Category Archives: Finance

CPOs Deserve to be in the C-Suite

And the general belief is that because Supply Management is so important to organizational success, CPOs should report to the CEO. And while this should be the case in theory, should it be the case in practice?

According to a recent study by A.T. Kearney (as highlighted over on S&DC Exec) conducted in association with CIPS and the ISM, only 10% of procurement functions have established recognition with their CFOs regarding how procurement contributes value and that the benefits are real and measurable. Ouch! Reading this make one wonder if maybe the CPO should be reporting to the CFO.

Why? Because if the CPO is a direct report, it might convince more CFOs to spend more time trying to understand the ways of Procurement and convince more CPOs to spend more time trying to understand the ways of Finance. The joint effort might result in more CFOs and CPOs coming to a joint understanding, which might result in more CFOs understanding the true value of Procurement.

Right now, as per a recent Cap Gemini Survey (available at this link), 20% of CPOs report to Finance. It’s unfortunate that we don’t know how many of these CFOs are among the 10% of those that understand the value of Procurement. Because if the majority of CFOs who understand the value of Procurement were those who had the CPO as a direct report, then the answer would be simple. Have the CPO sit at the table but report through the CFO on a daily basis until such time that Finance understands the true worth of Procurement. However, if the percentage of CFOs with direct CPO reports who understand the value Procurement brings is only in the 20% range, then having the CPO report to the CFO makes no difference.

Any thoughts on the issue?

Procurement Trend #24: Better Governance Model

Twenty-one dreary, and weary, trends still need to be discussed, so let’s keep the fire burning. The sooner we get through these, the sooner we can expose these charlatans once and for all.

So why do so many historians keep pegging this as a future trend, and keep poor LOLCat regressed in his past life? There are a number of reasons, but among the top three today are:

  • models may be few but most organizations don’t use the right one

    and even those organizations that have selected the right model don’t always apply it properly

  • compliance regulations make governance critical

    since SOX can put you in the Box with Fox!

  • investors want a return
    and they know a lack of governance won’t give them one

So What Does This Mean to You?

Governance Model

De-Centralized, Center-Led, Centralized, or Control Tower — which is right for your organization? The answer is all of them, depending on the situation.  For example, snow-clearing services should probably be de-centralized as it makes no sense to run them out of Houston, Texas or San Jose, California. IT Support should be center-led, as regional providers will probably give you the best price. Global contracts for your core product production should be centralized, as you need the volume for leverage and you need good supplier management. And it’s likely that a Control Tower model will be needed to manage the proper application of each model to each category it is suited to.

Fox in the Box

SOX can put your CEO and CFO in the box with fox if your company doesn’t make an acceptable effort to comply with the Sarbanes-Oxley Act of 2002. But this isn’t the only regulation that can get your company in hot-water. Labour regulations, environment regulations, etc. can all put your company at risk with unlimited (legal) liability in some cases. So companies have to make sure that the governance model takes into account compliance and supports the collection of all necessary data to insure that the organization doesn’t go foul of SOX or other regulations that could get it in hot, hot water.

Greedy Investors

They want a return and won’t be satisfied until they get one. And unless you can convince them that you have things well in hand, you’ll have a group of very clingy monkeys on your back, weighing you down. So you want to make sure that you have good, documented, governance procedures that will keep them happy and keep hundreds of pounds of monkeys off of your back.

Why Do Suppliers Get Screwed?

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

    1. definitions and metrics had to be uniform for reporting, comparison, and auditing,
    2. the data required was not always (readily) available,

and

    1. the calculations required for what is needed are intensive

…

we are now in a time where

    1. 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,
    2. all of the market data can be available all of the time,

and

  1. 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 … )

Risk Management and Suppliers: How Banks can Comply with the OCC’s Guidelines on Third-Party Relationships

Today’s guest post is from Rebecca Lorden, Business Development and Marketing Manager of Source One Management Services, LLC.

In October of 2013, the Office of the Comptroller of the Currency released specific guidelines to banks and federal savings associations that outline how their companies should assess and manage risks associated with third-party relationships. The OCC’s reason behind these guidelines was mainly due to the fact that “the quality of risk management over third-party relationships may not be keeping pace with the level of risk and complexity of these relationships“. (OCC Bulletin 2013-29, October 2013).

