CFO Talk: How to Manage Your Supply Chain Costs During a Crisis with Dileep Kulkarni
In this CFO Talk, Dileep Kulkarni, a supply chain expert and past finance professional, shares his unique perspective on how finance leaders and our teams can make a big difference in the effectiveness of our supply chains. He describes what a smooth running supply looks like with specific ideas on what finance can do to make a difference.
In the video Dileep and Steve make reference to some resources you can learn more about here:
- Here is a link to our supply chain risk assessment tool: Supply Chain Risk Assessment Tool
- Contact Dileep for his free offer to discuss how to improve your supply chain with you: Dileep Kulkarni
- Visit our CFO Crisis Resource Center
Welcome to CFO Talk. I’m your host Steve Rosvold, Chief Learning Officer at CFO.University. Our topic today is Managing Your Supply Chain Costs During Times of Crisis. Our guest is Dileep Kulkarni. Dileep is a Director at Expense Reduction Analysts where he helps CFOs and other business leaders effectively improve their supply chain costs and supply chain management. Dileep has a business technology degree from the Indian Institute of Technology and a master’s degree from the University of Michigan. He spent over 25 years at Intel Corporation in various finance and commercial roles, including the Strategic Deals Director of Intel’s global supply chain.
Welcome Dileep, to CFO talk.
Thanks Steve and thanks for having me on your show.
Well, it’s great to have you on. Dileep and I have known each other for quite a while and it’s great to be able to bring your expertise to our member scholars at CFO.University. We want to talk about our supply chains and how to manage them during the crisis we’re going through right now. I would really like to tap into your knowledge on how CFOs can get involved in this. Tell me, why is it important for a finance leader to get involved with and help manage their supply chain?
Yeah, Steve, I see the supply chain as an extension of the company’s operations itself. So,if you’re looking at any product, there are pieces that the company does and the rest of the pieces come from the outside through your supply chain. Any interruption to your supply chain will impact your ability to ship products. So that’s reason number one.
Secondly, from a finance perspective, if you look at your P&L, one of the largest spends collectively is your supply chain. In many businesses profitability is highly dependent on how well you manage your supply chain.
Look at the supply chain from the balance sheet perspective. Inventories make up one of the largest assets on the balance sheet. This affects your liquidity management as well. So, from a purely finance perspective, both margin management and liquidity management are important
aspects of the supply chain. From an operational perspective, you can’t function without having a successful supply chain. That’s why it’s important to really focus all the time but particularly during the crisis.
What a succinct response. I mean operationally, how important it is, you cleared that up very simply and two of our most important financial statements you hit on, the things where the CFO lives, the income statement and the balance sheet. I think that’s really insightful and helpful for our learners at CFO.University. Thanks for that.
Can you describe what the difference is between a smooth operating supply chain and one that’s broken?
Yeah, I think if we can step back a little bit, number one is to get a good grasp of the supply chain itself.
There are pieces of the supply chain that are critical. Critical in the sense that you can’t build or ship your product without the supply chain. Everything that touches the product directly is a critical part of the supply chain. That part of the supply chain is the first one to focus on.
The second part is probably semi critical. It’s important but may not be directly related to it. So, if you look at your critical part of the supply chain, any interruptions to the availability or quality would impact your ability to ship products and as a result, not getting your revenue.
Availability can be impacted by your supplier not being able to ship it or maybe it is a logistics issue. The supplier can build it, but you can’t get it. You have to think about both the availability side and the quality side of the supply chain equation. You might have the product but if it is not the right quality you cannot ship it.
Those two are important concepts to understand. A well operating supply chain ensures availability and quality.
In addition to those you can have third party risks that impact your supply chain. We recently had the trade war with China and an increase in tariffs. Suddenly, whatever you were buying from China was costing 25% more. That’s a major margin hit for many companies. It may not affect availability or quality, but it certainly impacts your business considerably. So in short, a healthy supply chain consists of three big pieces and I think these will recur in our discussion going forward.
One is the risk management, making sure the availability and quality is good.
The second part is margin management. Making sure your total costs, not just the purchase costs, are managed well.
The third one is liquidity or cash management. A lot of your assets and cash can get locked up in your inventory and your vendor payment terms.
If these three things are well managed it is a smooth-running operation and a healthy system. The ones that are broken, you will find either they don’t manage margins or they don’t manage liquidity?
That’s so interesting. We recently wrote an article at CFO.University to help financial leaders through this crisis, The CFO’s Role in Times of Crisis. And those same topics - risk management, margin management, and liquidity - are all included and all are hugely important. They’re always important, but today, they’re super important. Liquidity an immediate concern. Risk management is just as important but has a longer tail. Hopefully you’ve done a lot of that on the front end. Of course, keeping the pulse of our margins is a signal to the health of our business model. It’s good to hear that the supply chain aspect of this has the same components for CFOs to manage that they have in the other aspects of their role. So I really appreciate that.
When you’re talking about risk management and the risk management for suppliers, is there a checklist to go through to make sure that you’re managing your suppliers from a risk standpoint?
