A recent post in Purchasing Insight, “What can game theory teach us about Financial Supply Chain Management?” highlights the overall financial impact of paying suppliers as late as possible. The key point is that the working capital cost to supplier usually far outweighs the savings to the customer, thereby increasing the overall cost to the supply chain. The post got me thinking about a much bigger issue: how businesses manage their supply chains – a cross-functional collaboration or a collection of functional silos?
For most manufacturing businesses and many service businesses, continued financial success is dependent on the performance of the end-to-end supply chain.
The reality is that supply chains compete, not individual businesses. So it seems sensible to me that management teams should aim to optimize the end-to-end supply chain. Habitual late payment to suppliers is just one example of a failure to collaborate – in this case within a business, between procurement and financial functions – which will compromise the performance of the supply chain.
Another example is in managing risk. The customary practice of transferring risks to suppliers may increase both the risk and cost in the overall supply chain. There is potential for conflict between supply chain and legal functions, where lawyers are focused on transferring out risks and liabilities rather than mitigating risk over the entire supply chain. It may be better for the business to assume more risk, for example, when it is better positioned than suppliers or customers to manage the risk, or where the cost of insuring against the risk is lower than it would be for the other parties.
I could go on to list loads of conflicts, not just internally between functions but between stakeholders up and down the supply chain – driven by fragmented objectives and misaligned performance measures. Members of any supply chain have a common goal: the success of their chain.
The goal for individual businesses must be to secure most competitive position across the supply chain.
It follows that business functions, collectively, have first to find the optimum balance of added value and risk across the entire supply chain, then to maximize their own business’s share of the overall margin and mitigate its individual risk. Of course, financing considerations such as cash flow and cost of capital have to be taken into consideration. So too do other business objectives, which may influence the balance of risk vs. reward or shift the focus from short to long term (or vice versa).
Objectives for individual functions must be aligned to the business goal. For example, a key objective for Procurement is to frame a commercial deal with suppliers which secures control over risk and maximises financial gain over the life of the contract, and perhaps beyond. This is very different from the blinkered approach of a functional silo, where extended payment terms, risk transfer and short-term cost savings are customarily hailed as successes… even though the business is failing!
Is your approach to supply chain management a cross-functional collaboration? Or is it the blinkered approach of functional silos?
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