Supply Chain Facts Every CFO Should Know

There’s managing the finances of a business, budget forecasting, coordinating with accountants and other departments, highlighting cash flow bottlenecks and so much more. And that’s just typical financial requirements. Another key area that can’t be overlooked is how you engage with supply chains.

Why is this so important? There’s a tremendous amount of risk involved when dealing with third-party suppliers across the world. Labor shortages, complicated regulations, country-specific sanctions and shifting markets all contribute to the problems retail companies face. To offset these issues, supplier diversification is an effective way to manage the pressure. 

But this means that there needs to be a lot of planning to cope with a higher volume of suppliers. And departments tend to work in their own silos. Typically, finance works in its own bubble with spreadsheets, while sales want to focus on smashing targets. None of that matters if the procurement team can’t get the products needed to meet customer demand.

So, any CFO worth their salt will be breaking down barriers between these teams and addressing financial risk. You’ll be acting as a bridge between worlds and aligning everyone around similar supply chain goals.

These are some of the questions that you should be asking yourself:

• How well do you understand the supply chain of the business? What levels of understanding are there among different departments?
• Where are the supply chain and finance teams/functions overlapping and what threats are present because of those overlaps?
• What impact is inventory management having on your sales?
• What scenarios are you planning for in case something goes wrong in the supply chain and the company needs to find replacement suppliers quickly?
• Do you know why you’ve chosen to increase budget and has it improved procurement? 

Using these kinds of questions as a starting point means you can increase your risk management awareness. You can then drill down into specific metrics and facts to find solutions to any issues or gaps in understanding. Let’s explore some supply facts every retail CFO should know.

Where a supplier is based in the world should be high on your priority list. From a financial perspective, you’ll need to think about the currency of the country of origin and assign the necessary funds to be able to pay for the goods that are coming in. You’ll also need to be aware of the most lucrative and cost-effective locations for suppliers.

In recent years, Asian countries have become increasingly popular for offshoring. In fact, investment has tripled in Asia over the last 10 years. And if the company you’re working for has the majority of its suppliers in Asia, then it makes sense for you to devote a lot of your energy to making those processes run as smoothly as possible.

As part of that process, you’ll need to make sure finance, procurement and other departments are all singing from the same hymn sheet. In many cases, the finance and sales teams won’t have access to the same data as the procurement team has access to. The last thing you want is out-of-date information. 

Here are some best practices for aligning teams around key suppliers

• Define important KPIs and make sure you’re integrating your data with financial and credit risk data. While the finance and procurement teams may have different timelines, this visibility means everyone is on the same page from day one.

• Use extended planning technology to facilitate faster and more accurate decision-making for big supply chain deals. These kinds of tools will help teams adapt to unexpected changes like the true cost of goods sold.

• Have group discussions where members of finance, sales and procurement are speaking directly with the decision-makers at the suppliers. 

While it’s crucial to maintain good relationships with your main suppliers, you can’t stop there. You need to be pushing for investment in multiple suppliers and processes that prove they are reliable. This has become common for many CFOs in a post-pandemic world.

This is something Jimmi Sue Smith, CFO of chemical manufacturer Kopper Holdings Inc. learned for herself. She spoke to the Wall Street Journal, saying: “I’m not sure anybody was focusing on increasing their supplier base as so much of a risk before because it had not really happened where all of the sudden you couldn’t get things or the ports were jammed up or all of the containers were in China. After the disruptions that we saw during the pandemic, the focus has shifted a little bit. There’s definitely a focus on having diversity in your supply base, so not being single-sourced, if you can avoid it at all. Things that maybe you didn’t put as much value on before, you do today.”

When researching and vetting new suppliers, there are several factors to consider:

• Financial history: Run an international credit check to get a clear picture of their financial stability. Look specifically at their DBT (Days Beyond Terms) to understand how likely they are to pay invoices late and pay close attention to if their DBT has changed drastically in recent months. You’ll also want to see if they owe a substantial amount in past due payments (i.e. millions of dollars). Also, look at how much debt they have taken out and how much of their credit balances they typically use. These are just some of the things that could indicate the supplier has been in financial trouble and may not be the best partner to work with.

