Saturday, December 10, 2011

Finance IT and SCM

So far in this class, we've focused heavily on the physical procurement, movement, and creation of goods and services in terms of the supply chain. However, one area that deserves to be addressed is the role of IT in Supply Chain Management.

We've all heard about how advanced analytics are needed in order to accurately forecast or optimize the flow of components for final assembly based on historical sales. However, not much has been said about the steps necessary to validate the necessary purchases. Budget planning is as much a part of forecast planning as demand planning because if the funds aren't available for making the transaction, the entire supply chain suffers accordingly.

Finance IT systems assist multiple levels of decision making

Finance IT in particular serves as the backbone to the transactional process (see picture on left). For supply chains, this includes all manner of business to business transactions within a value chain. It serves to define part of the limits that decision makers use when modeling within constraints.

How does this fit into the core competencies of supply chain management? Financial competency is directly correlated to our good ol' responsiveness/efficiency matrix. Recall that supply chains must often choose between making their services more responsive (i.e. Dell) or efficient (i.e. Toyota). If we think about the relationship between the two as an inverse relationship (more responsiveness = less efficiency), and model the relationship with downward-sloping curves representing the trade-off between the two, we set the stage for understanding how financial IT systems affect supply chains.
Responsiveness vs. Efficiency trade-off curves

Since we know that the purpose of enterprise IT is to improve information delivery, and that financial IT capitalizes on the ability to delivery information  and calculations faster regarding budget matters, efficiency improves because there is less downtime between disparate branches of a company (i.e. accounting and marketing). Planners do not have to wait for individual departments to report in their financial activity, as they would have access to an enterprise-level overview of the entire company's financial operations and the effects of purchasing decisions on the budget.

In terms of the Responsiveness vs. Efficiency, this rotates the trade-off curves up and moves them to the right. As processes become more efficient, it may not necessarily be true that they lose efficiency as a result. As expressed by Frode Gjendem of Accenture, one area of opportunity presented to supply chains is ..."enabling rapid reaction... and minimizing cost across the business."

The street runs both ways. Whereas financial IT serves supply chain managers by providing them available information about budgetary constraints, and financial planners receive strategic information about how they should allocate resources to supply chain initiatives.

Despite the fact that there is immense opportunity to align supply chain and financial management, there are still challenges in adoption. A 2008 CFO Business Services and Business Objects (SAP subsidiary) company report indicates that 40% of CFOs find that forecasting practices are time-consuming. In the same report, partial or no integration across departments was reported.

As financial ERP systems become more sophisticated and become more aligned with supply chain services (due to an increasing amount of responsibility placed on CFOs to create efficient supply practices and to optimize their budgeting), it seems to me that the two practice areas cannot thrive without each other. Whether the rise of financial IT eventually comes to incorporate supply-chain needs, or there is a rise of supply chain IT and ERP systems or firmware that bridges the two together, it is certainly an area of uncertainty that challenges the 21st century CFO and CIO.

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