The coronavirus pandemic has caused many supply chain disruptions. Countries locked down and opened at different times. Containers were held up on ships queuing at docks across the globe. In the UK and the EU, Brexit caused further supply chain issues in terms of movement of goods.
According to Chris Cammoile, FCMA, CGMA, a former Welbilt finance director who still consults with the company, an understanding of costs has been a key issue for the US-based global supplier of food service equipment whose customers are fast-food restaurants worldwide. The lumpiness of the supply chain during the pandemic has been particularly challenging.
Welbilt's manufacturing sites are set up along principles of just-in-time, lean manufacturing, and value streams, and the disruptions increased freight costs. When the pandemic hit, containers, trucks, and ships were in the wrong place, resulting in increased administrative costs and delays. This led to discussions about whether these additional costs should be built into standard costs or whether they should be just taken as a variance.
In the long term, the intention is that permanent increases in logistics costs will be built into standards. However, actually identifying what these increased "normal costs" will be in the future is difficult due to the continued global disruption and dislocation in the logistics networks. So the availability of containers, trucks, and ships and their often presently exorbitant costs need to stabilise and return to some level of normality before it is known by what amount standards should be incremented.
Welbilt's customers are leading global brands and therefore demand delivery of products when they require them, and further questions were raised about a change in focus for inventory from just-in-time to just-in-case. Switching to just-in-case inventory would mean increased costs, whilst failure to do this might result in lost revenues through lost sales. Welbilt's products have a high level of standardisation but also an element of "personality models" that are unique to specific customers, which led to questions of whether warehouse capacity in the system is already sufficient or whether warehouse capacity must be increased and where it should be located.
Decisions were taken to invest in additional warehouse capacity in the UK to free up space for more local manufacturing capacity. Also, within Welbilt's existing warehouse facilities, inventory has been increased in the US and the EU to mitigate disruptions in the logistics networks.
Across businesses and industries, key learning for the future relates to increasing supply chain resilience and recognising that, despite all the pandemic issues, globalisation is here to stay. As a result, facets of lean manufacturing should be enhanced rather than abandoned. Associated costing systems such as lean accounting, value-chain accounting, and make-or-buy decisions around different warehouse and logistics configurations will remain important. This has implications for management accountants and management accounting systems going forward.
Product ranging: A closer look
Lockdowns at the beginning of the pandemic hit manufacturers hard. Keeping plants open, and production continuing, when perhaps only 80% of the workforce was present, was a challenge. Factories introduced COVID-19-safe working practices, with workers in small teams. To keep limited supply chains open, some food-processing companies responded with product ranging, identifying the minimum credible range that would work for the manufacturer and their customers, said Chris Tyas, OBE, a global supply chain expert who was head of Nestlé's global supply chain and is the former chair of the UK government's Food Resilience Industry Forum (FRIF) and chair of GS1 UK, a not-for-profit that sets standards for business communication.
Walkers Crisps, for example, temporarily cut back production of single-pack crisps and concentrated on multi-packs, thereby reducing the number of stock-keeping units (SKUs) and simplifying the production process. That change had little immediate impact on supermarkets, where most shoppers select multi-packs, Tyas said. However, convenience stores, which mainly sold crisps in single packets, lost their usual source of supply and had to identify new single-pack crisps from alternative manufacturers.
To decide on a minimum credible range of products that would work for manufacturers and customers, companies assessed each SKU's contribution to the particular manufacturer's profits, Tyas said. That had to be taken in tandem with the buying teams at the supermarkets, as there were significant variations in margins, highlighting the need for the sharing of cost and demand data. There was no set formula for doing this, given that this task was being undertaken in the middle of a pandemic, the various factors were too different across the sector's manufacturers, and each company had to make decisions that worked for both it and its principal customers. Initial concerns about the major food retailers' profitability were, it turned out, unfounded.
