We’re learning that anything lower invites a threat from today’s number one dampener of shareowner value - disruption in the supply chain.

A recent study by Georgia Tech University business professor, Vinod Singhal, reports that supply chain glitches adversely affect a company’s stock price more than any other negative corporate event, even a plant closing.

That’s confirmed in a September 2004 Information Week cover story. It cited supply chain malfunction as one of five major threats that can sink a company.

More, the Georgia Tech study concluded that the biggest hit to shareowner value came not when the company made a supply chain gaffe, but when the gaffe came from its suppliers or other outside parties.

Clearly, when the biggest risks to shareowner value come from outside a firm’s four walls, the defense to protecting shareowners also must be extended.

It had better include an operational focus on producer to customer processes - linkages that today often reach across oceans and time zones.

Fortunately, there’s a growing awareness among CFOs of the integral role supply chain management must play in not only achieving top and bottom-line growth, but in protecting shareowner value.

Senior finance executives are taking a much closer look at the way their organizations’ supply chains are designed, led, and executed.

In this article, I’d like to take a glimpse of today’s business world through the eyes of CFOs:

• What do they see as supply chain priorities?
• What do they see as challenges to achieving those priorities?
• And how can those challenges be met?

The CFO’s perspective on the supply chain is important to UPS.

It’s critical to our mission to help customers synchronize global commerce. So we’re continually trying to learn more about what’s on their minds.

To that end, UPS recently contracted with the research firm CFO Research Services to survey U.S. CFOs and senior financial managers.

We received more than 250 responses from corporate finance leaders who represented companies of US$100 million in annual revenue to
US$1 billion or more.

Our respondents represented primarily three industry groups: retail/consumer products, manufacturing, and health care. Others also worked in the professional services, chemicals, energy and financial services sectors.

Here’s what we learned.

First and foremost, more than six in ten CFOs surveyed view the supply chain as making a crucial difference in their ability to achieve corporate objectives.

Finance executives from the manufacturing and retail/consumer products companies particularly echoed this view with 74 percent and 68 percent respectively citing the critical importance of the supply chain to their business’s success.

Yet, only one in three of the respondents said their operational plans -- including supply chain -- were well integrated with business strategy.

A popular complaint centered around the five to eight week time lag between the development of business strategy and the creation of a supporting supply chain operational plan.

Why is aligning supply chain strategy to business strategy such a slow process that frequently misses the mark?

The most-cited response was because the supply chain is often fragmented into many organizational parts, with no single person in charge.

Logistics, fulfillment, and procurement departments still tend to function as silos, reflecting an era when supply chain was mostly about controlling cost.

Unfortunately, the world tends to change faster than organizational hierarchies. And not surprisingly, the traditional, decentralized approach to managing the supply chain has become a source of frustration to CFOs.

More than one in three said their company had unclear lines of authority when it comes to supply chain management.

And what about the importance of those supplier and customer relationships that the Georgia Tech research pinpointed?

Nearly three-quarters of the financial executives agreed that these two areas are vitally important. Eight in ten said customer relationship management is key to their organization’s success.

Yet, they also see their firms underperforming in these areas.

Only half report their companies handle supplier management well. Less than half believe their organizations are doing well at customer relationship management.

Closing the gaps between the “what should be” and “what is” in today’s global supply chain environment is seen as a daunting challenge.

Less than a third of the senior finance executives surveyed believe their companies can make major supply chain changes when necessary.

Nearly two of three say -- at best -- they can only make incremental changes.

Why is it so difficult to make headway on a business priority that looms as so critical to shareowner value?

The top two reasons cited in our survey are resistance from operations (or other functions), and lack of internal leadership.

Transforming the supply chain usually involves a mindset shift from thinking as a specialist to a generalist -- one who can look at the impact of the supply chain across functions.

It can take many out of their comfort zones and sometimes involve a loss of control. To shift control, you need support from the top echelon.

You can bet such a shift is imminent. Forward-thinking CFOs are already pushing it.

Now also might be a pivotal time for discerning, upwardly mobile supply chain professionals to put themselves in their CFO’s shoes.

They might wisely ask themselves, how can I speak the CFO’s language?

I believe there are four steps supply chain pros can take to make the translation:

Step One: Develop a single-minded focus to matching supply chain functions and objectives to business plan objectives.

As recently as a few years ago, it may have made a lot of sense to have a procurement department narrowly focused on buying from producers who offered the best price. The game was about squeezing cost savings from producers.

