Partnering for performance: CFO and the supply chain
Interviews: Alistair Davidson
Since its foundation, a principle of the IKEA Group has been to offer well-designed furnishing products at low prices.
As Alistair Davidson, Head of Staff at IKEA Group, explains, this focus influences the relationship between finance and the supply chain.
How would you characterize the relationship between finance and the supply chain?
I’d say that collaboration has always been strong and it’s well established throughout the organization. In a business such as ours, collaborating to keep our own costs and the cost of goods sold at the lowest possible level is crucial for everyone. We set fairly ambitious targets every year to make sure the cost of the goods that we’re purchasing and distributing through our value chain is kept to a minimum.
I think the interdependence between the different functions and processes is growing all the time nowadays. If you tried to do your role in isolation of what others are doing, it just wouldn’t work. I have to work with an end-to-end understanding, and so do the teams in the supply chain. It’s very collaborative, and it’s getting more so as we go along.
What do you see as the biggest challenges from a CFO’s perspective in terms of working with the supply chain?
We’re a volume-sensitive business so, for us, it’s a question of getting prices down and a good understanding of how the foreign exchange markets are affecting us. We need to make sure that the information we can get out of supply and logistics is being used on a widespread basis. Pricing and costs are central to everything that we do.
Another issue is volume forecasting, which is one of the most difficult things to get right. It’s something to which we’re paying a lot of attention. It depends on a combination of work around systems and algorithms, along with some intuition and extensive business knowledge. I don’t think there’s one solution that fixes everything; it’s just a whole set of different inputs that allow you to come to a better outcome. At the same time, we need to be measuring, following up and improving as we go along.
The benefits of accurate forecasting are clearly enormous, because it enables better relationships and performance across the supply chain. It means there’s no choppy order flow coming through, and you can plan and execute much more effectively. In order to do that, you need to have good master data to look at your historical information, good forecasting abilities and good team discussions around it.
What is the role of the CFO in terms of supply chain risk management?
Risk management is a global topic today, and you can’t chop it up into different functional areas because it doesn’t work. It has to be built around an overview that you’re going to look at, as a team, of how those risks emerge. Clearly, I’m going to take a higher level of responsibility for the foreign exchange risk, and the purchasing head is going to take a higher level of responsibility for the purchasing prices. But we all sit together and look at risk in a holistic way.
What do you see as the biggest sources of tension between finance and the supply chain?
There should be tension. If there’s not, then something is probably wrong. Everyone should have their own opinions and you’ve got to uphold your views in most situations. That said, the key thing is whether the team can come together to get a good holistic overview in a dynamic environment. You have to have an organization that can understand a decision has to be taken and is willing to get behind whatever path has been chosen.
A culture of cost management is clearly very important at IKEA. How do you instill this across the organization?
This is something that has been important ever since the company was founded. We remain absolutely focused on cost at all times and work together to produce an advantage for the ultimate customer. So that culture is part of the way that the company has developed.
At the same time, you have to strike a balance. When you overfocus on keeping costs low, you might not invest enough in making sure you have a stable environment. But equally, if you go completely over the top on stabilizing the environment, you’re probably going to give up part of the cost benefits. It’s a permanent challenge to strike the right balance.
The views of third parties set out in this publication are not necessarily the views of the global EY organization or its member firms. Moreover, they should be seen in the context of the time they were made.