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The Supply Chain-Finance Connection

  • Gary A. Smith
July/August 2017

Recently, I was part of an APICS job task analysis committee for the Certified in Logistics, Transportation and Distribution designation. At one point, we developed an elevator speech to describe supply chain management. After a couple of revisions, it looked like this: “Every organization has a supply chain. The most effective and efficient ones are closed-loop systems for moving, storing and configuring products, starting with raw materials and ending with a satisfied customer. Whether information or physical goods, nothing happens until something moves.”

While only a mere 41 words, this describes our discipline in terms that a layperson can understand. However, it omits some of the vital details — the blood, muscle and flesh that really make up the body of supply chain management. There are the basics, with which most of us are familiar — inventory, production, warehousing, distribution, transportation and so on — but there also are some other areas that are far less obvious. One of these is the connection between supply chain management and finance.

Verbal skills

In a 2015 article from The Wall Street Journal, “Guest Voices: Managing Supply Chains Is Intertwined with Financial Management,” authors Jarrod Goentzel and James B. Rice Jr. discuss the importance of finance in supply chain management decisions and how professionals should become more familiar with financial strategy. The authors contend that supply chain managers must understand the implications of their inventory decisions on working capital (current assets less current liabilities), the balance sheet and the income statement.

Finance is the language of business, and, by speaking it fluently, supply chain managers can become better advocates for new programs and investments.

The fingerprints of supply chain are all over the balance sheet and income statement. The decisions we make affect accounts receivable, payables, fixed assets, sales, materials and cost of goods sold, just to name a few. With this in mind, supply chain and finance divisions are integrating more and more at the strategic level as executives develop relationships and better understand the interdisciplinary implications of their actions on the organization’s overall strategy, vision and mission. In fact, the recent Ernst & Young study “Partnering for Performance — the CFO and the Supply Chain” reveals that organizations report higher earnings when there is a strong connection between finance and supply chain.

Taking action

As any business matures, its supply chain-finance connection gets more real and relevant. Finance and supply chain also become more connected at the operational levels. One area where supply chain can aid finance is by identifying unprofitable accounts and working together to make them lucrative. This can be done by changing the delivery channel. For example, a supply chain may choose to use vendor-managed inventory or a direct-store-delivery program to streamline operations. Another idea may be to switch shipping modes to improve service levels and increase sales. Still another way is for supply chain and finance professionals to work together to create payment incentives based on sales and service.

Additionally, supply chain managers who have an understanding of finance can better understand and deal with risk. When a supply chain manager knows the signs of a supplier or carrier that’s on shaky financial ground, it’s possible to inform the organization and steer it to new, less risky sources of material or services.

Mutual success

Supply chain managers work in the world of operations, where neither the physical nor the informational world is perfect. Finance professionals work in numbers — the language of truth and logic. Combining the two successfully is a win-win.

Aim to integrate the work of your supply chain management and finance professionals and develop their cross-functional expertise. The understanding they will gain becomes the basis for consensus, consensus is the basis for agreement, and agreement is essential in building trust. And when there is trust, anything is possible.

Gary A. Smith, CFPIM, CSCP, CLTD, is vice president of the division of supply logistics for New York City Transit. He may be contacted at gary.smith@nyct.com.

This article was prepared by the author, acting in his personal capacity. The views and opinions expressed in this article are the author's own and do not constitute, nor necessarily reflect, a statement of official policy or position of the author’s employer.

To comment on this article, send a message to feedback@apics.org.

Comments

  1. Javier Lujan August 27, 2018, 08:39 PM
    Interesting article for Finance

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