pay it in undermining your strategic positioning,” Desmet concludes.
Breaking down silos
The problem is that at most companies, Supply Chain and Finance don’t clearly understand each other’s objectives, which often seem conflicting, especially around inventory, he notes. Finance views inventory as a cash vampire, but it can also help manufacturers optimise costs, Desmet explains. For Supply Chain, inventory is a crucial buffer against supply and demand uncertainty or volatility.
Treasurers and CFOs are often frustrated, for example, when inventory reductions they have requested fail to materialise – not realising that Supply Chain has been simultaneously tasked with helping the organisation meet ambitious sales growth targets for which it needs extra stock.
“The supply chain world and the finance world are like parallel universes,” notes Desmet. “I think 80% of the supply chain planners today are still making decisions based on volumes, rather than on accurate margin data.”
Breaking down silos between Supply Chain and Finance could help rectify this, Desmet argues. Supply Chain’s volume-driven planning tools are operated in complete isolation from Finance’s value-driven tools. But they host huge volumes of data that could help Finance make more accurate working capital forecasts, he notes.
For instance, linking the customer payment terms that are maintained by Finance with Supply Chain’s sales forecasts would result in better receivables forecasts, he proposes. And more accurate inventory value forecasts could be produced by linking the granular inventory forecasts held by Supply Chain with Finance’s cost per SKU data.
Dynamic sharing of data like this would help companies finetune how much inventory they need to be both operationally efficient and achieve their business strategy, Desmet argues.
“One of the big opportunities I see is to merge these two processes and also better align the complementary capabilities of the two functions within the organisation,” he adds. “The tools can do it. The data is there. It’s just a matter of trying to blend two worlds which don’t understand each other sufficiently.”
At the same time, companies are increasingly concerned about the sustainability of their supply chains, and are willing to invest heavily in processes that offer improved visibility over emissions and the ethical or environmental practices of their suppliers, Desmet says.
Some view Scope 3 emission reductions as a key business differentiator, while others are targeting growth opportunities in satisfying consumer demand for more ethical, sustainable, or energy-saving products.
Investing in sustainability impacts all aspects of a business – from product design to production and procurement – so strategic trade-offs must be made, Desmet argues. “You cannot have the best quality of product, the broadest product portfolio, the best service and the lowest cost,” he says. “It’s about making choices.”
And if inventory is cut too low – meaning new demand cannot be satisfied or shipments must be expedited via expensive and polluting air transport – a firm’s sustainability strategy and margins can both suffer. All the more reason, Desmet argues, for bringing Supply Chain and Finance into this conversation too.
Desmet is a speaker at Working Capital Forum Europe in Amsterdam on 28th November. He will explore sustainability strategies and how they intersect with Supply Chain and Finance in his next book, due to be published in 2024.
© Adaugeo Media Ltd