First Thoughts
  By Dan Gilmore - Editor-in-Chief  
  - Nov. 21, 2014 -  

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.


Gilmore Says:

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 know it.

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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 defined 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 needed 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 very challenging to implement, though I am not sure my audience well understood that point.

But I then observed that the problem with the 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 from hanger that cost just a few bucks 3M moved products 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 the 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 of course 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.

Anyways, 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 "buidings," 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.



I noted that this model was really important for both sides to understand, meaning for finance to better grasp the supply chain levers available to impact shareholder value, while these supply chain finance concepts are increasingly being taught to SCM professionals so they can better connect in theory and practice what they do to driving shareholder value.

Then, as I have done here in the past, I summarized the work of Gerry Marsh, a California finance man who has worked with many of the greatest companies in the world. He has a proprietary but very compelling model for how increases in free cash flow - often derived from supply chain improvements that lead to inventory reductions - have a great and often not well understood impact on shareholder value.

I have seen charts from him using real companies and results comparable to the generic example you see below, in which the difference in market capitalizations between two companies with the same basic earnings per share (EPS) and growth rates can be explained by differences in free cash flow generation.


The savvy "buy side" analysts reward the company that spins out more cash per dollar of sales, even if that advantage doesn't show up directly in earnings per share the "sell-side" analysts focus on.

So I think that is where I will end it up this week. It also occurs to me this is all is just as relevant for supply chain managers too, not just accountants.

Finally, my good friend Gene Tyndall wrote an article a few years back on supply chain for some accounting journal that was very good and also relevant here. I will chase it down by next week.

Week after that, actually - no main newsletter next week due to Thanksgiving, but there will be an OnTarget on Tuesday. Would love your thoughts on all this.

What would you tell accountants about supply chain? Any reaction to what Gilmore has said thus far? Let us know your thoughts at the Feedback button (email) or section (web form) below.


Recent Feedback

Your speech to accountants is admirable but maybe can you be even more specific?

When you study accounting there are three branches...

 1. SEC, GAAP, etc.  

 2. Tax accounting... we all know what that is


 3. Cost accounting

Any good accountant knows cost accounting... either love it or ignore it as it is not the way to make money.

Aligning a cost accounting system around the cash flow, inventory flows, outside commitment flows (e.g. purchasing, contract manufacturing) is a secret weapon for better business management.  Accountants have been trying to do this for years but lack a model to follow.  If they would take a lead from a supply chain model to capture cost accounting, everyone wins.

I think that is all you have to propose, then prove a few facts I think we know:

1.  Measurement of supply chain activities is early warning, a measurement far earlier then "accounting;"

2.  An S&OP or supply chain plan can be a future look at Balance Sheet and Income Statement material changes;

3.  Supply chain measurement of inventory flows is a great "audit" tool to know what is going on;

4.  Leaverage of supply chain excellence managing lead time can improve working capital positions...and create a competitive advantage.

The list goes on.   

Accountants can have facts to know how understanding supply chain can help their clients or help their practice.   At least they can say to clients...managing your business using traditional accounting only measurement is not "optimal" ?

The fight goes on, but at some point formal business measurement systems will be based on an S&OP based supply chain model... just makes too much sense.  In the meantime we will continue to play translator.

Jon Kirkegaard
Nov, 22 2014

This is excellent.

A couple of points for feedback:

 First, the article you are looking for is:

"The Path to Higher Shareholder Value", Chief Executive, July/August 1998, Stephen C Johnson, Gerry Marsh, Gene Tyndall.

The gist of this also makes up the first chapter of our book "Supercharging Supply Chains."

Second, a few points you may want to consider:

Taxes. The Global Supply Network is a critical determinant of the global tax bill that companies pay, in terms of location, value-add operations, facilities, employment, inventory stocking (inventory taxes), etc.

Equally important, the "traditional" notions of inventory as a bad thing are moving fast towards inventory being a competitive weapon, particularly as the cost of capital is so low.

And, perhaps, that accountants should now view inventory explicitly in terms of "unsaleable" or waste, "channel stuffing", a definite liability vs. a true asset on the books.

I would also add (but this may be a little less relevant) the fact that adhering to global trade requirements (and penalties) are important in the core operations of the supply chain.

Finally, that the supply chain is a cash engine (which you mentioned) and a critical driver of customer growth (read "sales" and "margin").

I'd love to see the finished product.

Christopher Gopal
Changing to Academia
Nov, 22 2014

In 2013, I gave a talk to the Illinois CPA Society on inventory.  I asked myself the same question that you did - how in my case can I make inventory interesting to CPA's and what should I suggest they do to influence it.

