I have a new article coming out in Corporate Finance Review on the roles the CFO and the Finance organization should play in Supply Chain Management.
Here is a preview:
Once a subject discussed only by operations, research and logistics specialists, supply chain management (SCM) is now a common topic of conversation with and among chief executives. Challenges such as demand volatility, operational risk, supplier solvency and weather volatility have put this once-esoteric subject at the very top of most companies’ agendas.
The next step in this evolution of SCM concerns the role of the chief financial officer (CFO) in helping guide supply chain strategy. To date, the finance function has typically played a limited function in SCM within large companies. While most firms have teams of cost accountants and others who measure factors such as inventory and sourcing costs, these roles are often insufficient to deal with the complex challenges involved in managing today’s global supply chains. I believe that it is time to rethink and expand the role of the CFO in SCM, with a specific focus on three core functions. Sufficient CFO involvement in these three areas can help mitigate sub-optimal performance and decrease risk.
- Capital allocation
- Performance management
- Risk management
At most companies, the lack of CFO involvement in SCM creates sub-optimal returns and increases the firm’s overall cost of risk. Pressures such as global instability and market volatility are placing new demands on SCM organizations, and correctly assessing and responding to these demands now requires a much higher level of financial sophistication.
These challenges, and the need to solve them, are driving SCM to evolve in a number of key ways:
- SCM leaders will need to borrow quantitative methods and tools from finance and financial risk management
- Finance teams should drive financially optimal solutions to real and virtual SCM problems that may – or may not – correspond to the answers that “physics”-driven solutions would yield
- Finance teams should focus on understanding how the different ways of financing each aspect of a supply chain (e.g., self-funding, direct borrowing, third-party financing) can provide higher returns and/or operating flexibility, and impact risk profiles
- CFOs and their teams should help manage the financial complexities and yield/risk aspects of their companies’ operating models
To accomplish this transformation, financial skills will be as critical as operational and technology skills. Leading companies already realize that this evolution is underway and have begun to change the relationship between finance and SCM, often in dramatic ways. This is not just a leading practice, but a necessary one for those firms wishing to get the most from their investments, while correctly responding to the complex spectrum of financial and risk challenges they face today.
I will post the link to the full article when it posts on the CFR website.