By Tim Harden, member of Cloudleaf’s Board of Advisors
As Americans return to work following the Coronavirus disease (COVID-19) pandemic to the new business-as-usual, CFOs are rethinking their end-to-end distribution and manufacturing systems. A recent PwC poll found that supply chains are now a top priority for chief financial officers (CFOs). In a crisis like this, many CFOs are finding their supply chains can either cause distress for the entire business or be the determinant in a company’s resurgence. Now more than ever, the health of a company’s supply chain reflects the health of the business.
Shortening intervals, delivering revenue faster, and securing strategic contracts and pricing are supply chain factors that come under a CFOs purview of managing the bottom line. Because supply chains require money to be allocated ahead, they are one place that CFOs can look to free up cash and reduce costs overall. To optimize value in supply chains, navigate the new realities in the crisis and meet business goals, business leaders must improve diversification, capital-in-progress and continuous visibility.
The Japanese earthquake and tsunami of 2011 had rippling effects for companies all around the world. One crippling challenge that came to life for many in the wireless world, was discovering the value of physical diversity among suppliers. The critical element of preparing for crises is ensuring there are backup strategies for sourcing essential materials – strong secondary and tertiary options in supply lines in case a primary supplier is compromised.
Another layer of analysis is looking into subcomponents and making sure secondary and tertiary suppliers are not relying on the same subcomponent company. Diversity should be part of the contractual elements that are put in place when negotiating with suppliers. It’s essential to know the supply line strategies of suppliers and how they’ll ensure production if there’s a disruption in one path, and that there’s a second or third path they’ll be able to deliver through. Geography is one form of diversity supply chains need, but it requires consistent oversight to ensure diversity exists and is maintained in the supply chain along every delivery, assembly and subassembly path.
During a crisis, some supply chains need to step into high gear because they produce the critical resources needed to mitigate the emergency, while other companies need to determine how to redirect their supply chains because they are vulnerable to disruption. In some instances, companies that are prepared and have deep visibility into their supply chain can reroute to shorten delivery intervals and deliver supplies and cash faster. That can be the difference in winning a strategic customer contract or delivering personal protective equipment to prevent spread of disease, for example.
Capital in progress, also known as capital work in progress, is something each CFO tracks as an indicator of where the cash in the business is tied up. It exists as an asset account on the balance sheet and is used to record current costs related to long-term projects. Strong businesses can shorten that capital in progress timeline by redistributing resources from locations with extra on hand or where it’s not yet needed to locations that are experiencing delays in receiving materials and equipment. This is especially important for companies that rely on service providers or human capital in their processes. Visibility can get the right part into the right hands in order to not lose time. Lack of visibility into the supply chain prevents flexibility in these circumstances and causes delays that can tie cash up for months to years.
CFOs and supply chain executives should look at every bucket along the way that has work components and ask, “How do I shorten that up in order to gain capital back or not tie capital up?” Capital in progress is about understanding how many turns of inventory are on hand. How much of a cushion in inventory is there to have the ability to flex up and flex down? Flexible supply chains with continuous visibility also save money on excess inventory: as bottlenecks occur, these companies can rely on excess inventory in their supply chains instead of ordering more.
Another study found many organizations lack transparency within their supply chains, with 60% of those surveyed warning that poor visibility of who they do business with is a significant source of risk.
“Nearly a quarter (24%) admit they fail to effectively evaluate supplier business practices, with 45% citing manual processes that lead to incomplete data entry as a key cause,” the survey says.
As global disruptions become more common and as companies work to rebuild from the fallout of COVID-19, continuous visibility has now become a must. It can help companies reevaluate their entire supply chain point by point and supplier by supplier, ensuring there is a solid and viable plan to get goods get from Point A to Point B no matter what happens. Visibility makes it possible to track the condition of products, intervene before a problem occurs, adapt to changing circumstances by shifting resources in real time and plan ahead to make financially smart decisions. It’s only possible now because sophisticated and efficient predictive software and advanced sensors exist.
Diversity, shortening capital-in-progress and continuous visibility make the greatest impact in strengthening supply chains and would keep the international business community on its front foot during global crises like the pandemic. Supply chain visibility makes it possible to evolve to a just-in-time environment where businesses can alleviate inventory shortages or overages, balance supply and demand, and shorten up capital-in-progress time frames to free up cash on hand.
How better prepared for the business interruption caused by COVID-19 would companies have been if they had already digitized their supply chains and achieved continuous visibility? Now is the time to get ahead of a potential second wave.
This article was originally published at sdcexec.com on June 30, 2020.