Partnering for Performance Part 1

The Master CFO Collection Volume 5 Partnering for performance Part 1: the CFO and the supply chain

The CFO’s role We believe these six segments represent the breadth of the CFO’s remit. The leading CFOs we work with typically have some involvement in each of these six − either directly or through their team. While the weighting of that involvement will depend on the maturity and ambition of the individual, the sector and scale of the finance function and economic stability, they are all critical to effective leadership. l a n r e T t r x u e s T t e i h n t g o t E N t e h c e g n a n i l u X E t p a t m c e b i k n r e E M u a r P m m s C m Representing Ensuring business o O C the organization’s decisions are U L progress on grounded in T strategic goals sound ﬁnancial E to external criteria I y stakeholders O V g e t N a E r 1 t 6 P s r s o D s Developing Providing insight v e The id n i si and deﬁning and analysis to n ub the overall strategy 5 CFO’s 2 support the CEO ni g g for your organization role and other senior s nipole 4 managers thgi veD 3 Funding, enabling Leading key and executing initiatives in ﬁnance F strategy set that support overall u by the CEO strategic goals n d r i n e g d r o o r g n i a n e i s z u a o t h i o r n u a o l y s t g r a n t i e t g t y e E G NABLEMENT

In this report Executive summary . . . . . . . . . . . . . . . . . . . .4 A new relationship between finance and the supply chain? . . . .7 Who are the business partners? . . . . . . . . . . . . .12 Business partnering in action . . . . .19 Creating consistency across the supply chain, the business and corporate strategy . . . . . . . .20 Supporting and challenging investment choices ...........................24 Monitoring and enhancing performance ....26 Managing risk and business continuity ......30 Ten steps for CFOs . . . . . . . . . . . . . . . . . . . .34 Survey respondent . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 demographics Other titles for CFOs . . . . . . . . . . . . . . . . .37 Contacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

The Master CFO Collection provides insights on events and experiences that CFOs encounter as part of their role. Partnering for performance is a series within this collection that explores the contribution that CFOs can make by working in a business partnering relationship with different functional areas of the business. In Part 1 of this series, we examine business partnering in the supply chain, and explore how CFOs and heads of supply chain can collaborate to achieve superior financial performance. Our findings are based on a survey of 423 CFOs and heads of supply chains globally, and a series of in-depth interviews with CFOs, heads of supply chain and EY professionals. 2 Partnering for performance Part 1: the CFO and the supply chain

1 We are grateful to all participants in this study . In particular, we The basis of this study would like to thank the following finance and supply chain leaders The results of our survey were analyzed to compare: who readily shared their insights in a series of interviews: • The perspectives of finance leaders with those of Mutlaq Al-Morished, Executive Vice President for Corporate supply chain leaders . Finance, SABIC • The perspectives of respondents from companies where a Giacomo Baizini, CFO, Evraz business partnering relationship is in place between the CFO and Tony Barclay, CFO, Fisher & Paykel Healthcare the supply chain, with those where the CFO fulfills Simon Coombs, E&P CFO, Reliance Industries a traditional finance role. Alistair Davidson, Head of Staff, IKEA For the purposes of this study, “business partnering” refers to a Simon Dingemans, CFO, GlaxoSmithKline (GSK) highly collaborative, enabling and supportive relationship between David Gosnell, President, Global Supply and Procurement, the CFO and other functional areas of the business . A “traditional” Diageo finance relationship emphasizes core finance responsibilities, such as accounting, reporting and controls . We asked respondents Marc Gross, Chief Supply Chain Officer, Heineken to identify where their relationship with their finance or supply Matt Hilzinger, CFO, USG chain peers sat on a five-point scale between being primarily a Michalis Imellos, CFO, Coca-Cola Hellenic traditional finance role (ranking 1 on the scale) and primarily a Anthony Maddaluna, President of Global Supply, Pfizer more enabling, collaborative business partnering role (ranking 5 on the scale). We have characterized those who selected 1 or 2 Deirdre Mahlan, CFO, Diageo as having a traditional finance relationship and those who selected Jim Muse, Head of Supply Chain, Fisher & Paykel Healthcare 4 or 5 as having a business partnering relationship . Philippe Pédone, CFO, Galeries Lafayette Giangaddo Prati, CFO, Barilla 1 The survey was conducted in collaboration with Longitude Research . See page 36 for further details on survey demographics . Partnering for performance Part 1: the CFO and the supply chain 3

Executive summary When cost reduction leapt to the top of the corporate agenda at In this report, we examine the benefits a growing number of the height of the financial crisis, supply chains — which typically CFOs are realizing for their organization as they increasingly hold a large proportion of many companies’ costs — were one of partner with the supply chain leader. We also explore what the first places that CFOs turned to for savings. Cost efficiency business partnering means and how, in practical terms, the has since remained high on the corporate agenda but, as CFO can collaborate with the supply chain leader to improve companies get used to navigating ongoing economic corporate performance. uncertainty, financial market volatility, the impacts of globalization and an unrelenting pace of change, the supply Business partners are in the minority, but chain has taken on a new strategic significance. A supply chain collaboration is growing strategy that is aligned with the broader corporate and financial Only 26% of finance executives and 21% of supply chain goals of the business is essential. An efficient supply chain executives say that the CFO’s contribution to the supply chain that enables companies to respond to new market-growth is primarily based around an enabling, collaborative business opportunities is also paramount. As such, the role of the partnering role. However, 70% of CFOs and 63% of supply supply chain leader has become more prominent, and they chain leaders say that their relationship has become more now often sit on executive boards as peers to the CFO. collaborative over the past three years. Meanwhile, the CFO’s role has also been transformed. Leading The business partnering model relates to growth CFOs’ contributions now go far beyond the traditional finance and strong financial performance remit to encompass a strong strategic and commercial focus.2 Companies with evidence of strong business partnering between In order to do this effectively, CFOs are collaborating more the CFO and the supply chain leaders report better results than closely with other internal functions — not just from a those with a traditional finance model in place. They are more monitoring, reporting and risk management perspective, likely to report closer alignment between finance and the supply but also as supporters and enablers of performance. chain functions, and a mutual understanding of key risks and opportunities. Business partnering models have a stronger The result of this convergence is that CFOs and supply chain association with growth. Among business partner respondents, leaders are working increasingly together to understand, 48% report earnings before interest, taxes, depreciation and analyze and address supply chain issues. In companies where a amortization (EBITDA) growth increases of more than 5% in business partnering model is established, CFOs are drawing on their company over the past year, compared with just 22% of their unique, fact-based view of the organization to identify and those with a more traditional relationship. solve business problems, and provide insight to deliver more informed decision-making. Together, CFOs and supply chain The US, South Korea and Singapore take the lead leaders are creating alignment between strategy, finance, tax From country to country, there are significant differences in the and operations, unlocking hidden value within the organization proportion of supply chain leaders and CFOs with a business and strengthening financial performance. partnering relationship in place. While the US, South Korea and Singapore top the list, Western Europe makes up the tail, 2 The DNA of the CFO: a study of what makes a chief financial officer, EY, 2010. 4 Partnering for performance Part 1: the CFO and the supply chain

