Insights on Supply Chain Finance - 25 APR 2017 - report

Insights on Supply Chain Finance
Improving Costs in the Extended Supply Chain
4/25/2017
By Lora Cecere
Founder and CEO
Supply Chain Insights LLC

Contents
Research Methodology
Disclosure
Executive Summary
Current State
Insights on Managing Costs
Cost-To-Serve
Organizational Design Considerations
Recommendations
Summary
Sidebar: Impact of Oil Volatility
Appendix
Additional Related Research
About Supply Chain Insights LLC
About Lora Cecere
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Research Methodology
Our goal is to be the first place that business leaders turn to in order to understand the future of
supply chain. We write for visionaries. This report is based on results from five years of studying
balance sheet and income statement performance of publicly held corporations, and a recent survey
on supply chain finance. An overview of this study is shown in Figure 1.
Figure 1. Study Goals, Objectives, and Overview of the Methodology
Disclosure
Your trust is important to us. In our business we are open and transparent about our relationships. In
this research process we never share the names of respondents, or give attribution to open-ended
comments collected during the research.
Our philosophy is, “You give to us, and we give to you.” We collect data from a private network of
qualified participants and openly share the results. The participants of our research always receive
the final reports. We also share insights from the studies with the respondents of our quantitative
surveys and qualitative interviews in a complimentary one-hour phone call with supply chain teams,
or through a virtual roundtable discussion among respondents.

This report is written and shared using the principles of Open Content research. It is intended for you
to read and share freely with your colleagues, and through social channels like LinkedIn, Facebook
and Twitter. When you use the report all we ask for in return is attribution. We publish under the
Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and our citation
policy is outlined on the Supply Chain Insights Website
.

Executive Summary
The term ‘supply chain finance’ has different definitions on each continent. In Europe, it is often used
to describe ‘tax efficiency’, or the design of the supply chain to reduce the burden of taxation of cross-
border shipments. In many procurement organizations the term is often used to describe the use of
favorable capital rates to finance downstream trade. In this study the focus is on the management of
costs by either effectiveness of a Supply Chain Finance team or Supply Chain Center of Excellence,
Sales and Operations Planning (S&OP) processes, Cost-to-Serve Analysis and Supplier
Development efforts.
For the supply chain leader, managing costs is job one. It is easier said than done. The supply chain
is a complex system with interrelationships between growth, inventory, cost and complexity. Cross-
functional processes, organizational focus, and access to data are critical to align and maintain cost
effectiveness in this complex system called supply chain. We term this model the Supply Chain
Effective Frontier. This is shown in Figure 2. When companies operate on the Supply Chain Effective
Frontier they maximize the value of the firm1
. We measure value by either Price to Tangible Book
Value or Market Capitalization.
Figure 2. Supply Chain Effective Frontier
As will be shown in this report, managing costs is a struggle for most companies. While 88% of
companies have implemented Enterprise Resource Planning (ERP), the hard work of process
evolution and maturity continues. In this report we share the current state of supply chains in
managing costs, and then take a look at the processes and organizational design factors to evaluate
the impact on cost management.
1
Supply Chain Insights, Supply Chain Metrics That Matter Managing the Cast-to-Cash Cycle, http://supplychaininsights.com/supply-
chain-metrics-that-matter-the-cash-to-cash-cycle/ April 24, 2017

Current State
Cost management is closely coupled with process excellence. While technology implementations are
often touted as the path forward to control costs, implementing technologies is the easy work. Driving
value through process improvement is tougher. Implementing an ERP system is all-consuming and
an opportunity cost for an organization to start other initiatives. In this study we found 88% of
companies implemented ERP, yet only 29% of the respondents felt they could easily get to cost data.
While we can argue about the road from cost to value, no one will debate that managing cost is
fundamental 'blocking and tackling' for the supply chain team. As shown in Figure 3, while 88% of
respondents implemented ERP, there is process focus on Sales and Operations Planning (S&OP),
Cost-to-Serve, Supply Chain Finance, Supply Chain Centers of Excellence, and Supplier
Development. Why is effectiveness in managing costs, and getting to cost data, so difficult? That is
the focus of this report.
Figure 3. Characteristics of the Group Surveyed to Understand Supply Chain Finance
Process maturity in many organizations is low. In our discussions with supply chain leaders, making a
difference in process excellence comes down to leadership and grit. The road to supply chain
excellence is not easy or well-understood. As shown in Figure 4, while many companies have

