What Would You Tell Accountants about Supply Chain?
So, if you were to have the chance to present to a large group of accountants, what would you tell them about supply chain?
That was the question I had to answer for myself this week, as I gave a presentation to a big meeting of the tax and audit professionals at accounting firm BDO in Orlando.
Well, what is it they would like to hear about? That was naturally my question when I first discussed the gig with the BDO event organizers a couple of months ago. I would not say the mission was exceptionally well defined, except that they wanted to know what supply chain issues and trends were top of mind right now for the CEO/CFO. This would help them first just be more conversant in an important topic area, and BDO also does some more general consulting and this might help them scout for these opportunities at clients.
"I began with the famous Dupont model of enterprise value, actually developed all the way back in the 1920s and which is so classic I assumed nearly all of these accountant types."
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That left me a rather wide landscape to work with, didn't it?
So, here I will describe what I wound up saying, which may actually be enough to stretch into two columns' worth.
So, I began with just a sort of definition of supply chain, using the SCOR model that defines the meta process models of plan, source, make, deliver and (later) return some 20 years ago (with on-going revisions). The graphic I used illustrated that those core processes within a given company need to be designed and executed within the context of the plan, source, make, deliver and return processes of trading partners both up and down stream.
Under the SCOR model graphic, I illustrated that all this happens within the three key flows of supply chains: materials, information, and cash. But I noted that the reality is that for most supply chain professionals, the cash part of it is really not much of a consideration, though that is changing a bit. I also noted that the need to tightly sync material and information flow is one of the reasons some supply chain software - notably WMS and MES - are often really challenging to implement, though I am not sure my audience well understood that point.
But I then observed that the problem with that SCOR view of things is that it presents the supply chain as being some basically linear process, indeed a chain, whereas in reality for most companies today it is far from linear - more like a "supply web." I had a nice illustration for that, with all the various potential partners and flows. Like the New York City water system, I noted, no one person knows how it all works at a given company, yet somehow the goods like the water generally wind up where they are supposed to be within the time frame needed.
But to show the challenges, I referenced the 2012 Wall Street Journal article detailing 3M's "supply chain hairball," in which to make a picture hanger that cost just a few bucks 3M moved materials and WIP several times over many hundreds of miles, from adhesive plants to label factory, assembly and packaging.
It seemed like the logical answer to this not very efficient supply chain design was to move everything to the Minnesota area where the final assembly was being done, but was it? Perhaps the adhesive plant in Springfield, MO serviced lots of other customers besides 3M internal business and was located there for a very good reason. Perhaps Hallmark in nearby Kansas City was a large customer. So what do you do? Optimizing the answer to that question and many more like it is a big part of what supply chain is all about, I said, noting that similar "hairballs" are somewhat common in companies that are big suppliers to themselves.
In general, so far so good.
After that introduction to supply chain, it seemed to make sense to connect supply chain performance to shareholder value, a topic I have dealt with many times on these pages and which I assumed would interest accountants.
So I began with the famous Dupont model of enterprise value, actually developed all the way back in the 1920s and which is so classic I assumed nearly all of these accountant types would be well familiar with it - yet it seemed to me I was getting a lot of blank stares when I suggested such to the BDO crowd, though I can't be sure.
Anyway, as you see below I noted how supply chain greatly impacts many of the key areas of the Dupont model, starting obviously with cost of goods sold, but also general overhead (where most distribution costs go) accounts receivable (supply chain issues can cause delayed payments), inventories, and "buildings," which are impacted by supply chain design and insource/outsource decisions). To the good or bad, if you can outsource a process that both reduces costs and allows you to get rid of assets (plants, DCs), that drives a lot of shareholder value, per the model.