Money might be the bottom line for manufacturing operations, but it isn't often that supply chain management and financials are discussed in the same breath. Financial metrics can nonetheless be a valuable tool for benchmarking supply chain performance, as outlined in a series of recent reports on supply chain financials by Lora Cecere, founder and CEO of Baltimore-based Supply Chain Insights.
Supply Chain Insights mined and analyzed financial data from manufacturing organizations for the past year, Cecere explained, to get a snapshot of how this data is and isn't being leveraged throughout the supply chain. She found three clear patterns. The first is that companies aren't taking the time to look at financial ratios, which may be due to lack of access to the appropriate data. "This data hasn't really been in an easy form for people to get at," she said. "If they wanted to do a study, they would have to go into manual methods to get the data. There wasn't a systematic way to do it."
Manufacturing not getting the most out of financial metrics
Cecere expressed surprise at how few supply chain leaders seem to be holding themselves accountable for financial data. "Most of the work that has happened over the past decade has been more project- or function-based," she said. "At an organizational level, what we have done is we've improved productivity -- revenue per employee. We have not moved the supply chain forward on growth, profitability, cycles and complexity."
The only vertical industry that is successfully balancing financial metrics and supply chain metrics, according to Cecere, is high-tech electronics manufacturing -- a group that also was among the most successful at rebounding from the recession, she noted. "The rest of the groups are stuck at a plateau," she said. "Some subgroups, like industrials and pharmaceuticals, are actually going backwards, with costs rising and inventories rising. When we look at how they balance growth, profitability, complexity and cycles, they need better practices."
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Another observation Cecere made from her findings is that manufacturers are not measuring the right metrics to successfully apply financials to the supply chain. Too often, the focus is on "proxy metrics," such as return on assets (ROA), when the focus should be more on operating margins. "In the 1990s, the assumption was that the primary driver of costs was manufacturing, and the primary driver of constraints was manufacturing," she said. "What I've found is that distribution costs exceeded manufacturing costs for most process-based industries." The same can be said for the supply chain, in which logistics is the most expensive component. The financial focus should instead be on total cost, according to Cecere. "Based on our research, only 23% of companies [who have implemented enterprise management systems] have the ability to look at total cost," she said. "Only 10% of companies have the ability to do 'what if' analysis. What's been built is a very tightly integrated, inflexible value network that really can't sense, respond or adapt to costs."
Achieving a happy marriage of supply chain and financial metrics involves a systematic view of analytics, according to Cecere. While many view "analytics" as just another word for "reporting," there are many other forms of analytics to consider, from predictive to sensing and ontological. "What we're really got to do is power cross-functional processes and create analytics organizations in the line of business to look outside-in [at financial metrics]," she said. "We're going to win the next decade on the back of analytics platforms."
Avoiding the pitfalls in supply chain financials
Financial metrics and analytics can be applied to supply chains of any size, from Fortune 500 companies to small manufacturing operations, Cecere said. The trick is to focus on regional global governance. "The whole nature of supply chain excellence has to be defined by each company," she said. "The biggest thing that IT can do is bring forth platforms that allow that stimulation and predictive analytics that help people to align [to these standards of excellence]."
Cecere noted some common mistakes she's observed that manufacturers make when they try to apply financials in the supply chain. The first is assuming that a good ROA automatically represents supply chain excellence, when the two are not intrinsically linked. In addition, many companies look at singular metrics, rather than metrics as a group.
"A lot of consultants say, 'Go after low-hanging fruit,' and so the supply chain has been thrown out of balance," Cecere said. "It's a system where every action has an equal and opposite reaction."
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