multiple processes to improve supply chain finance—S&OP, Cost-to-Serve, Supplier Development
and a Center of Excellence—self-reported process effectiveness is the same probability as a flip of a
coin.
Figure 4. Analysis of Process Effectiveness
In designing the study we believed that companies with stronger cross-functional processes and
supply chain finance/centers of excellence would do better in managing costs. Unfortunately there is
insufficient sample and too low of a process satisfaction level in the critical processes of Sales and
Operations planning (S&OP), and Cost-to-Serve to test these beliefs. The same holds for the
functional groups of supply chain finance, supply chain centers of excellence, and supplier
development. We can see some general trends in the data. As shown in Figure 5, there is a higher
level of performance in transactional areas of order-to-cash and procure-to-pay. There is a lower level
of performance, yet a higher general belief in the importance of cross-functional processes of Supply
Chain Risk Management, S&OP, and Cost-to-Serve. Our take? The management of costs in the
supply chain is evolving, and while these cross-functional processes offer promise, driving
improvement is a struggle for most teams. In our qualitative interviews for the Supply Chains to
Admire we see that when companies tackle these cross-functional processes as a set of interlocking
horizontal processes that there is a higher level of satisfaction and improvement in the Supply Chain
Metrics That Matter2
.
2
Supply Chains to Admire, Supply Chain Insights, http://supplychaininsights.com/portfolio/2016-supply-chains-to-admire/, April 25,
2017

Figure 5. Analysis of Process Effectiveness
A large part of the battle in managing costs lies in managing the supply chain in the face of market
volatility. The supply chain team is constantly battling ups and downs in the cost of raw materials, oil
and labor while combating the rising cost of complexity.
In this effort not all industries face equal challenges. Note in Table 1, the volatility of cost/goods of
different industry sectors within the consumer value chain. What can we learn? The observation is
that within each of the value chains the industry sub-groups are very different. It is a mistake to
generalize the Supply Chain Metrics That Matter across industries. The second observation is despite
the focus on continuous improvement programs, the important metric of cost-of-goods sold is not
declining.
This supply chain segment is heavily impacted by oil and other commodity price volatility. To buffer
the impacts, companies need to consider shifts in process design to include alternate sourcing,
network design, orchestration of changes/material usage in bills of materials, rationalization of
platforms/items, and improvements in productivity. Unfortunately, for most companies, process
maturity and the lack of access to data makes it hard to get to cost data to make these decisions at
the cadence of market shifts.

Table 1. Average Cost of Goods Sold by Industry Sub-Segment: Consumer Industries (M of $)
The relationship between inventory and cost is different in each company, but what is clear from the
data in Table 2 is that the lack of improvement in costs is not due to a more stringent focus on
inventories. Only household products companies have made a progressive improvement in
inventories even though there is not a similar pattern in costs.
Table 2. Average Inventory Turns by Industry Sub-Segment: Consumer Industries

Supply chain disruptions also play havoc in managing supply chain costs. As shown in Figure 6, the
average company struggled with five supply chain disruptions in 2016. On average, 38% of these
disruptions were sufficiently severe to impact financial reporting. For the supply chain team there is
an increasing need to assess risk and mitigate the impacts through continuous design.
Figure 6. Supply Chain Disruptions
Insights on Managing Costs
To succeed, supply chain leaders need to manage costs like a decathlete. How so? A decathlete
competes in ten events over the course of two days. Day one starts with a 100-meter run and is
followed by a long jump, shot put, high jump and a 400-meter run. On the second day the athlete
competes in 110-meter hurdles, followed by the discus throw, pole vault, javelin throw, and finishes
with the 1500-meter run. Each event is scored on a point system. The athlete receiving the most
cumulative points wins the event.
In the history of the decathlon no athlete has successfully won all ten events. When a decathlete
enters the stadium, they work a plan.