with all respondents from France, Germany, Italy and Spain in it. This also extends to larger investments in the supply continuing to operate around a more traditional model. In the chain, which might include M&A transactions. In particular, UK, however, business partnering is well established. business partner CFOs help to set the right growth priorities and pace of growth; they support and challenge the rationale Analytics can be a powerful tool to drive a stronger for new investment, and they apply data analytics to support business partnering relationship and challenge business decisions. They also ensure that tax is Asked whether data and analytics present CFOs with a considered as part of operational decisions. significant opportunity to drive a more collaborative, business partnering relationship with the supply chain, an overwhelming 3. Monitoring and enhancing performance: the CFO’s 85% of business partners agree. Robust information and insight perspective across the whole organization, and their position are central to any business partnering relationship. CFOs’ access as a trusted advisor, enable them to play a vital role in helping to financial information from across the business allows them to to standardize the language, measurement, tools and key create a credible “single version of the truth” to drive decisions performance indicators (KPIs) across the organization. and performance measurement. However, many finance leaders admit that they need to do more to align KPIs and ensure that they are driving behavior Four key opportunities to business partner that meets the needs of the broader organization, not just the We identify four focus areas where the CFO has an opportunity specific function. to enhance performance through business partnering with the supply chain: 4. Managing risk and business continuity: business partner CFOs take a strategic, long-term approach to 1. Creating consistency across the supply chain, the risk management, which involves not only direct suppliers, business and corporate strategy: companies where a but also secondary and tertiary suppliers. The CFO also has business partnering relationship between the CFO and supply the opportunity to work with procurement and treasury to chain leader is in place report much stronger alignment determine the extent to which risk is owned and managed between the supply chain and broader strategy. They also by the company, and to what extent it is pushed further report better end-to-end visibility across the supply chain. down the supply chain. This is crucial to a company’s ability to plan, align manufacturing capacity with demand, improve the efficiency and effectiveness of operations, and fine-tune the supply The typical business partner chain operations as a whole. CFOs and supply chain leaders are most likely to take a business partnering approach if they’ve been in their role for less than 2. Supporting and challenging investment choices: business five years. They are also most likely to be found in the US, in a partner CFOs support and challenge investment choices technology company with over US$1b revenue, and EBITDA throughout the cycle, from idea formulation through to growth of 5%–10% in the last year. managing an asset’s performance, retiring it or reinvesting Partnering for performance Part 1: the CFO and the supply chain 5

6 Partnering for performance Part 1: the CFO and the supply chain

A new relationship between finance and the supply chain? Partnering for performance Part 1: the CFO and the supply chain 7

A new relationship between finance and the supply chain? The supply chain is a critical driver of both top-line and bottom-line performance. Through a complex web of processes and relationships, effective supply chains allow companies to meet the demand for their product, keep costs to a minimum and maintain a balance between agility and resilience . In recent years, however, it has become increasingly challenging to juggle these priorities . Pressure on margins has become more intense, complexity has grown and the pace of change has continued to increase . This means that the relationship between the supply chain and senior finance leaders has become more important than ever. Today, many supply chain leaders have been elevated to the top echelons of the corporate hierarchy, with a seat on the executive board and significant influence on strategic decision-making. This elevation of the supply chain has coincided with a re-evaluation heads of supply chain, there is strong evidence that relationships of the CFO position. Many finance leaders are moving beyond the between CFOs and heads of supply chain are becoming closer . traditional responsibilities of monitoring, reporting and controlling Among CFOs, 70% say that the relationship has become more to play a more forward-looking and commercial role. This includes collaborative over the past three years, while the proportion working closely with other functional areas as business partners, among supply chain heads is 63% (see Chart 1). supporting their decision-making through insights and financial Chart 1 impact analysis, and helping them to identify and manage risks Over the past three years, what change has there been to the and optimize performance . relationship between the CFO and head of supply chain in your company? (Shows “much more collaborative” and “a little more Chart 1: Over the past three years, what change has there been to the relationship This changed dynamic creates a prime opportunity for CFOs and between the CFO and head of supply chain in your company? (shows much more collaborative” responses) the supply chain to work together to make significant performance collaborative and a little more collaborative) improvements across the entire business . By applying rigorous insight and measurement to supply chain decision-making, 70 CFOs can improve alignment between corporate strategy, sales, marketing and operations . 63 Among many other factors, the company’s executive management 0 10 20 30 40 50 60 % structure will influence the nature of collaboration between the CFO and the supply chain . For example, some CFOs’ contribution Finance to the supply chain may be more through partnership with the Supply chain COOs, when such a role exists, than directly with the head of supply chain . However, in a survey of CFOs and 8 Partnering for performance Part 1: the CFO and the supply chain

Chart 2 “CFOs should be taking active steps to align the finance Which of the following factors have been most inﬂuential in creating the need for a closer relationship? (percentage) organization with the manufacturing and supply chain to make Which of the following factors have been most influential in creating the sure that finance is right at the heart of that discussion,” says need for a closer relationship? Select up to three. Simon Dingemans, CFO of GlaxoSmithKline, a pharmaceuticals 30 company . “From my point of view, the supply chain is a very high Rising external costs 32 priority in terms of shaping the operations of the company to support the strategy, but also to make it more efficient and agile.” The pace of change 27 Mutlaq Al-Morished, Executive Vice-President for Corporate 34 Finance at SABIC, a petrochemicals manufacturer, agrees . Rising supply chain complexity 27 “A collaborative relationship between finance and the supply 20 chain is of paramount importance,” he says . “Finance should never be a policeman just throwing a report over the fence and telling Changes in strategy 27 the business it’s their problem . We should be helping the supply 25 chain to work toward a solution, not just identifying problems .” Globalization of the supply chain 27 38 Rising external costs, globalization and the rapid pace of change drive a more collaborative approach Rising internal costs 26 26 Asked what has influenced the need for a closer relationship between finance and the supply chain, finance respondents point Shrinking product life cycles 24 to external costs as the number one factor while, for supply chain 27 executives, it is among the top three (see Chart 2). Increasing supply chain risks 24 19 Need for more strategic 20 oversight of supply chain 21 Inefﬁciencies in the supply chain 20 11 Unpredictable demand for 16 products or services 19 Impact of regulation and 15 compliance on supply chain 10 Return of the growth agenda 10 15 % 0 5 10 15 20 25 30 35 40 Finance Supply chain Partnering for performance Part 1: the CFO and the supply chain 9

