Three ways CFOs can help tackle supply chain disruptions

The supply chain crisis is bringing C-suite scrutiny to a function that many say has been underfunded for years. Now is the time to build resilience for short-term shocks and long-term growth. CFOs and supply chain leaders can take three steps to address resource availability, access to capital and a need for more efficient logistics.

Market and supply chain disruptions are no longer periodic or isolated events. Just as US impacts from the pandemic have begun to diminish, geopolitical concerns are very rapidly affecting a wide array of industries, ranging from semiconductors and energy, to automobiles and food.

Besides addressing immediate problems, executives need to develop long-term strategic alternatives by analyzing the risk and value of each option over time. But companies often balk at investing in supply chain improvements, such as logistics technology, onshoring capacity or acquiring a key supplier. Analyzing alternatives with a keen eye on risk reduction and efficiency gains can inform which actions are worth prioritizing and investing in for the long term.

As outlined below, CFOs can use scenario planning to help identify, evaluate and compare the alternatives from a comprehensive financial, operational and tax perspective when facing complex decisions.

1. Build out informed scenarios

Finance and supply chain teams can collaborate to develop models and scenarios that consider the impacts and duration of forces, such as geopolitical unrest, extreme weather, and drastic changes in labor markets and consumer behavior. Build models that reflect the current supply chain, including the constraints and parameters used to guide inventory management and planning decisions, such as order quantities, lead times, service levels and demand forecast accuracy, to determine the appropriate minimum and maximum levels of inventory to meet business objectives. Then stress test the current state by simulating various scenarios, such as a natural disaster or prolonged inflation.

This step requires gathering internal and external data, including:

  • Supplier research: Who else do your vendors supply? How much of their revenue comes from your company? Is your company helping the supplier help you, for example, by providing a demand forecast? Is the supplier financially stable? Whom are their competitors?
  • Critical material category research: What are the demand trends, cost drivers and alternative materials?
  • Competitive research: What investments are competitors making?
  • Internal research: How fit is the company’s financial health and flexibility for reacting to changing dynamics? What’s the company’s firepower or capacity for conducting M&A deals (considering cash and equivalents, market value and debt)?

2. Identify resilience-minded options

Consider short-term actions, such as:

  • Using the current supply chain model to identify opportunities to rebalance inventory to better reflect true end-customer requirements and exhaust excess inventory while addressing shortages
  • Segmenting products and customers to prioritize based on margin, percentage of revenue, customer impact and growth, as well as risk

For long-term supply chain strategies, ask operations leaders what initiatives are overdue but sidelined because of other priorities or cost concerns. These may include:

  • Implementing advanced logistics technology
  • Employing vertical integration
  • Reshoring
  • Building regional networks
  • Modernizing factories and warehousing

3. Conduct a data-driven strategic alternatives analysis

Quantify the economic value associated with each alternative and highlight how it performs under specific scenarios.

A comprehensive alternatives analysis considers

  • Capital requirements and financial feasibility – should a company vertically integrate through acquisition (faster) or build the capability internally?
  • Time, risk and tax elements – onshoring may be more costly from a tax perspective, but risk reduction may more than compensate for that
  • Operational synergies and strategic alignment
  • Leverage and return – consider debt capacity and its impact on shareholder return

An objective and robust analysis that models each alternative and highlights specific scenarios can be brought to life through dynamic data visualization (see Figure 1). Presenting the story visually can be a key tool in helping decision-makers gain clear perspectives of the impact on value creation.

Figure 1: Data visualization of potential scenarios and alternatives
Ey data visualization of potential scenarios and alternatives

Based on simulated data. While there are many KPIs to consider, we have highlighted potential stock price as one objective measure of value creation.

When informed by data and rigorous modeling, a strategic alternatives analysis provides actionable insight to support and drive decisions, allowing management to see, question, iterate and ultimately act to shore up the supply chain with a focus on long-term resilience.

Click here to learn more about how we can help you identify, evaluate and compare strategic alternatives from a comprehensive financial, operational and tax perspective.

This article originally appeared in CFO Dive.

Mark Tennant of Ernst & Young LLP co-authored this article.