Supply chain debate: Why senior management needs to come up to scratch

SJ, SCF Capital There is rarely one person with the title of financial supply chain manager. When companies talk about supply chain they’re usually referring to the physical. Elements of financial creep in, for example, procurement and negotiating payment terms with suppliers. They tend not to think about the end to end. That’s the challenge. The financial supply chain touches many different functions. Each has separate priorities and objectives. Few people in corporate organizations have a holistic view of the finance of an end-to-end supply chain. It’s at CFO level that projects get driven, because objectives, priorities and metrics need to be aligned across the organization. Treasury is not at a high enough level.

JE, Citi Bringing together the different functions is complex. There’s procurement, sales and treasury, compliance, IT, tax and legal – each with different objectives. The support function is looking for compliance but procurement is looking for the right product at the right price, and sales look to drive revenue. Establishing a common framework and agreeing performance metrics is a challenge.

SC, AstraZeneca The physical supply chain runs through the business, so initiatives on financing cannot be developed in isolation. Treasury, however, should be positioned to drive initiatives as it can facilitate the cross-functional working needed and will understand the financing implications – but senior-level support is critical.

JL, J&W Associates Should there be a single person in charge of the budget, and if so, who?

CH, Lloyds TSB It needs cultural direction from a CEO. We’ve worked with companies to implement financial supply chain solutions where procurement and treasury have been in conflict. It’s a lot easier when the two work in tandem. When there’s conflict over what to implement, finance or treasury usually win, but that can be at a cost to the company.

RD, Citi The CEO has to set the tone and instruct the organization to work in unison. Many organizations focused on these initiatives are multinational and a mandate can take care of a single geography, but to drive that across multiple geographies is a challenge. If there isn’t that alignment, treasury and finance might have the final say but the programme will never get off the ground. It needs buy-in across the organization.

SG, Lloyds TSB Corporates recognize the need to appoint supply chain directors at board level. Globalization has forced them to realize that you can’t drive a business with a silo mentality. But the physical supply chain has been leading the process. The treasury function has only been a bit-part player. You need to get clarification on what ‘supply chain’ means. It is a combination of physical and financial.

AA, Trelleborg There should be one person at management level in charge of an FSCM group. It is vital that this group is cross-functional with representation from purchasing, finance, IT and legal.

SC, AstraZeneca Ownership cannot sit within one function. It needs to be the business as a whole, through senior level support. Differing functional objectives need to be understood and aligned.

JL, J&W Associates So you need a supply chain director at the highest level to make it happen, and you have to move across all geographies. Of the 10 treasury departments I’ve talked to, five have said they’ve only just been asked to start doing this. Why so slow?

AA, Trelleborg We’re not slow, although it is tedious work and takes time. Let me illustrate the complexity. Our company is decentralized and consists of more than 100 legal entities in more than 40 countries and our supplier base consists of several thousand suppliers. Add the cross-functional perspective, including building an IT-liaison to a common supply chain financing platform and getting all legal documents approved and there is a lot to be taken care of. Many corporates know this and are either reluctant to allocate necessary resources or simply do not have the resources.

We’re coming from an era with inexpensive financing and the need might not have been as great. With a volatile credit market, I expect an increase in FSCM activities.

SG, Lloyds TSB They’re doing it in bite-sized chunks on a regional basis being fed into a group level. No person has overall control. It’s a combination of geographies working together. Multinationals are sourcing from new areas so they’re trying to define the supplier base more clearly and how they can move from one to the other quickly.

JL, J&W Associates Are there any lessons, in terms of what the treasurer does to get more involved?

SJ, SCF Capital Treasurers are looking at this because of the credit environment. They’re thinking about cash flow and liquidity. They’re looking at assets that are under-leveraged or under-utilized. Treasurers try to invest every dollar on the balance sheet and earn a return. On the flip side, multinationals have billions of dollars-worth of trade receivables, waiting for up to 90 days, during which time they’re not earning a return unless the 90 days includes an explicit financing charge.

JL, J&W Associates But treasury gets told it’s none of their business.

SJ, SCF Capital The tide’s changing. We’ve done a lot of work with companies that have outsourced manufacturing and distribution. No one made the decision to outsource the financing to those counterparties, because if you look at the relative creditworthiness of those supply chain partners, it doesn’t make financial sense to have, for example, a lower creditworthy contract manufacturer holding inventory for 30 days. Companies are waking up. In line with what procurement have done around strategic sourcing and moving to smaller sets of strategic suppliers to get volume leverage, they’re recognizing that they’re reliant on those suppliers. In the current credit environment, if those suppliers can’t get access to working capital to service you, then your business is at risk.