As a result, the food industry turned to a form of open-book accounting, Tyas said. That means a network of suppliers, distributors, warehouse operators, and retailers share production data, assess the impact of ranging on margins of specific SKUs, and manage the movement of goods to where they are needed. The positives here are increased visibility across the supply chain, and such visibility promotes efficiency enhancements, an increase in value-adding processes, more consideration of customer service requirements, and win-win scenarios for all concerned. Care is needed, though, to ensure that no partners in the network take adversarial advantage at the expense of other partners.
Going forward, elements of this data-sharing model could well be retained, and this will require a commensurate rethink about competition legislation. Putting it simply, it means building back industry and commerce in a more sustainable way, both environmentally and socially as well as economically. Managing performance metrics systems across supply chains and networks is crucial in this approach, and management accountants and the accounting systems they use facilitate transparency beyond single organisation settings.
The use of open-book accounting between suppliers — companies that supply original equipment manufacturers (OEMs), companies that supply OEMs and other industries, and raw material suppliers — and customers to enable continuous improvement in processes and the sharing of benefits will enhance flexible collaborative contracting arrangements between companies. Open-book accounting also enables visibility across the supply chain. Sharing of cost and demand data is a fundamental lesson arising from the pandemic.
Clare Francis, a commercial team partner at international law firm Pinsent Masons and a co-author of the Warwick report (see the sidebar, "Practices to Fortify a Supply Chain and Manage Cost"), identified two key aspects of collaborative contracting arrangements:
- Continuous improvement provisions in the contract that focus on sharing information (eg, process costs across supply chains) to provide gainsharing across supply chain partners.
- Payment structures that reward the willingness to change rather than penalise failure and aim at providing appropriate behavioural changes through the supply chain. The contract offers a reward when a product is delivered rather than a penalty for nondelivery of the product. Also, the contract is linked to a performance measurement system, resulting in a changed mindset towards doing business well.
It is incumbent upon management accountants to facilitate this collaborative contracting approach by providing real-time data to support flexibility in terms of changing circumstances. Nimble but well-thought-through management accounting information is crucial here.
Innovation in workforce management
Manufacturers in the food industry developed methods for persevering amidst the implications of the pandemic, keeping plants open and continuing production when just a portion of the workforce was present. Factories introduced safe working or cohorting practices, where workers were grouped into small teams of between six and 12 people, often identified by coloured lanyards, who worked and took their breaks together. Those measures were coupled with coronavirus testing and the use of acrylic screens to separate the teams. That approach enabled production to continue, albeit at a reduced capacity.
In the longer term, the focus seems to be on making existing factories more "agile" or with "sprint" capacity where facilities can be quickly altered to increase inputs and be more flexible to meet different demands.
Risk assessments during the pandemic identified single-sourcing of intermediate products as a matter of extreme concern. There were serious outbreaks of infection at some food factories, which resulted in the temporary closure of those sites and the loss of supply. Thus, dual sourcing (or multiple sourcing) became a necessary precaution for most manufacturers, Tyas said.
Any company following a single-sourcing strategy going forward needs to undertake a risk management evaluation of its vulnerability arising from such an approach.
Handling changes in demand
For retailers, Tyas said the change in demand patterns was perhaps the hardest issue they faced. As chair of the FRIF, Tyas learned that online shopping became far more popular, with home shopping being responsible for 16% of total grocery spend in the UK, up from 5% before the pandemic, resulting in the dramatic rise in weekly grocery deliveries from 750,000 at the start of the pandemic to 5.2 million now. Having lost the opportunity to browse, shoppers tended towards selecting known brands.
To facilitate the changes that occurred in the UK in the early days of the pandemic, the UK government realised that the Competition and Markets Authority (CMA) policy on competition law was hindering data sharing and preventing necessary changes and, as a result, published a register of exclusion orders that facilitated a relaxation of those laws. In food stores, there has been an observed reduction in shopper dwell time in store, again meaning that shoppers have tended towards selecting known brands. The reduced time spent in stores, coupled with the adoption of self-scan systems, has diminished shopper-staff contact.