Globalization also looms large, particularly for supply chain Companies’ existing structures and processes present an respondents. Global supplier relationships create significant opportunity to improve alignment and efficiency. Over the years, complexity, but also bring huge potential to optimize performance many have invested in the supply chain in a piecemeal fashion by reducing costs and driving economies of scale . Global by bolting on extra capacity to meet new demand, introducing companies also need to realign themselves to meet demand surges new outsourcing relationships or obtaining new capacity as a in emerging economies while, simultaneously, managing flat result of M&A . Supply chain functions, including procurement, growth in the developed world . “Meeting the needs of this highly manufacturing and distribution, are often poorly connected and diverse global customer base demands constant innovation as well rely on disparate interpretations of data and manual processes as huge variety and choice,” says Andrew Caveney, Global Supply that are often inconsistent . In turn, the supply chain itself is Chain and Operations Advisory Leader at EY . “It also introduces frequently not integrated with the commercial side of the business . even greater complexity, and requires companies to re-evaluate This leads to difficulties in matching demand with supply, and traditional supply chain configurations.” an uneven flow of inventory from manufacturing through to the Fluctuating demand, shrinking product life cycles, volatile customer . exchange rates and a constantly shifting risk landscape mean that Bringing different perspectives to problem solving companies need a highly responsive and flexible supply chain to be can lead to breakthroughs confident that they can deliver the right products to the right place at the right time . Equally, many sources of competitive advantage A cross-functional relationship between finance and the are now temporary at best . Rising labor costs, particularly supply chain can be the catalyst for addressing these issues . in core manufacturing hubs, mean that many price arbitrage “Breakthroughs in business performance occur when looking opportunities may be reaching their limit . at the business or supply chains from an end-to-end perspective,” says Brian Meadows, Americas Leader of Supply Chain and Growth opportunities are now more fluid and dependent on Operations at EY . “When operations are aligned with strategy, non-traditional markets. “Companies are operating in a world in and organizational functions are aligned with operating strategy, which tried and tested approaches will no longer be sufficient,” innovation breakthroughs occur . These breakthroughs can says Mark Yeomans, Leader of Supply Chain Strategy, Europe, drive greater productivity and can help the business performance at EY. “Growth is taking place in non-traditional markets and exceed customers’ expectations . Without this alignment, channels, many of which have unknown risks . Capturing this performance improvements tend to center on functional growth will require new models and collaborative approaches to improvements . A “partnering” mentality is a core cultural leadership .” attribute behind innovative breakthroughs, where the success of your colleagues is as important to you as your own success, with everyone focused on delivering the customer promise .” 10 Partnering for performance Part 1: the CFO and the supply chain

CFOs’ and supply chain leaders’ different perspectives on business challenges can be a source of conflict or, in a business partnering dynamic, create a fruitful environment for problem solving . CFOs, for example, cite cost cutting and efficiency as the single most important priority for the next three years, while supply chain leaders cite improving product or service quality (see Chart 3). In reality, both are important, and it is only by bringing the two functions closer together that the right balance can be struck . Chart 3 Which of the following do you see as the single most important priority for your business over the next three years? Select up to three. Cost cutting and efﬁciency 27 22 Organic growth (e.g., investing in products, talent retention, 25 research and development) 21 Inorganic growth (e.g., acquisitions, alliances 19 and joint ventures) 14 Improving product or 17 service quality 25 Improving customer service 6 14 Survival 6 3 % 0 5 10 15 20 25 Finance Supply chain Partnering for performance Part 1: the CFO and the supply chain 11

Who are the business partners? The term business partner has become increasingly common Revenue to describe a more collaborative, enabling and supportive In companies with higher revenues, there is a higher incidence relationship between finance and other functional areas of of a business partnering relationship. Fifty-six percent of the business. Business partnering is not universal — indeed, business partners work in companies with more than US$1b companies that have established this model between finance and annual revenue. the supply chain are still in the minority. Among our respondents, Chart 5 26% of finance executives and 21% of supply chain executives What is your company’s annual revenues in US$ (%)? say that the CFO’s contribution to the supply chain is primarily based around an enabling, collaborative, business partnering role. 55% of finance executives and 46% of supply chain executives say that the CFO’s contribution to the supply chain is 56 47 44 53 primarily based around a traditional finance role. The remainder considers they strike a balance between the two. Chart 4 More than US$1b US$100m — US$1b Where on the spectrum from 1 to 5 (see legend below) would you place your relationship with your CFO/ head of supply chain (%)? Business partnering Traditional Finance Growth 15 40 20 19 7 Companies that have a business partnering model in place tend to have higher EBITDA growth. Chart 6 Supply How has your company’s EBITDA changed over the past chain 12 months? 20 26 33 18 3 % 30 1. Primarily a relationship based around a traditional ﬁnance role 25 20 15 5. Primarily a relationship based around a more enabling, collaborative 10 "business partnering" role 5 0 -5 -10 -15 -20 Over 20 10–20 5–10 1–5 No 1–5 5–10 10–20 Over 20 change Increase Decrease Business partnering Traditional 12 Partnering for performance Part 1: the CFO and the supply chain

Sectors Geography Technology and consumer products tend to have a strong The countries in our survey where business partnering is most business partnering emphasis. However, in heavy industry, established are the US, Singapore and South Korea. The story in mining and metals, and oil and gas, it is less established. Western Europe is very different. In France, Germany, Spain and Chart 7 Italy, no respondents describe the relationship between the CFO What is the primary industry for your company (%)? and the supply chain leader as being one built around business partnering. This was also the case in Argentina and Russia. 20 34 33 Time in role Technology Consumer Automotive Business partners are also more likely to be relatively new products to their role. Chart 8 34 41 58 How long have you been in your current role (%)? 20 12 10 Business partnering Traditional 3 12 21 Telecoms Life sciences Oil and gas 29 46 56 74 37 40 More than 15 years 31 11–15 years 8 6–10 years 7 16 2–5 years 3 Less than 2 years Mining and metals Business partnering Traditional 76 To learn more from CFOs and heads of supply chains about how they are partnering for performance, read some of our interview transcripts at ey.com/cfoandsupplychain Partnering for performance Part 1: the CFO and the supply chain 13

