Supply Chain and Finance: Part III - Working with Finance

This posting is the third and concluding parts of Supply Chain and Finance. The first two parts were posted in December 2011.

Every company wants to, or should want to, control their inventory. Inventory is essential for smooth production and order fulfillment. Too little inventory or inventory in the wrong balance, will impact revenues. When out-of-stocks are the issue, everyone in all functions are suddenly inventory, planning, purchasing, and logistics experts. A lot of attention is given to this kind of “inventory problem.” The attention comes immediately upon customer service going south. Sales, Marketing, Finance, and General Management all want to help the Supply Chain fix the breakdown in the supply chain.

On the other hand, having too much inventory is also a problem. It is not a problem for Sales or Marketing. As long as they are making their revenue numbers, the Supply Chain is doing well by them. Bloated inventory, however, has tied up cash and this gets the attention of General Management and Finance.

Too much inventory:

[1] May require more short term borrowing to have the right amount of cash
[2] Catches the eyes of both external auditors and Wall Street analysts
[3] If growing unchecked, will eventually require the need for outside storage which is something that seems to irk General Management and Finance even more than it bothers us in the supply chain… and it really bothers us.

Too much inventory makes both General Management and Finance feel that planning, procurement, and production are not well run. It gives the impression of a sloppy Supply Chain. They will want to help and provide direction with increasing frequency depending on the size of the problem. Their interest in this seems to run hot and cold depending on what other business priorities are keeping them occupied. When the attention is on inventory and planning, the attention can be quite intense. It seems that everyone in finance is suddenly an expert in all things inventory and planning related.

Supply Chain leaders, at least the ones we know, do not like any of the above mentioned assistance. They prefer to run their own operations and do not like being told how to do their business. As a result, the better Supply Chain leaders take an aggressive approach to driving their numbers when they can and vigorously defending them when circumstances prevent them from achieving the objectives.

This is a lesson everyone of us can and should follow. Supply Chain leaders always need to be taking the lead. If inventory goes up or down, it would be best if Finance and General Management can hear it from us first. For perpetual inventory, given the sophistication of the ERP systems in place these days, this should always be the case. Monthly and quarterly adjustments and accruals are the responsibility of finance to calculate and report.

Also, in the vein of leadership, if there is a routine inventory review meeting that is separate from staff meetings, the supply chain should organize and chair this meeting. Finance should be part of the meeting and be responsible for any number of recurring agenda items. The supply chain inventory manager should include his or her finance counterpart in the preparation of these meetings. This is important to establish leadership, foster teamwork with finance, and, most importantly, to make sure all numbers presented to the President and CFO are the “official” finance numbers.

To best work with Finance, it is incumbent on the supply chain to understand all of the finance terms related to inventory and how each of the line items in their inventory reports are calculated. As noted in the earlier parts of this series, they look at things from a different perspective than the operational viewpoint we take in the supply chain. When we, in the supply chain, report our numbers must be in sync with the finance numbers.

As the Supply Chain owns the perpetual inventory, we need to always be ready to report on it. We need to be partners with the Finance leadership and analysts dedicated to working capital and inventory. We need to know what they are thinking and wanting to dig into. They need to know the status of our inventory optimization efforts and changes in the market place that will have an impact, either positive or negative, on inventory.

These two factors, proactive and vigorous ownership and management of perpetual inventory and nurturing an open door constant communication with finance, are the key to having an alliance with finance. An alliance with finance is much better than the adversarial relationship that we just see too much of.

We hope this provides a basis our clients and readers to improve the partnership between the supply chain and finance in their organizations. We invite you to post methods you have used to improve this partnership.