That’s a good question and I think it probably varies from company to company. But I’ll give you some of the key aspects of the checklist.
We talked about critical supply chain. You need to look at all your supply chain and kind of outline which ones are the most critical aspects and which ones are important, but maybe semi-critical. Which ones, would stop you from building and shipping your products and or shut down operations.
The second part is to look at whether each of those items that you are buying and decide, are they custom, something that is unique to you? Or is it a commodity? For example, a food manufacturer that is making a ketchup can have the ingredients of the ketchup, tomatoes, sugar, etc. are all critical items. Even the packaging, the bottle, lids and labels are all critical items. You need to be able to identify which are custom ad which are a commodity. Sugar is a commodity but the packaging is very unique to your product. First you need to outline the level of criticality. Next is the input custom or a commodity.
The custom versus commodity question lets you figure out its potential availability if one supplier is unable to deliver. So you have options and how does the answer impact your inventory levels, especially safety stock.
The third aspect of the risk management to identify is sourcing. Is this currently single sourced? Or do you have multiple sources already? In the event of a crisis like we are having, maybe one your supplier is not able to deliver on time. Maybe the lead times are increasing. Maybe there are issues in logistics. Whatever the case may be, having multiple sources allows you options if one source is unable to deliver. Single source has risks similar to a custom input.
The fourth part of it is, if it’s a critical part, and a custom part and a single source, you need to identify a backup plan. Have you actually identified an alternate source? Have you gone through some level of verification testing so that you can move to that ultimate source in the event something happens. I think that’s part of the simple checklist one should always have.
Yeah, that’s three really good ideas. How critical is it? Is it custom or is it a commodity? And is it a single source? It just wraps it up in very simple, kind of bite sized pieces that we can evaluate the different parts of our supply chain with. I think that’s great. Do you have some key questions that you’d ask around assessing the supplier viability?
This is sometimes not done as effectively as it could be, particularly in small businesses. So, this is a very good question. I think there are two things we should look at from a supplier perspective. We should always assess their lead times and their performance to lead time. That gives you an idea. not only of the availability, but of the amount of inventory one needs to hold.
If there is a big variability in performance to lead times you have to have an even bigger buffer. So that’s number one.
Number two is, what kind of quality do they have in terms of quality performance as well as quality systems?
Number three is the cost effectiveness. You need to go to the market periodically to assess the purchase price, it should be a Total Cost of Ownership (TCO) analysis, which includes three big components; purchase price, shipping costs and carrying costs. Do a market assessment to make sure that the cost competitive is maintained.
Those would be the three big things you should assess periodically and actually have a scorecard reflecting these supply chain aspects for all your major suppliers.
Another important thing to keep in mind, is the supplier’s facility locations relative to yours. Who are their downstream suppliers and where are they shipping from? What are their emergency response plans? Putting a process in place to keep this information up to date is a key piece of the supply chain risk management plan and especially important to done before selecting a new supplier. It shouldn’t have to be dusted off when a crisis hits.
Great answers. Bing, bing,bing. That gives us a nice checklist to start with and some really important things to look at. We do have a supply chain assessment tool at CFO.University that people can go to. It’s a very simple, effective checklist that dovetails really well into your list. I’ll definitely include it when we post this CFO Talk. Here it is: Chain Risk Assessment Tool for CFOs
Do you have any success stories, anything you want to share with us to helps us get a real good picture of what a good finance supply chain person looks like versus a finance leader or team who hasn’t helped managed their supply chain very well.?
I think finance needs to take a really active role. They are a very important collaborator not only because it impacts the finances in general, but it also impacts the operations as we talked about. I think there are three main areas where finance really can elevate aspects of the supply chain.
Finance professionals bring a different perspective. They’re very data driven people. I used to be in finance. I remember how well everything was done. How we had a data driven perspective. Finance leaders bring in both the strategic business aspects, as well as the data driven aspect to the supply chain. And those are very valuable.
So, here are the areas I think finance can add a lot of value to the supply chain.
First, one of the things we discussed already is risk management and the critical aspects of your suppliers performance. You really need to have a backup plan in place for items we already covered in the checklist.
I’ll give you an example of how a finance leaders at one of our clients made a big impact by working with the purchasing department who was buying their glass jars from China. Everything was working well but they were buying and everything was working well but they decided it’s such a critical part of their supply chain, they needed to have a backup plan. They actually went through and evaluated an alternate supplier in Taiwan. Out of the plan they decided to create a mold for the jars. This mold required some investment as did testing the mold and creating some product samples from it. They invested time and money so they would have an executable backup plan available. And when both the tariffs hit in China and the coronavirus struck they have been able to shift their supply chain to Taiwan and avoid both disruption in their production and distribution, with a minimal impact on their margin.
So that is a very good example of, of how a backup plan was put in place well ahead of time.