I liked your approach to the broader topic of supply chain, and how you related it to cash and profitability.  In both cases - supply chain or inventory, if management outside of supply chain sees the connection to profits and cash as a result of a presentation, I think we have done a good job.  I will be interested in part 2 of your discussion.


Herb Shields
HCS Consulting
Nov, 22 2014

Great article, can’t wait for part 2.

Bruce Cole
Nov, 22 2014

I enjoyed your column ‘what would you tell accountants about supply chain’….. as you asked for feedback, here’s a slightly different perspective from my experience working with small to medium sized companies who often are operating in competitive space without the luxury of fully equipped procurement/supply chain management departments. I can also relate to the matter from a large enterprise point of view having held manufacturing and operations management positions for many years within a large multi-national.

I have learned that finance folks are often attracted to discussions related to supply chain ‘simplicity’ and resulting cost savings potential – especially if they believe it possible to make bottom line impact without spending lots of money.

At my organisation, our core business belief revolves around the notion that companies compete on the strength of their supply chain – it is supply chains that are competitive (not entities in isolation). Very often, we discover that supply chains have at least some historic component that results in complexity, inefficiency or waste of some kind - this can become locked into the supply chain value map without a business realising it (a bit like ‘boiling a frog’ as the old saying goes!).

In looking at the basic structure of a supply chain – asking questions about a business’s market and competitive factors (does the business face ‘local’ or ‘global’ competition, how many links does a supply chain consist, how well do supply chain partners compare to others in their field, what is the true value of each link in the supply chain..., etc.,) we’re able to explore whether or not a supply chain is effectively structured within it's target market. It may be surprising to some but always interesting to finance folks when realising that by getting back to supply chain basics it is often possible to strip out unnecessary complexity or to make simplifications that result in lower costs, smoother communications, reduced inventories, improved material and cash flow processes that result in overall improved delivery service etc. as a supply chain is more ‘optimised’. In effect, by challenging a company’s ‘supply chain norm’ at a basic level, there can be surprising yet simple improvements that result in improved competitiveness. Low hanging fruit as they say...

Without over ‘simplifying’ (excuse the pun) an often complex matter, my starting point is to always look for obvious opportunities to simplify a company’s supply chain structure and to challenge upstream and downstream supply chain partners in the same way before getting into complex and potentially costly analysis. Having said that, a good starting point is often to conduct a rather simple spend analysis; it always seems impressive how the old 80/20 rule tends to point the way!

Good luck with your presentations; I’m sure your audience will enjoy the topic of supply chain as it truly does allow the potential of business improvements. Which accountant would not love the thought?

Peter Malone
PCM Global Support Services Inc.
Nov, 22 2014

The models and examples you referred to are meaningful.  However, in my experience (coming from Ernst & Young, and writing and talking actively with CFO's and Finance and Accounting (F&A) managers over the years and continuing today), "keep it simple" is the best place to start.

First, we believe supply chains include 6 Mega Processes:


and 4 Flows:  Products, Information, Cash, and Work (we differ from SCOR).  Yes, they may not all be linear, but the finance and accounting is.

Second, there are costs -- Fixed and Variable -- for each of these Mega Processes.  Further, there is Capital Efficiency (Fixed and Working) tied up in assets, along with CapEx for investing in these.  Even further, there are both direct and indirect expenses for Operations (OpEx for funding some of these). And, there are investments and costs to operate the processes -- labor, technology, and other.

These provide the "buckets" that F&A people need to know, to measure, to record, to budget, and to report.  They also often have to be allocated and attributed.

Interestingly, from SELL -- there are revenues that supply chains contribute to. Sales not only emanate from sales people or websites -- they are also impacted by supply chain services.  And, Returns are a cost and revenue impact as well.

They should also understand the major cash flow Processes -- for example, Cash-to-Cash; Procure-to-Pay; Order-to-Cash; Cash Conversion Cycles, etc.

Lastly, there are several Taxes that Supply Chains impact -- income; property; real estate; VAT; Customs and Duties; and others.

SO...if F&A people can learn all these basics, they can then participate better in supply chain strategies and operations. 

All too often, the terminologies used by either profession are misunderstood or misdirected.  Once F&A and Supply Chain managers start collaborating, some important things can happen for the company and its customers.

Thanks for raising this issue and helping to clarify it. 

Gene Tyndall
Tompkins International
Nov, 22 2014

I would tell, and have told, accountants that paying suppliers on-time makes the supply chain happy. So often supply chain delays are started by accounting. :)

Jerry Allgire
Director of IS/IT & Purchasing
Alex Products Inc,
Nov, 25 2014