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Why CFOs are taking on supply chain digitisation

The pandemic is one of several factors playing a role in the push for a more digital approach to optimising supply chains.

For many reasons, pandemic-related and not, digitisation of supply chains is increasingly on the radar of CFOs. Improving processes can help manage costs, comply with new regulatory requirements, set pricing strategies, and keep customers happy by avoiding supply outages.

Andrew Hyland, FCMA, CGMA, the CEO of Australian disability services provider Lifestyle Solutions, said his company has been digitising its supply chain as part of a major integrated project that he expects will yield cost savings and make the company better at matching and meeting client needs.

"People are our supply chain, as 100% of our services are provided by people supporting others," Hyland said. "In digitisation [of] this 'people supply chain', we are always trying to better understand and predict customer demand, then match the right people and skills to that."

New York-based Guy Melamed, CPA, the CFO and COO at data security company Varonis, has seen how digitisation can provide quick procurement savings in the near term and beyond.

"COVID has forced everyone to digitise in some way," he said. "[As travel opens], we prefer our salesforce to continue interacting face-to-face with customers, but we want to do it prudently."

Here are several considerations for organisations seeking greater digital presence in their supply chain optimisation efforts.

It's a journey

Hyland said it is critical to think long term when digitising supply chains. "You need a vision for the end state, then to break it up into small, bite-sized chunks to get a good result," he said.

That's how many finance leaders are going about the process of supply chain digitisation, which can be described as using a range of electronic tools to improve processes in the chain, from sourcing goods to paying for them. It encompasses many technologies, from simple software that helps staff procure goods and services more efficiently to sophisticated tools that help integrate and analyse supply chains with a host of potential benefits.

The ideal goal could be what consultant McKinsey describes as supply chain 4.0, which involves the internet of things, advanced robotics, and analytics in supply chain management. This would use sensors, networks, automation, and analysis to significantly improve performance and customer satisfaction.

In addition to saving costs, McKinsey says supply digitisation can help solve the challenges of the global and regional spread of suppliers and meet growing customer demand around delivery of products and services.

Most finance leaders and their companies have not yet scaled the lofty heights of supply chain 4.0 — many are still climbing the foothills with a few simple digitisation efforts. But according to a survey by Lehigh University and software firm DiCentral, most CFOs are looking for savings and cash flow improvements from their supply chain, and digitisation is becoming a critical tool for both.

"Many of the processes that require digitisation are directly linked to financial performance indicators, as these processes often impact inventory, sales, cost of sales, or the ability to view information that would influence financial decisions," according to the study.

Many CFOs in the study said they had completed some digital integration with a supplier, and 85% expect digitisation of procurement processes to improve the average time to collect payment by three days or more, among other improvements. But 85% of participants also felt they needed more investment in digital tools.

Aligning demand with costs

The expanding role of CFOs includes greater ownership of an organisation's strategic cost management. Digitising the procurement process helps the CFO to better align business demand with forecast costs during the budgeting cycle, said Kate White, managing director in Accenture's CFO practice. It also gives procurement a stronger base for negotiating rates and contracts with suppliers.

"Given third-party spend is such a large proportion of a company's cost base, the CFO must work closely with procurement and supply chain functions to optimise costs," White said. "Digitising the supply chain process can have a material impact on overall costs by reducing spend on suppliers. It can also streamline the operational cost of finance."

For example, by placing most spend with preferred suppliers, digitisation can increase efficiency in invoices and payments processing, enabling accounts payable teams to focus more on business outcomes such as compliance and delivering payments on time. In addition, payment analytics can help the finance function identify optimal terms for suppliers, based on market norms, to maximise cash flow.

Address uncertainty and changing regulation

Increasing uncertainty and greater need for information during the COVID-19 pandemic have accelerated CFOs' moves towards supply chain digitisation.

Rachel Grimes, CPA (Australia), Sydney-based CFO at Challenger Financial Group, and a former president of the International Federation of Accountants (IFAC), said many reporting requirements moved from monthly to daily, so investments in systems that could report such information quickly has been key to maintaining market confidence.

Supply chain digitisation has also been accelerated by regulations requiring firms to pay within a limited time, such as the Payment Times Reporting Scheme in Australia.

To meet the requirements, most large entities are racing to digitise their invoicing and accounts payable and ensure the accuracy of their delivery data, Grimes said. One benefit has been that it has freed staff from looking backwards in the payments processing to more forward-looking, win-win negotiations with suppliers, she said.

Logistics, cost and pricing wins

Shanton Wilcox, US manufacturing lead at PA Consulting, said there are several options to digitise areas like logistics and planning.

"For instance, within logistics, there are widely available systems available for digitising transportation management processes and operations," Wilcox said. "That extends from transportation execution through to international shipments. These are critical, high-value, low-risk options for digitising high-volume, day-to-day operations."

Another option is to use supply digitisation to improve pricing strategies. Wilcox said PA Consulting has talked to clients about using more informed pricing projections to hedge prices on commodities such as lumber and steel.

"This informs purchasing decisions and helps manage volumes to optimise capital tied up in inventory," Wilcox said.

Melamed said his company was tracking travel expenses much more closely and piloting a system that incentivises staff to reduce spending on travel bookings.

"It will give more responsibility to managers and employees in booking travel with part of the savings from reduced spend going directly to them. Based on our assumptions about post-pandemic travel levels, the savings can be significant."

Varonis is also working on a pilot that aims to save office leasing costs. In hoteling, no space is designated to a specific employee. Staff must log on to the hoteling system in advance and book their desk — thus matching supply of office space with demand more efficiently.

"Again, the cost savings can be significant," Melamed said. "Companies and employees have realised they're not in one location anymore. Where you work is becoming based on a hybrid model."

See the big picture

Grimes said one big challenge in supply chain digitisation is the upfront cost of implementing the necessary technology.

"While it may reduce costs long term, constant reinvestment is key to a successful digitisation strategy," she said. "It is not 'set and forget'. You need people with different skills. So, take a medium-term view and keep investing in technology to ensure you continually derive benefits and work with your suppliers to ensure solutions work for everyone."

Another challenge is to make sure the touted benefits of such software are real, not overpromised, at the outset. "When we buy software like this, we talk to other companies who have used it, investigate risks, pilot it on a smaller group first, and make sure it is adaptive," Melamed said.

To improve chances of success in larger projects, White said, "focus on an end-to-end view around process and technology change. Do not underestimate the importance of cultural and behavioural changes — build them into plans from the outset. Be data-driven and build a robust business case upfront with clear outcomes and expertise agreed."

— Tim Cooper is a freelance writer based in the UK. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.