It is true that third-parties pose a threat if their own security protocols are not up to par with that of a major financial institution. In fact, in March of 2013, Bank of America became quite aware of this when they announced that a hack into TEKsystems, a third-party security firm they contracted, was the reason their internal emails were released to the public. These emails were no ordinary messages, but documented proof that Bank of America was monitoring hacktivist groups. Furthermore, the hacking group, known as Anonymous, later revealed that data was not retrieved from a traditional, time intensive and difficult hack, but “stored on a misconfigured server and basically open for grabs“. (“Bank Of America Says Data Breach Occurred At Third Party”, Computer World, February 2013). The scandal was not only damaging to Bank of America’s reputation, but also an obvious indication that banks needed to manage supplier risk more effectively.

The OCC’s guidelines outline eight key phases that should be considered when developing risk management processes. These phases include planning, third-party selection, contract negotiations, monitoring, termination, accountability, reporting and reviews. As clear as that might be, banks are still struggling on how to properly implement controls around these factors. That is where supplier relationship management can play a significant role.

Supplier relationship management, otherwise known as SRM, is the actual practice of strategic planning and managing all interactions with third-parties to maximize their value. Many think of SRM as a way to reduce spend. SRM processes can reduce quality issues and delays with suppliers that, in turn, can translate into cost savings. More importantly, however, SRM can function as a main component in reducing a bank’s risk with suppliers. Supply chain experts feel as though SRM offers a “solid framework” that can provide companies with a “formal risk and control process to follow“. (Building The Case For Supplier Relationship Management, May 2014).

For those that already have an SRM program in place, or believe SRM is just a sales tactic for supply chain consultants, now may be the time to reevaluate. First, suppliers can be neglected over the course of their contract. Even if the relationship started off on a good foot, the value from a supplier can diminish pretty quickly, especially if the supplier or the bank is faced with turnover or a redirection in initiatives. SRM dictates a process that continually communicates and supports the relationship, helping build supplier engagement no matter what changes are on the horizon. Secondly, for those non-believers, consider this: if managing suppliers is now a major priority set by the OCC, what better way to adhere to these guidelines than to build a solid foundation on which to base all third-party relationships on?

It certainly seems that these OCC guidelines are a daunting task for banks to tackle. Managing supplier risks and enforcing compliance is not something that can be done overnight. Banks, however, have a secure solution in supplier relationship management. SRM can be the catalyst to successful third-party relationship management, ensuring that the risks are minimized to the best of a bank’s ability.

Thanks, Rebecca.

The New Silk Road Might Be the Biggest Boon to Supply Chain Finance This Year

In yesterday’s post, we asked what impact will the new silk road have on global trade. Specifically, what impact will the new Russia, China, and Germany trade partnership have on global trade — besides simplifying and building Eurasian trade relationships.

One thing it will do is strengthen the resolve of these countries to not only de-couple their currency from the dollar and launch a new reserve currency backed by their union, but to trade in local currencies as well. As trading in local currencies becomes more and more common, banks will become more and more inclined, and even comfortable, to lend in foreign currency denominated debt as well as local currency. Private lending institutions will not only follow, but begin to lead the way.

This will be a great boon to foreign companies which, until now, have been limited to either borrowing from local lenders, at high interest rates, but in the local currency, or a handful of global lenders, at slightly lower interest rates, in a foreign currency, that could cause their debt to skyrocket if their currency weakens with respect to the foreign currency.

The whole point of Supply Chain Finance is to help the cash-strapped supplier. Early payment or dynamic discounting doesn’t help the supplier if the discounts are too high. Arranging for third party lenders to lend using your credit score, and not the suppliers, doesn’t help if the supplier has to take a risk in a foreign currency. And factoring isn’t a solution at all! (Since a third party will only buy your suppliers’ receivables if it can make money off of them — loan sharks at their finest.) Arranging for lending in your suppliers’ local currencies on your credit score when you can’t pay early is safest for your supplier and probably the best supply chain finance solution we’re going to see for a while.

Thoughts?