Supply chain leaders need to manage supply chain costs like a decathlete competes within an event.
This is important because one of the most important metrics the supply chain leader must manage is
supply chain costs. It is not simple. This management is also growing more complex. Within the
supply chain there are ten distinct cost pools: transportation; manufacturing; procurement;
warehouse; inventory; planning; information technology; customer service; cost-to-serve; and general
administration. To manage total costs the organization needs to orchestrate functional costs (and
trade-offs) against a plan. It requires a skilled leader.
So what do we do? How can we drive the lowest costs? The first step is to learn from three typical
mistakes and overcome the barriers:
Organizational Mistake #1: A Sole Focus on Functional Objectives. Most companies throw the
supply chain out of balance by trying to have the best costs in all functions. The functions are not
naturally aligned; and without clear leadership, the functional efforts will counteract each other and
sub-optimize total costs. Shown in Figure 6 is the conflict between functions.
Figure 6. Conflict between Functions
The role of supply chain strategy is to set the goals of each function based on the market, the
organization's capabilities, and trade-offs between cost, service, and inventory. It is for this reason
that organizations should not drive to have the lowest functional costs in all process areas.
For the organization leader this is a hard concept to grasp. There is enormous pressure from the
finance team, and each functional leader wants to be the best. The greatest pull is between
transportation, procurement, and manufacturing organizations. To win, companies must align against
total costs.

Organizational Mistake #2: Lack of Clarity on Total Supply Chain Costs. To drive the lowest cost
there needs to be clarity for the entire organization on the impact of functional decisions on the total
costs. This is more difficult than many believe. Why? The average company has five to seven ERP
instances and four to five Advanced Planning Systems (APS). As shown in this report, getting to data
is a major obstacle. This has become worse with mergers and acquisitions over the last decade (over
2700 M&A activities in process-based industries). As seen in Figure 7, today only 29% of companies
can easily get to total costs. (We see similar trends in multiple studies we have fielded over the past
five years.)
Figure 7. Ability to Get to Total Costs
Organizational Mistake #3: Orchestration of Continuous Improvement Programs without the
Goal in Mind. The average company also has over 100 continuous improvement processes, mainly
focused on improving costs. Without clarity of total costs and supply chain strategy this is often like
pulling money out of one pocket and placing it into another. In Figure 8 we share some results from a
prior study on the effectiveness of continuous improvement programs.

Figure 8. Current State of Continuous Improvement Programs
Cost-To-Serve
One of the processes offering promise is cost-to-serve. In this research study the definition of cost-to-
serve is a process/analysis to determine the profitability of products, customers, and route-to-market.
As shown in Figure 9, many companies have these programs off and on. They are hard to sustain.
This is especially true when there are alignment issues between sales and operations teams. One of
the issues is the inability to get data as shown in Figure 7. A second issue is the lack of a mature
technology market to support this process. We do know from our Supply Chains to Admire research
that when this process is mature, and supported by leadership teams, magic happens. A case study
for reference in this area is L’Oréal: A Beautiful Supply Chain.3
3
L’Oréal a Beautiful Supply Chain, Supply Chain Shaman, http://www.supplychainshaman.com/supply-chain-2/supply-chain-
excellence/loreal-a-beautiful-supply-chain-2/ April 25, 2017

Figure 9. Cost-to-Serve Process Overview
The volatility of prices in transportation, customer special requests, product mix shifts, and changing
customer service policies cause the most variation in the cost-to-serve analysis for those with these
processes. To align and manage costs, mature companies include cost-to-serve analysis as a part of
their S&OP process cycles. In this process, the companies are able to rationalize routes-to-market,
special requests, and the impact on product mix.
The impact of these shifts on everyday cost management is major. As a result, a strong
recommendation of this research is to implement a cost-to-serve program with a focus on the cost
variability areas outlined in Figure 10.

Figure 10. Factors in Cost-to-Serve Variability
Organizational Design Considerations
In this research, 48% of companies had a supply chain finance group, and in organizations with the
supply chain finance group, the team had been in place for an average of seven years. Only 59% of
companies consider their teams effective. One of the issues is governance in reporting—the role of
the corporate team versus the role of the regional and divisional business teams.
Contrast the effectiveness comments in Table 3 with companies considering their supply chain
finance teams less effective in Table 4. The issues center on the definition of supply chain excellence,
access to data, and the alignment of goals.

