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When you initiate change processes in the realm of operations & supply chain, there’s no doubt that you can book some very important gains in terms of efficiency and quality. But if you really want to achieve the goals you’ve set for yourself and realize the very best possible long-term improvements for your firm, then you really need to include both operations & supply chain on the one hand, and your finance department on the other in the change process. That coordination across functional lines serves as the foundation for achieving growth ambitions or creating a leaner organization in a responsible manner. The results can be, among other things, optimization of working capital, the right investment decisions, optimal cost controls, and better cash flow management.
So make certain you’ve got “finance on board” whenever you embark on a change and improvement program in operations & supply chain. That enables you to achieve your immediate financial goals, including cost savings, increased sales, and the optimization of CAPEX or cash flow. And it also helps you to also achieve other less immediate goals, for example by improving quality, reducing the volume of complaints and returns, boosting sales and implementing structural cost reductions. The big advantage is that with finance in the loop, it is easier to demonstrate the financial impact of an improvement and change program. Beyond that, the decisions which must be made can be supported by the numbers and can be optimally aligned all along the organizational chain, from purchasing, supplies, production and logistics to sales.
An essential precondition is that the financial data used in this endeavor needs to be appropriate for the established and desired changes and improvements. In other words, if you take action and make decisions based on the wrong information, you are bound to be disappointed. Consider, for example, what would happen if you made calculations with a total cost assumption based on outdated information, with the associated risk of flawed decisions. Without ever realizing it, you might then discontinue a product that you’d have understood, with the right data, actually contributed in a significant way to your financial results. And all the while, the possibility would exist that you didn’t recognize that other products were detracting from the bottom line. That would be a shame.
Another example is the proper coordination among various KPIs. Conflicting targets per department often lead to outcomes that fall far short of the ideal. For example: if production decisions are based exclusively on costs, you are likely to prefer optimized long runs. And that can lead to too much – or the wrong – supply. And it won’t be aligned with supply chain, where they only take supply into consideration. With that sort of tension between those two opposing approaches, you can never achieve efficient coordination between the two departments. As a consequence, it is impossible to achieve the optimal balance between costs, working capital, and services; the result then is the risk of value destruction. And that despite the fact that when you are managing the company based on the essential KPIs as part of a change and improvement process, the goal is precisely to achieve the best possible result for the entire plant or organization.
In this case and many others, the use of up-to-date dashboards can offer a solution, as long as they are continuously supplied with financial information from the past, current data, and reliable forecasts. In addition, it is vitally important to carefully consider what information is truly essential. Dashboards that are burdened with an excess of irrelevant information are actually counterproductive. After all, the word “balance” originated in the world of finance for good reason.
It’s also the case that achieving the right balance is indispensable in cash flow planning and price-setting exercises. Consider decisions regarding investments in maintenance and equipment replacement, production capacity expansion, and employee training and development. In the short term you may want to implement cost-cutting measures, but over the long term – if the consequences are raw material shortages, equipment failures, or insufficient knowledge and capabilities – such a strategy may turn out to be very costly. And here as well, finance can help to provide the financial underpinnings, so that with everyone on the same page, you are able to achieve and maintain a healthy balance between cost controls, working capital optimization, investment, quality, and performance.
Finally, one other question that comes up often in the real world: we work in a dynamic market that demands maximum flexibility in our organization. How can we ensure that we keep that flexibility and also ensure that we can maintain profitability? And here too, a financial foundation is essential. Moreover, in these strategic considerations, finance not only has a controlling role, but also an advisory role with shared responsibility and an equal role in the decision-making process. When that happens, then cooperation with operations & supply chain truly pays off.
Pauline Kloeze
Associate Alignment Finance & Operations ARV Group
The word “balance” originated in the world of finance for good reason.