14 Partnering for performance Part 1: the CFO and the supply chain

Business partnering yields rich returns in business partnering relationships rate the overall quality of Our research suggests that business partnering is associated the relationship as positive, compared with 23% of those in a with stronger financial performance. Among the business partner traditional relationship with finance. And more than 90% consider respondents, 48% report EBITDA growth increases of more than both the level of agreement over key priorities, and the mutual 5% over the past year, compared with just 22% of those with understanding of key risks and opportunities, to be positive, a traditional relationship (see Chart 6, page 12). Although a compared with just 18% and 26% respectively of those in a company’s financial performance will inevitably be determined by traditional relationship (see Chart 9b, over page). a multitude of factors, a business partnering relationship between It is also worth noting that in a comparison between CFOs and the CFO and the supply chain leader seems likely to contribute . supply chain leaders that identify themselves as being part of a Equally, higher growth may enable greater investment in the business partnering dynamic, the supply chain leaders have a resources required for business partnering . This can create a more positive view of the relationship as a whole . But in the more “virtuous circle” in which business partnering and higher growth traditional dynamic, CFOs have a consistently more positive view can reinforce each other. “In a growth-oriented company, you of the relationship than their supply chain peers . need to have deep and transparent conversations about how that growth will be achieved, and that requires a robust partnering Chart 9a approach,” says Mr . Meadows, Americas Supply Chain and How would you rate the following aspects of the relationship between the CFO and head of supply chain (%)? Operations Leader, EY . Overall quality Business partnering facilitates deeper insight across a of the relationship range of business challenges 80 A business partnering relationship between finance and the supply 82 chain can help build a more integrated, end-to-end perspective Mutual 35 87 understanding of Level of agreement across finance, operations and the commercial functions. At key risks and 37 over key priorities companies where a business partnering relationship is in place,3 opportunities 26 CFOs and heads of supply chain report a much more productive 28 40 relationship across all key metrics measured . For example, 16 80% of business partner CFOs report a good or very good overall Ability to work 72 74 Alignment between the through business ﬁnance objectives relationship with the head of supply chain, compared with 35% challenges 65 and the supply chain of traditional CFOs . They also report stronger agreement over key priorities, better alignment between finance objectives and Ability to link supply chain the supply chain, and a mutual understanding of key risks and strategy with ﬁnance objectives opportunities (see Chart 9a). We see similar sentiment in a comparison between business partner and traditional heads of Business partnering ﬁnance Traditional ﬁnance supply chain. In the supply chain function, 100% of those 3 See section “The basis of this study” on page 3 for an explanation of how the business partner and traditional respondents are defined. Partnering for performance Part 1: the CFO and the supply chain 15

Chart 9b How would you rate the following aspects of the relationship between Teaming takes time the CFO and head of supply chain (%)? An effective, collaborative relationship between finance and Overall quality of the supply chain demands time, resources and commitment. the relationship Among our sample of CFOs, business partners say that 100 they spend 25% of their time with the head of supply chain, whereas those with a more traditional relationship spend Mutual91 91 12%. Both, however, agree that this is not enough: the understanding Level of agreement business partner CFOs think that they should be spending of key risks and 26 23 over key priorities opportunities 18 one-third of their time on the supply chain, compared with 23 17 20% for the traditional CFOs (see Chart 10). 8 82 Spending more than one day a week with the head of Ability to 78 Alignment between the supply chain may be unrealistic, but it does illustrate the work through ﬁnance objectives and importance of the relationship. The consensus, even among business challenges the supply chain 80 business partner CFOs who already dedicate a lot of their Ability to link supply chain time to supply chain issues, is that this is an aspect of the strategy with ﬁnance objectives business that deserves more attention. Business partnering supply chain Traditional supply chain Chart 10 What proportion of your time do you currently spend working with the head of supply chain, and what proportion do you think you should spend? Traditional 12 ﬁnance 20 Business 25 partnering ﬁnance 33 % 0 10 20 30 40 Currently spend Should spend 16 Partnering for performance Part 1: the CFO and the supply chain

Business partnering is a two-way street Chart 11 Both CFOs and supply chain leaders need to work hard in order How would you rate the quality of support that you receive from the to make a business partnering relationship work . CFOs need to CFO across the following areas? demonstrate that they can make a valuable contribution beyond their traditional finance role, and heads of supply chain need Supporting and 40 87 challenging investment choices to build trust through transparency . “If I can deliver the cost Strengthening business continuity 33 87 benefits to the business that the financial community has asked and risk management us, then it helps to reinforce the relationship,” says Marc Gross, Optimizing and monitoring 11 71 Chief Supply Chain Officer at Heineken, a brewing company . performance “By establishing a very good relationship with finance, the Aligning operations with 12 67 supply chain gets the support it needs .” overall corporate strategy % Asked about the quality of the support that they receive from the 0 10 20 30 40 50 60 70 80 90 CFO, heads of supply chain in business partner organizations are Traditional supply chain much more likely than those in traditional finance relationships Business partnering supply chain to report they are happy with their relationship with the CFO. For example, 87% of heads of supply chain in business partner relationships say that they receive good support in Business partnering between the CFO and the strengthening business continuity and risk management, and in supporting and challenging investment choices . This compares supply chain improves: with 33% and 40%, respectively of those in traditional finance 1 End-to-end visibility across finance, operations relationships (see Chart 11). and commercial 2 Alignment across objectives and priorities 3 Ability to work through business challenges 4 Overall financial performance 5 Collaboration at a strategic level 6 Understanding and management of risks and opportunities 7 Quality of investment decisions Partnering for performance Part 1: the CFO and the supply chain 17

18 Partnering for performance Part 1: the CFO and the supply chain

Business partnering in action Partnering for performance Part 1: the CFO and the supply chain 19

Business partnering in action When business partnering between the CFO and the supply chain is happening, our survey indicates a clear link to good business outcomes. However, 55% of finance executives surveyed say their relationship with the supply chain is still based around a more traditional finance role, which suggests that the shift to a more collaborative relationship may be difficult. In this section, we look at four areas where the CFO’s unique skills and perspective can enable them to improve corporate performance by partnering with the supply chain . We compare the perceptions of CFOs and supply chain leaders in business partnering relationships to identify the opportunities that yield results, as well as the areas of tension . 1. Creating consistency across the supply chain, the business and corporate strategy A business partnering relationship between finance and the “There is a strong connection between helping the supply chain supply chain offers the opportunity to break down functional to achieve financial targets and fulfilling our long-term financial barriers and establish a clear line of sight between corporate objectives,” says Michalis Imellos, CFO of Coca-Cola Hellenic . strategy, sales and marketing, and the operational side of “Ensuring that there is congruence between what the supply chain the business. By creating greater end-to-end visibility across function aspires to, and how this aligns and enables the business the organization, companies can strengthen planning, align strategy, is of critical importance to achieving our long-term manufacturing capacity with demand, and improve the strategic goals .” efficiency and effectiveness of operations. 20 Partnering for performance Part 1: the CFO and the supply chain