Table 3. Reasons for Supply Chain Finance Group’s Effectiveness
Table 4. Reasons for Supply Chain Finance Group’s Lack of Effectiveness

In parallel, we see that 39% of companies have a supply chain Center of Excellence, yet only 21%
overall consider their Center effective. The gap? Clarity on the definition of supply chain excellence,
and maturity of supply chain processes. In the study we find the top three focus areas are aligned
with the gaps outlined in Figure 5. In this research, 21% of companies report the supply chain Center
of Excellence influences their network design responsibilities, 20% Sales and Operations Planning,
and 18% Cost-to-Serve process capabilities. These focus areas are shown in Figure 11.
Figure 11. Supply Chain Center of Excellence Roles and Responsibilities

Recommendations
So, what do you do? How do you improve costs? The answer lies in building both organizational and
process capabilities. The journey starts with clarity of supply chain excellence, and a holistic
management of costs. Access to data is fundamental to manage costs. To get started, here are five
recommendations:
1) Challenge Traditional Thinking. The greatest cost opportunity lies in the cracks of the silos
of the organization. Traditional thinking makes the organizational silos very efficient, but
does not make the organization effective at managing costs. Push past the focus on
transactional processes, like order-to-cash and procure-to-pay, and drive alignment and
cost awareness in cross-functional processes like Sales and Operations Planning, Cost-to-
Serve, and Supplier Development. This is not easy work. Be prepared to answer the
question of which metrics drive the greatest value. Companies rating themselves higher in
the ability to manage costs also rate themselves higher in Sales and Operations Planning,
Supplier Risk Management, and Cost-to-Serve programs. Most companies in this study, as
shown in Figure 12, consider their supply chain processes and teams to be traditional, and
reactive, without strong alignment. Push past traditional transactional focuses to build
strong cross-functional processes and organizational capabilities.
Figure 12. Supply Chain Descriptors

2) Embed Network Design Work into Process Evolution. While many companies use
network design tools for one-off or ad hoc processes, embed network design into S&OP,
Risk Management, and Cost-to-Serve. Plan by design. Make the work continual. Test the
network to understand the interoperability. Recognize that the most variability stems from
transportation, special requests, product mix, and customer service policies. Understand
the impacts and drive process improvement.
3) Recognize that the ERP Implementation Is Not the End State. While many leadership
teams believe that great things will happen with the implementation of ERP, challenge the
paradigm. Many companies have implemented technology for the sake of technology. The
hard work lies in driving process effectiveness. My observation is that greater success
happens when there is a clear charter for the supply chain Center of Excellence, and when
there is clear alignment between IT and the business teams. (Supply Chain Excellence is
easier to say than define. Make it real for all.)
4) Benchmark. Evaluate. Benchmark. Continuously Learn. While no benchmarking activity
is perfect, use the activity as an opportunity to learn. There are always issues with peer
groups and methodologies; but if you are open to the outcome, there are usually also great
learnings. While it is important to not take everything you hear at face value, it is also
important to thoughtfully consider the findings. Ironically, the teams that are the most
advanced at process evolution are usually the most open to the outcome. In contrast, those
at the beginning of the journey, or lagging the peer group, are usually very defensive. Take
every opportunity to benchmark and learn from other teams moving on a similar journey.
5) Organize for Success. In our research for the Supply Chains to Admire4
, we find
companies that make the most progress have five characteristics:
1. A clear supply chain strategy that is communicated cross-functionally.
2. The presence of a supply chain leader with a five to ten-year tenure.
3. Bonus incentives focused on total, not functional, costs.
4. The reporting of make, source and deliver organizations to a common leader. (Based on our
research, we find that this only occurs in 33% of organizations.)
5. An organizational focus on a balanced portfolio of metrics on the Supply Chain Effective
Frontier: growth, total costs, inventory, customer service, and Return on Invested Capital
(ROIC). These are rewarded and managed cross-functionally.
4
Supply Chains To Admire, Supply Chain Insights, http://supplychaininsights.com/portfolio/2016-supply-chains-to-admire/, April 23,
2017

Summary
For the supply chain leader, cost is job one. However, based on the results of this study, there is
much work to do. A strong transactional focus does not deliver effective cost management. The
answer lies in a clear definition of supply chain excellence, access to data, and alignment of cross-
functional processes like S&OP, cost-to-serve, supplier development, and risk management to
mitigate cost impacts. Strong supply chain finance and centers of excellence can help as well, but
require clear governance and leadership support.

