In many companies, financial, information and physical flows are often not synchronised. Managers take ecisions from an operational or financial point of view and do not recognise the impact of supply chain management on financial performance or vice versa. Growth, profitability and capital utilisation are better optimised through information, financial and physical supply chains integration. There is a strong interdependency. Operations and finance departments have to collaborate to reach common objectives.
Both operations and finance managers have to be bilingual and understand each other’s language. They must speak a common business language. The first step in developing this dual competency is a better understanding of how various concepts (in operations) and financial accounts are interrelated.
Better links between supply chain and finance The value of supply chain initiatives should be measured in terms of impact on cash flow and market value, and on key internal financial performance metrics such as economic profit (EVA), return on capital, return on equity, working capital, etc.
This objective can be reached by a three-step approach that provides a comprehensive vision of the existing relationship between companies’ operational and financial performance.
Understanding the answers to three key questions provides the basis for the approach.
1) How does operational performance impact the components of the financial statement (income statement and balance sheet)?
2) What is the impact of the operations in term of profitability, asset utilisation and financial leverage efficiency?
3) What is the impact of the operations on the ‘real’ pro!t that takes into account the cost of capital?
The financial impact of the supply chain components can be identified on the income statement and balance sheet. The income statement reflects the operating activities of the company during the year. It provides financial analysts and investors with key measures of profitability: revenue, expenses and net income.
This approach links the company strategy to the operational performance. If the company wants to increase its sales, or reduce its cost, it will act on different components of the supply chain. For example if the company’s strategic priority is to increase its market share and therefore its revenue, it will focus on leverage parameters such as perfect order fulfillment, order fulfillment cycle time, and so on.
In order to optimise the overall performance of the company, it is important to help establish the link between effective supply chain management and improved financial performance.