SCDigest editorial staff

Does accounting limit supply chain effectiveness?

That’s the provocative question we saw discussed recently in The Financial Express (see Accounting And Logistics Costs: An Impediment To Supply Chain Effectiveness).

The fundamental problem is that the accounting systems used today have in many respects changed little in basic orientation in the past century, while the nature and process of supply chain management have rapidly evolved in recent years, creating a disconnect.

Today’s accounting systems really were developed in an age of vertical integration, siloed operating functions, business operations focused almost exclusively on the home country, and other characteristics that defined most corporations until just the last 10-20 years. While this business approach, at least among larger companies, is basically gone, the accounting principles and systems that were developed to meet the needs of the traditional supply chain has not nearly kept pace.

The key question: Is this limiting our ability to drive supply chain excellence?

The article highlights several key areas of change for which accounting systems have not well adapted:

• Focus: From its historical roots, accounting is focused on tracking and summarizing transactions. Supply chain management is about process across the company and external organizations. Within the company, accounting information has traditionally been organized along vertical, functional lines (e.g., manufacturing), whereas supply chains operate horizontally across functions.
• Scope: Accounting systems deal primarily with intra-company data, whereas supply chains are increasingly inter-company in nature, with complex relationships and trade-offs that accounting has a hard time capturing. Certain concepts, like the costs and value of “collaboration,” really have no accounting parallel.
• Continuous versus Discrete: Supply chain and logistics are all about movement and velocity, whereas accounting likes to take a moment in time and neatly put things into buckets. Performance against “Time,” a key attribute of supply chain, is not a part of any financial statement.
• Dynamic versus Static: Supply chains today are increasingly dynamic – and the velocity of change is increasing for most companies. New suppliers, new customers, changing logistics requirements, transportation modal shifts, etc. Accounting is organized for a more static environment, and cannot well capture, to use just one example, why transportation costs may be increasing due to a change in the mix in products being shipped, only that the aggregate costs themselves rose.

The article says that “These differences make it difficult to develop meaningful performance metrics for supply chain management that are recognized in the board room and that are aligned with the company strategic plan. Financial metrics, while commonly used, have limited application to supply chain management performance improvement.”

Of course, companies supplement traditional accounting statements with a slew of other reports and metrics that fill in many of the gaps, but the point is that the CEO and board are driven primarily by the financial reports, which are lacking in their ability to model the supply chain.

An especially interesting example relates to “Lean.” The goal of lean is to drive out waste and non-value added processes. Yet, accounting systems have almost no ability to measure waste and inefficiency.

In many ways, it seems, accounting systems are the protectors of the old ways of doing business, and not the way of today’s high performance supply chain realities. There are certainly work arounds, but getting the two better in line would likely lead to improved supply chain performance.

Do you agree that accounting systems and the supply chain are out of sync? Is it enough to simply supplement traditional accounting with other performance metrics? Or should the accounting profession look to upgrade the way it calculates and thinks about the numbers?

Let us know your thoughts.

Related story:

Supply Management: The Return of Vertical Integration?