The majority of CFOs and heads of supply chain in a business Building end-to-end visibility improves the quality partnering relationship surveyed are in agreement that there is of decisions good or excellent alignment between the supply chain and broader The CFO’s access to numbers from across the business, and their strategy across all key metrics measured (see Chart 12). broader view of the day-to-day operations, gives them a different, Chart 12 and perhaps more neutral, perspective in interpreting data . This How would you rate the following aspects of alignment between the position enables them to produce a fact-based, single version of How would you rate the following aspects of alignment between the supply chain supply chain and broader corporate strategy? the truth for the whole business . Eliminating information silos also and broader corporate strategy? (percentage) (Shows 1 or 2 ratings on a scale from 1 “excellent” to 5 “poor”) helps to defuse arguments over which set of numbers to believe . Use of technology to achieve a “Having consistent data and systems frees up individuals to have holistic, enterprise-wide view of 87 a more constructive dialog about the value they can bring,” says the supply chain performance 91 Simon Coombs, E&P CFO of Reliance Industries . “They are no Level of communication between 83 longer fighting over which version of the truth is right.” ﬁnance and the supply chain 78 Mr. Dingemans, CFO of GlaxoSmithKline, agrees. “If every part of Operational alignment between 81 the supply chain has its own data, then you have lots of debate ﬁnance and the supply chain 87 over comparability . An integrated supply chain depends on data standardization, data comparability and simplification. This means Consistency of processes across 76 that people can see a total cost picture, which is what drives ﬁnance and the supply chain 84 commercial behavior .” Quality of governance and reporting lines to ensure alignment 65 CFOs also bring an element of consistency to the way that between ﬁnance and supply chain 69 decisions are evaluated, which can build trust throughout the Degree of alignment between business. Greater involvement from finance as a link, often supply chain and broader 65 alongside the COO, between commercial and operations, for corporate strategy 82 % example, can help to provide confidence that decisions are being 0 10 20 30 40 50 60 70 80 90 100 made from an informed standpoint . “Once we have a good idea Business partnering ﬁnance of how much product we are going to sell, we can build a strategy Business partnering supply chain around that and optimize our manufacturing footprint to deliver it,” says Matt Hilzinger, CFO of USG, a building supplies company . “As a CFO, it gives me comfort to know that we’ve got some science behind this and that the recommendations being put forward are analytical, fact based and not based on someone’s theory or emotional view of the industry .” Partnering for performance Part 1: the CFO and the supply chain 21

As an objective broker between different functional areas of Better integration between the commercial and operations teams the business, the CFO has an important role to play in building also means that objectives can be aligned more closely . “If you stronger bridges. Consider the relationship between R&D and have accountability and management in one place, then you can manufacturing as a case in point . “For a long time, manufacturing also drive one P&L and one set of numbers,” says Mr. Dingemans, has not had a voice in defining a new product, and it’s always been CFO at GlaxoSmithKline. “That can be very effective in making the assumed that it will simply be able to translate ideas from R&D into commercial business more responsive and more understanding of products,” says Stan Brown, a Partner at EY in the US . “But by the consequences of their actions .” giving manufacturing a voice, you can enable decisions that affect A partnership between finance and key functions within the the efficiency with which products are made, creating equal or supply chain, such as procurement, helps to ensure that the right greater consumer benefit at a reduced cost point. CFOs can play objectives are being met . “Procurement reports into the CFO, an active role in creating an internal structure that enables and but we have a dedicated procurement team focused on the global promotes this more collaborative behavior .” supply chain,” explains Mr . Maddaluna . Purchased materials and At the pharmaceuticals company Pfizer, a strong relationship goods represent a significant portion of cost of goods sold, so between the commercial and operational sides of the business they play a key role . Regardless of reporting relationship, the helps to create a careful balance between efficiency and procurement team is integral to our success and the working responsiveness in the supply chain . “The supply chain is a large relationship is seamless . It is a true partnership in terms of what part of the financial structure of the company because we we need to deliver and how we deliver it . Cost is important; are responsible for both product supply and inventory, which however, quality and compliance are essential . Procurement fully represent a significant portion of both the Profit & Loss (P&L) understands this .” statement and the balance sheet,” says Anthony Maddaluna, An effective sales and operations planning (S&OP) process is President of Global Supply at Pfizer . “Our focus is on delivering vital to ensure alignment and minimize debate between different products to satisfy customer demand that meet our exacting functional areas . If the company has too much stock, for example, quality standards at the best cost of goods, and doing so while the CFO and supply chain leader need to understand why — it balancing required product supply and inventory . We strive to may be due to over-forecasting, underselling, change in the ensure we are not consuming excess cash in inventory and, at the market or the wrong price . The S&OP process can help to reveal same time, ensure we have the right inventory in our supply chain the drivers of performance in the supply chain and facilitate a to fulfill orders and drive revenue.“ stronger partnership between finance and the supply chain. Although CFOs have not traditionally been at the heart of S&OP planning, they have the opportunity — through business partnering relationships — to play a more central role . 22 Partnering for performance Part 1: the CFO and the supply chain

Misaligned incentives in the supply chain An integrated planning model that links finance, sales and operations in a transparent and accountable way helps to overcome some of the misaligned incentives between different parts of the business . Below are some examples of actions that can result in misalignment, along with their unfortunate implications: Action Implication The sales team underestimates demand in forecasts Operations plan for less capacity and, when the real so that it can demonstrate that it has beaten demand hits, they are unable to meet it . its targets . Operations pushes as many products through Inventory builds up, increasing working capital and the supply chain as it can reduce unit cost of reducing visibility and overall efficiency. products manufactured . Sales and marketing maintain a high number of Servicing the product lines, some of which are likely product lines to increase customer choice . to be unprofitable, increases cost and inventory complexity and reduces profitability. Cost-reduction incentives drive procurement to Poor-quality parts cause problems in manufacturing purchase low-cost parts. when they fail . The finance team puts the supply chain under The supply chain reduces production and trims pressure to reduce working capital to improve inventory levels, which leads to stock-outs and poor financial performance. service levels . Partnering for performance Part 1: the CFO and the supply chain 23

