Industryweek 34835 Finance Department

Supply Chain Management Doesn’t Belong in the Finance Department

May 3, 2019
Supplier capability can’t be summarized by a small group of performance numbers reviewed on a spreadsheet, from behind a desk.

At a recent manufacturing event, I sat in on a presentation that focused on the need for supply management to communicate and coordinate with other parts of the company.

The speakers made a lot of good points. I agree that communication is important. But in my experience, that puts the onus for better collaboration on the wrong foot.

I’ve seen supply chain managers make the effort to reach out to other company leaders, but the love doesn’t flow in the other direction. Outreach from other functional areas tends to be scarce. Why? Because purchasing tends to be regarded as tactical; its leaders don’t have a seat at the strategic-planning table. Consequently, any effort on purchasing’s part to reach out tends to be stonewalled or otherwise disregarded.

This lack of collaboration is based on thinking that purchasing tends to need only a sole focus on piece price and for this reason can only provide incremental (at best) financial impact to company financials.

If you are a regular reader of my columns, you see I believe this needs to change for organizations to maximize purchasing’s positive impact.

The presenters also said that some of the best supply chain leaders are found in the finance department, noting that only supply chain and finance have end-to-end visibility of a company’s entire value stream.

I would argue that the visibility finance has into their company’s value stream is very limited. Why? In most organizations—again, from my experience—finance only submits executive-level financial exhibits related to piece-price reduction, internal costs due to poor quality and costs associated with operational downtime due to late shipments. 

Read more Supply Chain Initiative columns by Paul Ericksen

Purchasing professionals know that these three metrics give very little visibility in the actual capability of individual suppliers, particularly since those metrics can be “gamed.”

I also believe that the financial function has played a major role in keeping the purchasing function from getting a seat at the strategic planning table, ensuring purchasing will have only tactical, incremental impact on company financials.  The primarily executive-level purchasing metric at most OEMs I am familiar with is material variance; i.e., did prices go up or down?  Improvements made as a result of increased supplier capability should be the focus of supply management activity. And, by the way, shouldn’t OEMs collaborate with suppliers to facilitate increased capability?

For instance, when raw material safety stocks are reduced, the purchasing function seldom gets credit. Instead, since operations usually owns raw material inventory, operations tends to get credit for cost reduction in that area, whether they played a part in it or not.

I do agree that supply management should be evaluated on financial metrics; i.e., their contribution to company profitability. But supplier capability can’t be summarized by a small group of performance numbers reviewed on a spreadsheet, from behind a desk. (No kidding, a lot of OEMs make sourcing decisions based on such spreadsheets.)

I also believe the approaches and processes used by financial people and organizations tend to place a high silo around the purchasing function, decreasing the chances of communicating with other internal departments.

The above is mostly opinion based on personal experience. I’d welcome feedback—either supportive or non-supportive—on this issue.

Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers. 

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