Faced with heightened competition and a weak economy, companies are spending far more time developing business cases to justify their supply chain initiatives. Sometime back I was helping a client to improve their supply chain operational performance. In doing so, I was trying to figure out what operational area to target for supply chain improvement at their farm. We could have taken a generic approach of addressing demand and supply planning-related issues. Those activities could possibly have resulted in a few operational performance improvements. I was, however, looking for a somewhat different but effective approach.
Suddenly, I remembered one study performed jointly by a leading business school and a consulting firm where it demonstrated a correlation between improved supply chain and financial performance and vice versa. That study gave me the idea of framing supply chain improvement projects a little differently.
So, I started by examining the balance sheet and income statement of the farm in question. I performed a comparative analysis of a few key financial performance measures with the farm’s peer group of companies to understand where the farm is excelling and where the farm is lagging as opposed to its peers.
This analysis is based on the understanding that there is a connection between supply chain activities and financial performance. The table below as an example shows what supply chain activities impact the income statement element of COGS (Cost of Goods Sold).
Below we show how we started the analysis of the client farm ABCD Inc., and how we have compared its key financial parameters; e.g., profitability against its peer group of companies in the sector where it operates. In this case Basic Materials.
Using the analysis, we put together a supply chain improvement initiative that would generate a measurable improvement in the company balance sheet and income statement for the client, ABCD Inc. The sections below show the analysis:
a. Competitive Analysis
b. Benefit Analysis:
In the table below, we identify some key components of the Balance Sheet and Income Statement of ABCD Inc. for potential supply chain improvements. The table below lists the current numbers against target improvements and shows related supply chain activities needed to achieve potential benefits.
FINANCIAL BENEFITS ESTIMATE OF YEAR 20XX SCM PROJECTS FOR ABCD Inc.
Here we have demonstrated the link between Finance and Supply Chain and how this understanding can help define supply chain improvements by understanding elements of the Balance Sheet and Income Statement. Using the SCOR idea of Benchmarking the financial parameters should be benchmarked against a peer group of companies to highlight areas of improvement. This is a different approach to begin the journey of financial improvement using supply chain improvement projects.
In my upcoming webinar, The Connection Between Finance and Supply Chain Performance to a Firm’s Financial Success, I will discuss the connection between supply chain activities with the financial performance of an organization. Hope to see you there!