Turning Your CFO into a Supply Chain Fan
Value measurement for solving supply chain problems has been a challenge in the past. However, the emergence of analytics frameworks that are tightly integrated into planning and execution platforms, and a renewed emphasis on measuring business performance has encouraged organizations to embed value realization into standard business practices. To simplify the measurement and realization of value, data-driven organizations should first segment Key Performance Indicators (KPIs) into two distinct sets: Value Metrics and Process Metrics.
- Value metrics are the final goal and directly relate to cost savings, revenue increases or other tangible forms of return. Examples relevant to the topic at hand – order promising initiatives – include: inventory (finished goods, raw material, etc.), lost revenue or revenue left on table, revenue uplift, margins, Days Sales Outstanding (DSO), and the like.
- Process metrics are KPIs which relate to value metrics, but not in terms of actual dollars. These are metrics which can measure the effectiveness of various business processes that impact your customer-facing functions. Examples are: order processing time, fulfillment lead time, order planning cycle time, etc. These can also include very detailed metrics such as On-Time-in-Full (OTIF) and Conversion Cost.
Why the need to define process and value metrics? Since process metrics roll up to value metrics, defining and linking these measures can provide a roadmap to value and thus, a value realization plan. E.g., if one business objective for your order promising initiative is to reduce finished goods inventory (FGI), a business that sells a variety of products can relate order planning cycle time to this specific KPI. Reducing the time to plan customer orders from 3 weeks to 1 week can alleviate the need to hold extra inventory. While a 2-week reduction in this process metric may result in a 2-day reduction in FGI, these 2 days can provide an immediate impact to cash and an on-going carrying cost reduction.
Aligning with the CFO's Agenda
How can you involve your CFO in your order promising initiative, and in fact turn her or him into a fan? What value metrics does the CFO focus on? How can faster order promising reduce DSO? Based on a reduction in FGI, can this saving ripple throughout the business and impact other forms of inventory – safety stock, raw materials, and others? In addition to expressing this in dollars, can we express this in days – Days Inventory Outstanding (DIO)? By aligning improved order promising to DSO and DIO, we can apply the following working capital formula:
Days Working Capital = Days Sales Outstanding + Days Inventory Outstanding – Days Payables Outstanding
Working capital is very high on the CFO’s agenda and sometimes is discussed in a company’s earnings calls (if the company is public). Therefore, projected benefits expressed in terms of working capital impact are sure to catch the eye of the busy CFO.
Getting Started Down the Value Realization Path
Most order promising initiatives have a strong list of metrics, just not segmented into Value Metrics and Process Metrics. Therefore, step one is to place your metrics into these two groups. The rule of thumb is straightforward:
If the metric means dollars – contributing to top-line revenue or bottom-line savings – it belongs to the value metric segment. Anything else is a process metric.
Once we have this list, we need to start relating process metrics to the value metrics they can impact. It is acceptable for there to be cross-overs – one process metric can impact multiple value metrics – just be careful not to double-count value metrics, or else the overall value amount would be incorrect.
The final preparatory step before starting the value realization journey is to decide which process metrics to try to address first through your order promising initiative. This prioritization is very dependent on your situation – is the objective a quick win? A long-term strategic transformation? Servicing a new customer or channel? That is a question only you can answer – but think about how to sequence and you’re off to a strong start down the path to value realization for order promising.
So, what value metrics and process metrics do you think impact your company’s order promising initiative? Contact us today to discuss.