• Payment flexibility: Find out how open they are to negotiating with payment terms. Are they willing to accept a partial deposit and then be paid the rest when the products have been delivered? 

• Compliance:  There are all sorts of laws related to employment, ethical sourcing, commerce and more. You don’t want to get into bed with a supplier who is engaged in unethical practices or is on sanctions lists. Do your homework and run sanctions checks on suppliers. Think about how they’ve interacted with other brands in the past and if it’s worth the risk of being associated with them. 

• Communication policies: Does the supplier communicate openly and regularly? Are they candid about what’s going on in the business or does it feel like they’re hiding something? Poor communication can be troublesome, especially if they are in financial trouble and stop communicating with you and leave you with unfulfilled orders (and angry customers).

Production capacity is something you should always be thinking of when reviewing and signing contracts with suppliers. You need to know they have both the creative and financial capacity to fulfil your orders.

While some things may be out of your control, like political unrest, wars, natural disasters and worker protests, there are certain things you can control. And having visibility into your suppliers’ financial stability is certainly one of them. This comes back to the concept of strategic procurement. It’s not just about cost-cutting but about driving value for the business.

One of the biggest CFO challenges with supply chains is identifying and assessing the extent to which supply chain disruptions will impact the business. And following the pandemic, many CFOs have had to shift how they approach the supply chain and what they prioritize. This is something Jimmi Sue Smith, who leads the finances at Koppers Holdings Inc., has learned. Before the pandemic, her supply chain-related priorities included analyzing the costs and inventory levels and the terms the company was getting from vendors. That has changed and now, she is prioritizing increasing the company’s supplier base.

As Ms. Smith explained in the Wall Street Journal, “I’m not sure anybody was focusing on [increasing their supplier base] as so much of a risk before because…it had not really happened where all of the sudden you couldn’t get things or the ports were jammed up or all of the containers were in China,” she said. “After the disruptions that we saw during the pandemic, the focus has shifted a little bit. There’s definitely a focus on having a diversity in your supply base, so not being single sourced, if you can avoid it at all,” she said. “Things that maybe you didn’t put as much value on before, you do today.”

That’s why it’s so important to do your due diligence on suppliers. As with anything in life, nothing is guaranteed. You can’t ignore the possibility that things could wrong and production could be affected as a result. So, as part of your procurement strategy, you’ll want to have a list of backup suppliers who have been thoroughly vetted for production capacity, financial stability and quality control before you ever need to use them.

Ask questions about suppliers’ materials and manufacturing processes. Make sure you’re happy with their production quality by ordering samples before handing over big orders to them. In our research into the challenges of overseas manufacturing, we found that 17% of businesses ask for samples upfront before committing to a full order. 

For this fact, we mean the length of time that suppliers can operate and meet their operational and financial obligations amid a catastrophic event. It also covers the amount of time your company can operate during supply chain disruptions. This is especially important for the holiday season and for avoiding mistakes like not ordering products early enough or not having enough cash to finance orders. 

To plan for this, you should think about different kinds of delivery models that work for your circumstances. For instance, just-in-time processing is an effective approach for getting products shipped close to a specific date. Direct benefits include saving on storage space, improving cash flow and working capital.

Another option is to invest in AI and automation technology and pair it with your inventory management strategy. You can get valuable insights into customer buying preferences, in-demand products and cost efficiencies. Knowing this information will prove valuable in planning for future sales periods and for cutting out excess costs.

AI is also proving useful with supply chains in the world of transportation logistics. Generative algorithms can provide a bigger view of the supply chain and optimize transportation times based on factors like weather conditions and road traffic. A knock-on effect is identifying the most efficient transport vehicles and providing cost-effective fuel options.