2. S upporting and challenging investment choices Investments in the supply chain are among the largest and In a traditional finance relationship, discussions around investment most important that any business makes, and the CFO’s role in and capital expenditure can frequently be sources of tension . But supporting and challenging these decisions is vital . Companies in a business partnering relationship, the supply chain is more must invest in and maintain manufacturing capacity, distribution closely aligned with corporate strategy, and the projects they networks, inventory and the raw materials that are used in the request usually are too . “When the supply chain has a real manufacture of products . An effective supply chain also needs understanding of and alignment with corporate strategy, greater significant investment in people, technology and processes value is generated from capital investment decisions,” says to ensure that it runs smoothly and can serve as a source of Mr . Caveney, Global Supply Chain and Operations Leader at EY . competitive advantage . “The supply chain is in a better position to know what the In traditional financial management, the CFO and their team serve organization needs to produce, and can start to direct capital as the gatekeeper for investment and resource allocation . They set investment to building the right capabilities in line with that budgets, determine appropriate returns for investment and capital strategy. That conversation becomes much more efficient, expenditure, and manage trade-offs between resource allocation because all the key constituents are participating .” across different functional areas of the business . Data analytics are a catalyst for better Business partner CFOs retain these responsibilities, but also play business partnering a much more active role in supporting investment choices . They An overwhelming 83% of finance business partners and 87% get involved across the entire investment cycle, from formulating of supply chain business partners agree that data and analytics the idea through to managing an asset’s performance, retiring present CFOs with an unprecedented opportunity to drive it or reinvesting in it . a more collaborative, business partnering relationship with “Every function is trying to maximize its investment allocation, the supply chain . and the CFO needs to act as the business integrator by combining “There is a tremendous opportunity for CFOs to take ownership and balancing these different requirements to find a solution that of analytics, because there is no one in the organization with is strategically correct for the company, thereby maximizing the complete responsibility for it,” says Andy Rusnak, Americas value creation,” says Giangaddo Prati, CFO of Barilla, a food Enterprise Intelligence Practice Leader at EY . “Finance leaders manufacturer . “By having clear and shared strategic priorities, need to think differently about the data over which they have using a common language and fixing precise rules at the outset control . There is no reason why you wouldn’t apply the same around the ratios and paybacks we need to approve investment, rigor, control and analytical capability across all of the data we minimize tension and help to focus attention on execution .” that the organization produces and view your role as somebody who sits down and pushes value from that data into the rest of the organization .” 24 Partnering for performance Part 1: the CFO and the supply chain

But the sheer proliferation of data raises its own challenges . One is how to narrow down the datasets that the company considers important and convert it into useful information for decision-making. For Mr. Rusnak, the key is to take a driver-based performance approach . “CFOs need to really understand what drives value for the organization and focus on that,” he says . “That makes the CFO’s challenge not one of ‘how do I aggregate every little piece of data that ever existed?’ but ‘how do I get the organization to understand what’s important’?” Make-versus-buy decisions When a company is considering investment in the supply chain, the CFO can bring a risk perspective to that conversation and force a transparent discussion about investment choices. Consider a “make-versus-buy” decision, in which the company is deciding whether to build manufacturing capacity or buy it in through a contract manufacturing (CM) arrangement. Working with their supply chain partners, CFOs need to ask themselves the following questions: What does our future demand look like? If it is volatile, would CM help us to access capacity and meet unexpected demand? If demand looks as if it is declining in a particular market, can CM act as a downside hedge to enable volumes to be reduced without having to retire fixed capacity or leave it idle? Where are our existing manufacturing assets? If they are in a high-risk area, can CM capacity in another location help us to manage the risk of supply chain disruption? If input prices are volatile, could a fixed price arrangement with a CM help us to mitigate some of our risk exposures? Partnering for performance Part 1: the CFO and the supply chain 25

3. Monitoring and enhancing performance Business partner CFOs go beyond monitoring performance to play Chart 13 an important role in defining and driving the behaviors that will Do you agree that you need to do more work to ensure that the support organizational goals . One way they do this is by helping to KPIs and targets set for the supply chain are driving the right behavior? Please indicate whether you agree with the following statements (percentage) (Shows “agreed strongly” and “agreed”) standardize the language, measurement, tools and KPIs across the organization . “CFOs have a unique skill to bring together different parts of the organization that may be at odds with each other 57 or may not have a great mechanism for open communication,” 27 says Mr . Brown, Partner at EY in the US . “They provide a single point of reality and, when you combine that with a more % 0 10 20 30 40 50 60 collaborative relationship, you can start to have transparent, high-value conversations.” Business partnering ﬁnance Business partners see room for improvement in setting KPIs and Business partnering supply chain targets to drive the right behaviors in the supply chain, with 57% of those in finance and 27% of those in the supply chain saying that Ensuring that there are consistent definitions for measures, such they need to do more here (see Chart 13). “Technology and the as working capital and tax, across the business is central to driving supply chain are the two main drivers to support the growth of our the desired behaviors . “It’s extremely important that you develop business,” says Philippe Pédone, CFO of Galeries Lafayette . “This consistent definitions for KPIs, so that groups come together and means we need to have the best KPIs in order to be more efficient set those KPIs from a leadership perspective and let them cascade on these two aspects that support the business .” down through the organization,” says Jim Muse, Head of Supply When finance is less involved in the supply chain in a more Chain at Fisher & Paykel Healthcare, a medical devices company . traditional relationship, there is a danger that it will apply targets, The CFO’s neutral position within the supply chain means that in areas such as working capital, that do not take the realities of they can evaluate trade-offs between different targets and give a the function into account . perspective on which course of action will deliver the best overall “You can’t just dictate terms or arbitrarily put working capital benefits. Consider, for example, an initiative to increase service goals in place that aren’t achievable,” says Mr . Hilzinger, CFO of levels or fill rates in the supply chain. Increasing them from, say, USG . “Finance can establish that working capital is important and 95% to 96% would benefit customers, but it would also require ensure that there are consistent definitions in place, along with increasing inventory . “The CFO can add a valuable perspective to objective measures to show whether or not we are achieving our this discussion by evaluating the impact of increased service levels goals. But it is then up to the supply chain to figure out what they on other metrics, such as working capital,” says Sean Ryu, Supply can do to meet those objectives .” Chain Leader for Asia Pacific at EY . 26 Partnering for performance Part 1: the CFO and the supply chain

