In our recent series, we noted that Supplier Pre-Payment where pre-payment is made within the supply chain is an advanced concept and not one even most of the Supply Chain Leaders are doing … even though it’s so simple that anyone can do it. Instead, what usually happens, is suppliers get their payment delayed months and months and months when they should be paid promptly so that, they too, can pay their suppliers promptly. In effect, they get screwed, and their suppliers get screwed.
And it’s a question that we struggle with when the answer is so obvious. But I know the answer, and I’m going to tell you.
It’s because Finance Forerunners are Fools!
Let me be clear that I do not mean that all people in Finance are fools – as many of today’s analysts have PhDs and build financial models that would make the doctor proud if he were still teaching and his students built such in-depth models in an attempt to understand the business world that supply chain lives in. These people are not fools — they are investigators with intuition who could help companies make better decisions. Nor do I mean that their bosses, typically without their education or their brains, are fools. Most people who make CFO are, even if their view of the world is limited and skewed, reasonably intelligent and capable of doing math and logic, which less than 1 in 7 adults in America are capable of doing.
No, it is the people who run the financial world, set the financial and accounting standards, and teach it in Universities who are fools.
Why? Because the way they define the operating cycle, financial net obligations, and cost of capital is stupid. Very stupid.
Why? Because, in the financial world, including the world of CFA (Chartered Financial Analyst), working capital management theory (as per a recent textbook by prominent finance authorities), and, most importantly, accounting standards, the operating cycle does NOT contain “pay suppliers” (that is cash conversion, a secondary requirement of finance), financial net obligation is defined as a fixed amount at a fixed date as per invoice terms (and not the variable function it really is), and the cost of capital is not only not fixed per opportunity (as finance would have you believe), but changes greatly depending not only on payment terms, but payment windows and supplier cost of capital (as defined as their supply chain). Moreover, all the standard financial calculations, metrics, and analysis is internal to the firm or on the firm against the market, nothing looks at the contributing factors within the supply chain.
While I understand that it historically had to be this way because
- definitions and metrics had to be uniform for reporting, comparison, and auditing,
- the data required was not always (readily) available,
- the calculations required for what is needed are intensive
we are now in a time where
- software can produce standard reports using standard analyses for tax authority reporting, comparison, and auditing while also doing variable types of WCM (working capital management) and what-if analysis in the same time frame,
- all of the market data can be available all of the time,
- the software does all the calculations in seconds no matter how complex you make them, the analyst just needs to define and analyze the right model.
So there is no longer any excuse for inferior definitions, models, calculations, and WCM decisions. Except for the ubiquitous excuse of “the financial authorities say this is good enough”. So we, as Supply Chain professionals, are going to not only have to learn to speak their language but teach them how to do their job.
How? You can start by perusing SI’s previous posts on the subject and then dive onto it’s upcoming series as well. Which will follow, or be part of, an expose on why Supply Chain Futurists are so foolish. (Which will take place once I manage to convince LOLCat to put down the shotgun … )