Sidebar: Impact of Oil Volatility
A major driver on cost of goods for most industries is oil. Cheap oil defined traditional supply chain
practices. For the last three decades, with low oil prices, companies chased lower costs of labor. This
included reducing operational costs through manufacturing outsourcing, offshoring, plant
rationalization, and facility consolidation. Low oil prices drove these trends. There is always a balance
between labor and transportation costs. The price of oil shifts this balance. Volatility during the period
of 2008-2014 fundamentally changed supply chain practices. The post recessionary period of 2010-
2016 represents a very volatile period for oil prices.
Source: Wikipedia
From 1999 until mid-2008 the price of oil rose significantly. The rise of globalization and additional
consumption from China and India increased demand. In the middle of the financial crisis of 2007–
2008, the price of oil decreased.
The higher the price of a barrel of oil, the more important it is to invest in a flexible supply chain
strategy to reduce transportation costs. The challenge for supply chain professionals when the price
of oil falls, is to not get lulled to sleep. If oil prices stay low, and there is less volatility in the price of
crude, there will be a temptation to back off of network design efforts and reduce the focus on building
agile value networks.

Appendix
In this section, we share the demographic information of survey respondents, along with relevant
research findings to support the key insights shared in the text of this report.
Our philosophy is that “respondents give to us and we give to them.” All respondents participating in
this survey will be given the results of this study and invited to share in a roundtable discussion with
other survey participants to gain additional insights.
In our research, the names, both of individual respondents and companies participating, are held in
confidence. The demographics and additional charts are found in Figures A–H. At the bottom of each
image are the specific questions asked in the survey along with the survey details.
Figure A. Overview of Respondents

Figure B. Respondent Profile by Industry
Figure C. Details on Supply Chain Finance Group

Figure D. Supply Chain Finance Group Organizational Design
Figure E. Supply Chain Finance Group Effectiveness

Figure F. Supplier Development Group
Figure G. Supply Chain Organization Reporting Structure

Figure H. Supply Chain Center of Excellence Presence and Effectiveness

Additional Related Research
Supply Chain Insights regularly publishes reports. Unlike other industry analyst groups—who keep
research behind a paywall—we share research openly to help all global supply chain leaders. All of
the research is archived in our community on Beet Fusion, for social sharing on SlideShare and on
the Supply Chain Insights website. To gain an understanding of supply chain excellence, check out
this related research:
In Search of Supply Chain Excellence
Driving Improvement Through Supply Chain Centers of Excellence
Improving Supplier Reliability
The Global Supply Chain Ups the Ante for Risk Management
Supply Chains to Admire 2015
Supply Chains to Admire 2016

About Supply Chain Insights LLC
Founded in February 2012 by Lora Cecere, Supply Chain Insights LLC is beginning its fifth year of
operation. The Company’s mission is to deliver independent, actionable, and objective advice for
supply chain leaders. If you need to know which practices and technologies make the biggest
difference to corporate performance, we want you to turn to us. We are a company dedicated to this
research. Our goal is to help leaders understand supply chain trends, evolving technologies and
which metrics matter.
About Lora Cecere
Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 15,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written five books. The first book, Bricks
Matter, (co-authored with Charlie Chase) published in 2012. The second book, The
Shaman’s Journal 2014, published in September 2014; the third book, Supply
Chain Metrics That Matter, published in December 2014; the fourth book, The
Shaman’s Journal 2015, published in September 2015, and the fifth book, The Shaman’s Journal
2016, published in September 2016. A sixth book will publish in September 2017.
With over 14 years as a research analyst with AMR Research, Altimeter Group, and Gartner
Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and is a frequent speaker on the
evolution of supply chain processes and technologies. Her research is designed for the early adopter
seeking first mover advantage.

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