I can really appreciate the way the finance person thought, “Hey, there’s a risk here. I need to work with somebody” to mitigate it. And then move forward with a plan the required them to ask for an investment from the company. This is a great example of proactive whole risk management lead by finance. We just can’t be cost containment people, sometimes we have to look at ‘this is going to be an investment for us’ and the finance group, thinking of themselves as part of the commercial team, not just the cost control freaks. Being, the investment and ROI people is really important aspect of our role.
I think there are a couple very good examples of the insight this finance person had about the single source and the willingness to invest the funds in mitigating that risk. That’s a great, great story.
There are a couple KPIs you mentioned to me that you thought were really important. Will you let the group know what those are?
We talked a little bit about the scorecard. I think that KPIs for the supply chain can include a lengthy list. But if I were to look at the three biggest aspects here is what I would list
Number one, lead time. How long does it take and what the variability of lead time has been. A very important part of the lead time you should always look at is not only what a standard lead time is, but what is their ability to do rush orders if needed? They could charge a little bit more, but are they able to do that? Can they squeeze that lead time? That’s number one.
As part of lead time measures, do they have upside and downside capabilities that you can turn the spigot off? Even if you have a purchase order open, can you turn the spigot off or reschedule much of the purchase order. Can that be done? What flexibility do you have? Maybe you have a sudden new orders, many of our food customers are seeing a major uptick. If they had put some of those thoughts and ideas in place with their suppliers, maybe the upside wouldn’t be that difficult.
Number two is quality. Clearly, we need to have a regular measurement by the supplier as well as your own feedback to the supplier of what the quality has been. Quality is not only the product quality but also how you ordered something and the correct shipment quantities. Are they shipping less quantity or more quantity? All of those are part of the quality aspect
The third part of it is clearly the cost competitiveness. Periodically, you have to measure that against the market. As I said, total cost of ownership in that case. If we can have just three simple things, finance can truly help build that because purchasing many times is so busy in delivering the products and making sure they are available. There are so many things that are constantly managed that these things are sometimes left out and finance can help there. That would be a huge benefit not only to the purchasing but to the suppliers themselves Everybody likes to know that they are being checked and monitored as well as being part of the partnership of working together. It’s what helps us get better.
Partnership is an interesting word to use There’s a position in finance called the Finance Business Partner (FBP) that has been around for almost 60 years but has become much more common in recent years. How you described working with the supply chain people to develop a better less risky model is really what this concept (the FBP) is all about. Working with our colleagues and even our customers to take all those skills that finance brings to the table and make sure they’re leveraged. So getting finance to partner with all aspects of the company, similar to what you have described for the supply chain, is a value added trend the profession is delivering to its business partners.
One of my last questions is do you have any recommendations on how finance chiefs should be looking at their supply chain in today’s terrible environment?
Yeah, these are very unusual circumstances with Covid 19. Businesses are being impacted very differently.
Some non-essential businesses are unfortunately, shut down or running a very skeleton crew to basically keep the business alive. The number one thing those businesses need to do is shut the spigot off quickly. This is where we talked about not only worrying about lead time but how do you manage the upsides and downsides. I’m assuming that’s the first thing most of you have already done, because now it’s this crisis is already in the fourth week. Many of the businesses have been shut for three weeks. So that’s one type of business.
There are some types of businesses that may not have seen an immediate slowdown, but they are seeing a slowdown over the horizon. The rest of the downstream businesses that are getting shut down due to their customers are not requiring as much products from them. Now what is happening as a result of it, their sales are falling, they still have the fixed cost and their margins are going to get impacted. They need to really focus in addition to the availability, make sure that whatever they are shipping that’s available, but their requirements are also going down. Their focus should include margin improvement because this is the time to go figure out how do you do the cost savings so that your margins are reasonable and you are still a profitable business.
The third type of business which actually are seeing an uptick, some of the food manufacturing companies are falling in this space. Some of the companies that are doing health care related activities are seeing an uptick. This is where I think the uninterrupted supply and upside availability is the key focus. How can you do rush orders? How can you increase your suppliers to be able to give you the upside at this point? Along with managing the margin and liquidity, because you don’t want to pay the expedited charges, your margins are at risk and you’re carrying so much inventory that your cash is all locked up at a very critical time. I think availability will be the big focus here.
Well, thank you for that great information on how finance leaders and professionals can add value to the supply chain. You shared lots of great ideas to guide people along the way as we go through this crisis.
You also wanted to make an offer to your clients and to people who could use your services.
A lot of companies around me are struggling at this time. I want to offer, totally pro bono, advice and help of any sort to look at your supply chain, especially the critical supply chain assessment. We can evaluate what you should be focusing on given your need for the business at this point during the crisis.
Steve - Well, I hope you are flooded with phone calls and emails, but I hope for your sake, it’s manageable because that’s quite an offer. We’ll make sure people know how to get ahold of you when we post the video. Learn more about Dileep and get his contact points here: Dileep Kulkarni
So that wraps up today’s CFO Talk. I want to thank you Dileep for being with us.
Thank you Steve for having me on the show.
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