Cutting costs in supply-chain management

The finance department has a key role to play in areas such as capturing good financial data and setting up strong relations with partners in the supply chain.

When the Australian operation of Philip Morris International, the tobacco company that sells its products in 180 countries, embarked on a programme to improve its supply chain, it made the kind of financial wins that should encourage any CFO to sit up and take notice.

After three years, the programme has delivered impressive results that include a cash-to-cash cycle time of fewer than 20 days, improved return on supply-chain fixed assets above 25% and return on working capital of 20%.

“Profitability increased through a double-digit reduction in the cost of goods sold and continued double-digit growth in EBITDA, through portfolio management and market strategies,” explains Parker Kapp, head of the supply chain at Philip Morris Limited, which covers Australia, New Zealand and the Pacific Islands. The programme won the company the US-based Supply Chain Council’s Global Operational Excellence Award this year.

CFOs ought to be on the front line when it comes to getting a grip on supply-chain costs – an imperative for many companies in the face of an unprecedented range of logistical challenges and associated risks. These include increased fuel and labour costs and continued uncertainty about currency movements, says David Noble, chief executive of the UK’s Chartered Institute of Purchasing & Supply (CIPS).

As inflation erodes the benefits of outsourcing to low-cost economies, such as India and China, it is the CFO who needs to highlight the impact on the bottom line – and suggest alternatives. “Organisations outsourcing to low-cost countries may need to find a new model,” says Noble. “A radical supply model that outsources, offshores and single-sources often from one plant” may no longer be effective, he said.

Noble says that as companies that previously took on outsourced work become innovators in their own right, Western companies need to seek out new partners that best meet their business strategies.

But the task of designing new supply chains is one that is going to involve the finance function working more closely with logistics professionals, argues Rick Blasgen, president and chief executive of the Chicago-based Council of Supply Chain Management Professionals. “More than ever before, finance executives need to be close to supply-chain professionals,” he says.

Finance executives must grasp the links between supply-chain investments and a company’s ability to introduce new products and grow its market share, Blasgen argues.

Yet it’s not just a question of gaining a strategic understanding of the role the supply chain plays in generating the company’s revenues. When it comes to the trade-off between supply-chain cost and performance, the devil is often in the details and the risks to consider.

And a significant amount of that detail is in managing and controlling supplier costs – a front-line task for the finance function. Daniel Ball, a director of Wax Digital, a UK company that is a specialist in e-procurement, spend management and electronic sourcing, says, “You see a lot of cost going out of the window in the proliferation of suppliers.”

“If procurement isn’t controlled so that, effectively, anybody can buy anything from anyone, you will find that your maverick spend profile is high,” Ball says. His advice for CFOs: Adopt a policy that ensures every product is bought through an approved supplier at an approved price, unless there is a specific agreement to shop elsewhere. Recognise that you will likely meet some resistance in implementing such a policy and that you will need to emphasise the savings that will result.

But the finance function’s first step in implementing such a policy is to get better information on spending. “A lot of organisations have a pretty high level of inaccurate data about how much they spend with whom,” Ball says.

Spend data is not the only supply-chain financial metric that finance and operations executives should be seeking to improve. “Work with suppliers continually to innovate products or find ways to use cheaper or smaller amounts of materials,” advises Noble.

Blasgen says the cash-to-cash cycle is the key metric to focus on in a world-class supply chain.

At Philip Morris, Kapp knows that lesson more than most. “Getting key stakeholders to work in cross-functional teams focusing on key business priorities was critical,” he recalls. “It was imperative that we created a common vision and goal.”

The company worked with the Supply Chain Council to establish a working framework and benchmarking. It set up an employee-engagement programme so that everyone across the company understood what needed to be done.

The supply chain work has delivered a raft of business benefits including order fulfilment above 99.75% and order response times of just one day in urban and two days in rural areas.

“Our upside supply-chain flexibility has improved to above 20%, enabling us to ramp up production to meet demand at short notice. Sales forecast accuracy remains consistently above 90%,” Kapp says.

He adds: “Today, we talk about how we improve the business model as a team, understanding that certain decisions may have negative impacts either on an individual, department or functional performance, but understanding that ultimately these trade-offs lead to improved EBITDA without compromising the high service standards and quality our customers and consumers expect of us.”

It’s a mindset that successful CFOs have adopted and fostered throughout their organisations.