It also may have made perfect sense to push back inventory risks to suppliers, who in turn, emphasized efficiency.

A procurement department could then report to senior management that it did its job of saving the company money.

But we’ve learned the supply chain demands more multi-dimensional relationships.

If producers and suppliers are squeezed on price, they may take short cuts, adding risk to the supply chain.

Efficiency may not be as important as flexibility in a world with volatile changes demanded by customers empowered by the Internet.

The Hong Kong-based trading company, Li & Fung, understands the empowered customer.

Li & Fung has created a network of 5,000 suppliers in more than 40 countries to create the best worldwide supply chain for each specific order it receives from its retailing clients.

A typical order can involve production at six factories and in three different countries. Selection decisions are based on capacity, quotas, price, speed, and quality.

The supply chain is constructed around the initial product idea, and involves the entire design process.

It’s an approach that delivers value by satisfying consumer tastes, and by building in contingencies against disruption, two CFO priorities.

Flexibility at Li & Fung also focuses the big-picture savings opportunities beyond a supplier’s production process.

Li & Fung views the producer cost as only 25 percent of the picture.

A holistic supply chain view offers the opportunity to attack the other 75 percent of the soft costs in getting a product from point A to B.

Those costs include transportation, cost of in-store delivery, duties, shrinkage, insurance, overhead, and more.

In short, a procurement or supply chain manager who focuses on the big, holistic picture can not only speak the CFO’s language, but bring music to his or her ears:

• By adding top-line value;
• By adding bottom-line value in attacking soft costs;
• And, by minimizing risk.

In addition, flexibility means suppliers gain an incentive to perform well. Li & Fung succeeds in aligning its own incentives with those of suppliers because of the repeat business it offers them.

Step Two: Build visibility into the supply chain to solidify collaborative relationships with suppliers, customers, and within the organization.

One of the world’s largest direct marketers, Home Shopping Network (HSN), recently lit up the dark holes in its supply chain.

Previously, it had handled orders through a variety of individual carriers, and black holes in tracking capabilities occurred along the chain.

Partnering with UPS, HSN took several steps to eliminate the black holes:

• It changed its shipping label to include a UPS-compliant, two-dimensional bar code containing package level detail.
• It created a process for e-mailing a daily shipping record to UPS -- one that contains information for every load by lane and allows UPS to forecast the load.
• It made over a fragmented supply chain into a holistic one that combined imports, inbound transport, customer order fulfillment and outbound delivery to ensure end-to-end tracking capabilities.

Building visibility is essential to creating a nimble supply chain team. Data on changes in supply and demand must be visible to all the players so they can respond quickly.

Step Three: Ensure your supply chain has a solid risk mitigation strategy.

Stanford University business professor, Hau Lee, says his research shows that most supply chains are incapable of coping with emergencies.

Preparing for the extraordinary circumstance involves analyzing where the major risk areas might be and whether there’s a contingency plan in effect to cover them.

For example, concentrating inventory in too few facilities might make a firm less able to respond quickly to swings in demand.

On the other hand, should concentrating inventory make sense, a firm can protect against risk by creating a contingency to back up a primary inventory management location.

When evaluating transportation carriers, an analysis should include how they’re optimizing their networks to ensure contingency routing.

When the recent 11-day strike of West Coast ports threatened a major consumer electronic company’s Holiday inventory coming into the U.S., UPS network planning re-routed ocean-bound shipments from wharves in Asia to aircraft, and on to U.S. retailers on time.

Step Four: Seek outside counsel..

The organizational stumbling blocks identified by CFOs are as much matters of emotion as inertia. An independent third party can often provide a fresh perspective, and serve as a detached catalyst for more closely aligning the supply chain with business strategy.

A skilled supply chain counseling viewpoint should align actionable solutions with benefits that can be measured and that deliver lasting value. And it should bring forward best practices to benchmark against.

Perhaps more than anything, looking outside can add network resources that help head off unexpected supply chain glitches.

When it comes to supply chain strategy, no one solution fits all. Each business plan has its own character, and it demands a supply chain strategy that uniquely complements it.

The one thing that’s evident to today’s CFOs is that the two must become interconnected to adapt to a 21st century world of fluid, shifting markets, conditions, and customer demand.

That’s today’s challenge and opportunity.

#####

Scott Davis - as CFO of UPS, Davis is responsible for all the company’s financial activities and serves as liaison to the finance, investor and analyst communities. He is a member of the Federal Reserve Bank of Atlanta’s board of directors and the finance committee of the Georgia Council on Economic Education.