The significant move towards more online retail shopping during the pandemic has created a major structural change in the retail sector. Understanding the different cost structures associated with bricks-and-mortar retail as compared with online provision requires input from management accountants. More online retailing in nonfood items results in more customer returns, and a useful tool to deal with increased returns is the Reverse Logistics Toolkit developed by the University of Sheffield, Cranfield University, and Sheffield Hallam University. (Visit cgma.org for more information about the toolkit.)
Just-in-time or just-in-case?
The debate about just-in-time versus just-in-case inventories requires accounting data to be used as part of the decision-making process. Increased inventory costs associated with just-in-case need to be evaluated, but conversely, lost revenues arising from lost sales due to inventory shortages also need to be considered. The economic concept of opportunity cost is important, and management accountants have a crucial role to play here. In the food industry, it is not just inventory in terms of working capital and warehousing costs but more importantly wastage and write-offs due to shelf-life and freshness restrictions.
Practices to fortify a supply chain and manage cost
A 2021 supply chain resilience report published by the Warwick Manufacturing Group, an academic department at the University of Warwick in the UK, recommends three practical steps and six best practices to increase supply chain resilience and manage cost:
3 practical steps
- Adopt a risk management mindset by identifying supply chain vulnerabilities and accelerating fixes.
- Use demand profiling to prepare your supply chain for market variability.
- Adopt flexible contracting to enable greater collaboration.
6 supply chain resilience practices
Demand forecasting and contingency planning. From a management accounting perspective, this involves carrying out a cost/benefit analysis of potential risk mitigation strategies. Importantly, such an analysis needs to go beyond OEM suppliers to fully incorporate a financial understanding of different contingencies.
Have access to real-time data. From a management accounting perspective, a company needs quick access to information about suppliers, sites, parts, and products at risk, as well as mitigation processes. Mapping supply chain networks is a first step towards obtaining this information and allows companies to go deep beyond OEM suppliers.
Work with supply chain partners to deliver customer value. Management accountants can facilitate this collaborative contracting approach by providing real-time data to support flexibility in terms of changing circumstances. Collaborative contracts place a focus on metrics that ensure all parties have a stake in best outcomes and work together to achieve them. Use open-book accounting to facilitate collaborative contracting and transparency across the supply chain.
Utilise inventory and production capacity to enable material flow. Management accountants can prepare financial data related to just-in-time compared with just-in-case scenarios. Provide information that evaluates meeting customer demand whilst at the same time managing trade-offs between cost, quality, and time.
Establish multiple sourcing options. Management accountants can provide financials for diversifying the supply base to reduce dependence on one factory, one supplier, or one region. Working with colleagues from other disciplines, evaluate the provision of sources that are not vulnerable to the same risks.
Transform the supply chain in responding to a dynamic business environment. Management accountants can work on preparing financial cases for investing in new equipment or moving production lines, allowing companies to reflect on decisions related to make-or-buy, the need to make process improvements, and the utilisation of new technologies. This incorporates the possibility of making existing factories more “agile” or with “sprint” capacity, where facilities can be quickly altered to increase inputs and be more flexible to meet different demands.
John Cullen, FCMA, CGMA, is an emeritus professor of management accounting at the University of Sheffield Management School in the UK. Richard Bruce, Ph.D., MBA, FCILT, is the team leader for MAR@S (Management Accounting Research at Sheffield). The team concentrates on innovative academic and commercial research into contemporary management accounting issues. Bruce is also chief business adviser to the university's Grantham Centre for Sustainable Futures. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.
- "From the Filings: Supply Chain Lessons From the Pandemic", Journal of Accountancy, 18 February 2021
White paper and video series
- "Agile Finance Reimagined: Jumpstarting Resilient and Reimagined Operations", CGMA.org, 29 September 2020
- "Agile Finance Reimagined: Building Finance Resiliency and Returning the Business to Scale", CGMA.org, 24 June 2020
A useful tool to deal with increased returns is the Reverse Logistics Toolkit, developed by the University of Sheffield, Cranfield University, and Sheffield Hallam University.
A toolkit to deal with the ethical issues across supply chains is the Supply Chain Accounting and Employment Practices Diagnostic Toolkit, also developed by the University of Sheffield.