With the right definitions in place, the leadership team can Chart 14 make a decision about the most important metrics to drive In which of the following areas do you see the key opportunities for the throughout the organization . When teams are incentivized on CFO to play a more active role in the supply chain? Select up to three. too many different metrics, the result can be confusion and lack Optimization of excise 48 of clarity around what the real priorities of the organization are . and trade incentives 47 “Over time, reporting becomes more comprehensive, everything Better understanding of 48 is being measured and what is lost is the focus on what is most working capital 51 important .” says Mr . Meadows, Americas Supply Chain and Strengthening analytical support 39 Operations Leader at EY . “A great area for a CFO to build a strong around supply chain data 31 working relationship with the head of supply chain is in the area Improving understanding of 33 of performance management . They can help align operational the cost of inventory 33 objectives to the business strategy, in order to determine the most Improving organizational design 26 critical measures to monitor strategy execution .” to aid tax effectiveness 24 Better understanding of 26 More broadly, CFOs can play a pivotal role in benefits realization — total delivered costs 44 the process of determining whether the intended outcomes of Better understanding of 26 a particular investment are actually achieved . CFOs can help to manufacturing cost and efﬁciency 22 set the right expectations, provide a clear understanding of the Improved compliance 17 resources required to achieve a particular benefit and ensure that with contracts 7 the benefits — which may not always be easily quantifiable — are curement More rigorous pro 13 fully understood . assessments 24 % 0 10 20 30 40 50 60 Tax incentives, customs, excise and trade incentives Business partnering ﬁnance can improve bottom-line performance Business partnering supply chain Twenty-six percent of business partner CFOs and 24% of business partnering supply chain executives see improving organizational design to aid tax effectiveness as one of the top three opportunities Joost Vreeswijk, Tax Effective Supply Chain Management for the CFO to play a more active role in the supply chain Leader, at EY for Europe, Middle East, India and Africa (EMEIA), (see Chart 14). says, “When a company is designing its supply chain and operating model, the CFO can make sure tax is brought into the equation early . If tax is left as an afterthought, the consequences can be severe. We have seen instances where make-versus-buy decisions and location choices have had to be completely revised due to the late inclusion of customs and indirect tax effects .” Partnering for performance Part 1: the CFO and the supply chain 27

At a strategic level, the CFO also plays a fundamental role in Although tax should never be the ultimate driver of operational ensuring integration between the different elements of the decisions, it can be an important influencer that can yield operating model . Mr . Vreeswijk adds, “Traditional operating significant bottom-line benefits. One CFO we spoke to said, models encompass business processes, transactional flows, “Finance should not lead the charge in terms of operational organizational structure and cost-effective location choices. But decisions, but if there is a choice between one country and the CFO can also ensure that the direct tax, indirect tax, transfer another that both work operationally, then we need to be involved pricing and legal entity layers are also integrated to the model . in that decision and make sure that tax considerations are taken This helps improves the alignment between tax and the business, into account . Of course, we have a clear responsibility to our and can also significantly boost shareholder value. These days, shareholders to try to maximize returns for them, but that also competition between peers ultimately comes down to one has to be done in the context of risk .” operating model versus another, and the CFO’s role in getting that operating model right is crucial .” Creating value through a centralized procurement operating model The role of procurement within organizations is shifting The centralization of procurement can also have important from one of cost reduction to a broader goal of value creation . tax benefits, in terms of reduced direct and indirect tax costs In addition to maintaining a low-cost base, procurement and improved free cash flow. Companies need to factor tax functions are tasked with achieving operational excellence, into the decision-making process. Tax-effective procurement managing key risks, sourcing sustainably and collaborating operating models have a proven track record of being flexible, across the value chain . business-driven solutions. They can also lead to reductions Achieving these varied goals requires the right procurement in the effective tax rate that may be as high as 2%. operating model . For a growing number of companies, this More broadly, companies can also start to think about how means a more centralized approach in which they can leverage the centralization of procurement forms part of a broader skill and scale, build new capabilities, manage risk and make approach to shared services implementation . A growing better decisions . This helps to deliver demonstrably enhanced, number of companies are re-thinking their approach to shared measurable procurement value propositions and related services, moving from a narrow, function-specific approach value outcomes for the business . to a multifunctional model, as EY explored in its recent report 4 Diageo, for example, has taken steps to centralize procurement Delivering tomorrow’s companies today. To add value and to drive economies of scale and consistency across the optimize costs, these companies are developing a single, business . “Although we have local procurement teams, they unified global business services organization that is capable now form part of a centralized group,” says Mr . Gosnell . “We of managing end-to-end processes across different business have category managers at the center who set strategies and functions, including not just procurement, but also human manage contracts globally . So if an executive wants to buy resources (HR), finance and a range of other activities. a flight locally, they can do that through a portal, but it rolls up into the central procurement model .” 4 Delivering tomorrow’s companies today, EY, 2013 28 Partnering for performance Part 1: the CFO and the supply chain

Similarly, the CFO can ensure that government incentives — such Improving visibility across the supply chain also helps to optimize as customs, excise and trade incentives — are taken into account working capital efficiency. With better information flowing through in investment decisions . This, alongside a better understanding the system, a more accurate picture of demand can be created . of working capital, is the number one opportunity to contribute “To really get at the working capital challenge, we have been to supply chain performance that business partner CFOs identify working to make our supply chains much more flexible and able (see Chart 14, page 27). “As well as being the gatekeeper, to operate on shorter lead times . This is delivering much better the CFO should be part of the strategic vision for investment in responsiveness to the demands of the commercial organization, the supply chain,” says Matthew Andrew, EY’s Tax Effective and allows us to hold less stock against the inevitable changes Supply Chain Management Leader in Asia Pacific . “Particularly in their requirements and still improve overall service levels,” in a region such as Asia, where there are so many free-trade says Mr. Dingemans. agreements, incentive arrangements and other tax, regulatory and Giacomo Baizini, CFO of Evraz, argues that finance leaders financing factors to consider, choosing a location for procurement, need to take care when pushing for working capital reductions to sales or distribution hubs is far from straightforward . The choice ensure that there are no unintended consequences . Evraz has a has to be right operationally, but CFOs need to be involved to US$600m maintenance budget, and this requires getting spare consider the impact that incentives and other regulatory issues parts to the right places at the right time so that repairs can might have on returns from that investment .” be made. Equally, however, an excessive inventory build-up of Improving working capital performance remains spare parts can itself cause problems by tying up working capital an opportunity unnecessarily . “You need to be careful when you push to reduce working capital because you can get to the stage where you don’t Despite many companies having focused intensely on reducing have the right spare parts in stock, and it then takes months to working capital over recent years, there remain significant repair a piece of equipment,” says Mr . Baizini . opportunities for improvement . According to EY’s recent report 5 The CFO’s role is crucial in striking the balance between improving All Tied Up, the leading 2,000 US and European companies still have up to US$1 .3t of cash unnecessarily tied up, which is working capital and managing operational and reputational equivalent to nearly 7% of their combined sales. In other words, risk . “It takes effort to get this balance right but, ultimately, it’s for every US$1b in sales, the opportunity for working capital worth it,” says Mr. Morris. “Companies that achieve top-tier improvement is, on average, US$70m. working capital performance send a strong positive message to the capital markets . They are likely to be rewarded with a higher “To improve working capital performance, companies need valuation in comparison to their peer group .” better visibility and control,” says Jon Morris, EMEIA Working Capital Advisory Leader at EY . “Finance needs to be more closely involved in demand planning, and that depends on having better information so that you can get a better picture of working capital and make the right decisions .” 5 All tied up, EY, 2013. Partnering for performance Part 1: the CFO and the supply chain 29

4. Managing risk and business continuity Business partners and supply chain business partners agree Chart 15 Which of the following do you see as the biggest risks to the that mitigating risk is one of the biggest contributions that Which of the following do you see as the biggest risks to the supply chain? (percentage) CFOs can make to the supply chain . But in a complex global supply supply chain? Select up to three. chain, identifying key risks is a significant challenge. Most large Currency risk 41 companies rely not only on primary suppliers, but on secondary 20 and tertiary layers as well . With operations happening at several Labor disputes 37 layers removed from a company’s direct control, it can be 33 challenging to understand exposures and ensure that these risks Overinvestment in capacity 33 31 are mitigated . Fraud and corruption 30 CFOs and heads of supply chain have different perspectives on 18 supply chain risks . While both are concerned about labor risks, Potential for unexpected disruption 30 business partner CFOs’ other preoccupations are about currency from natural events 38 risk and overinvestment in capacity . Business partner heads of Unethical practices by supply 26 supply chain, however, are most concerned about lack of visibility chain partners 11 into outsourcing relationships and the potential for unexpected Lack of visibility into outsourcing 24 relationships, particularly among 51 disruption from natural events (see Chart 15). secondary and tertiary suppliers Concentration of manufacturing 22 activity in speciﬁc geographical areas 27 Abrupt regulatory change 20 13 Underinvestment in capacity 15 22 % 0 10 20 30 40 50 60 Business partnering ﬁnance Business partnering supply chain 30 Partnering for performance Part 1: the CFO and the supply chain

To some extent, it helps that finance and supply chain executives Risk exposure should align with risk appetite are thinking about risk in different ways, because it ensures that As the board-level sponsor of risk management, the CFO also there is better coverage of the key exposures that the company is plays a vital role in ensuring that risks taken by the business are in likely to face . Paul van Kessel, Global Risk Leader at EY, argues line with the company’s overall risk appetite . This should include that companies need to conduct more frequent monitoring of ensuring that there is a careful balance between having a lean high-risk indicators, and ensure that they have the ability to supply chain and one that is resilient and can withstand shocks . respond quickly when the unexpected happens . “By executing Although efficient, lean supply chains are more susceptible to more quickly, they can reduce their financial loss, minimize the disruption, and this can have severe financial, as well as business, impact and perhaps come out of some of the situations in a impacts. “The balance between lean and resilient is a difficult one stronger position than their competitors,” he says . to strike,” says Alistair Davidson, Head of Staff at IKEA . “When Regulatory risks will be high on the CFO’s agenda. In 2012, for you overfocus on keeping costs low, then you might not invest example, the US Securities and Exchange Commission (SEC) enough in making sure you have a stable environment in which issued a rule to implement disclosure requirements regarding to work . And if you go completely over the top on stabilizing the “conflict minerals” as part of the Dodd-Frank Act. Conflict minerals environment, you are probably going to be giving up on part of the refer to those that originate from the Democratic Republic of the cost feature . So it’s a permanent struggle to strike that balance .” Congo, where armed groups are using the proceeds of the sale of Working together helps to mitigate risks these minerals to finance regional conflicts. This affects any SEC issuer, including foreign issuers, that manufactures or contracts to By becoming more engaged in the supply chain, business partner manufacture products where conflict minerals are used. Industries CFOs can look more deeply at exposures and assess how they are likely to be affected include electronics and communications, being managed . When asked about their key risk management 6 priorities, business partners highlight risks in the secondary and aerospace, automotive, jewelry and industrial products . tertiary supply chain as a key area of focus . This is also the number Tax risk is another important — and increasingly severe — one area of focus for heads of supply chain in business partnering risk category. Disagreements between taxpayers and tax relationships (see Chart 16). authorities, as well as between tax authorities in different jurisdictions, as to the appropriate tax treatment of the supply chain operating model can have serious financial consequences if not managed carefully . 6 Conflict minerals: What you need to know about the new disclosure and reporting requirements and how EY can help, EY, 2013. Partnering for performance Part 1: the CFO and the supply chain 31

Chart 16 Take a holistic view of risk, with clarity over who What do you see as the key priorities to ensure that supply chain What do you see as the key priorities to ensure that supply chain risks risks are appropriately managed in your business? owns what are appropriately managed in your business? Select up to three. Companies also need to adopt an enterprise-wide view of risk Increasing the degree of focus and ensure that a gap does not emerge between accountability on risks in the secondary and 50 for operational and financial risks. “Risk is a global topic, and you tertiary supply chain 60 can’t chop it up into different functional pieces because it doesn’t Use of scenario-planning techniques 48 work,” says Mr. Davidson, Head of Staff at IKEA. “It has to be built to examine the impact of changes to 31 key supply chain performance drivers around an overview — that you’re going to look at as a team — of Increased use of insurance to provide how those risks emerge . Clearly, I’m going to take a higher level 44 coverage for supply chain risks 40 of responsibility for the foreign exchange risk and the purchasing head is going to take a higher level of responsibility for the Applying analytical information 44 purchasing prices . But we all sit together and look at it in a to identify and mitigate 29 risks across the supply chain holistic way .” Conducting frequent audits of 39 Owning risk, rather than pushing it down the chain, suppliers to ensure that key 47 standards are met and risks managed can be a safer long-term strategy Modeling the impact of supply 31 Leading companies are also looking to gain greater visibility chain disruption in the secondary 44 and tertiary supply chain and control over financial risks in the supply chain. Prior to the % financial crisis, many companies would have been happy to push 0 10 20 30 40 50 60 Business partnering ﬁnance the management of risks, such as commodity price volatility, onto their suppliers. They would negotiate fixed contracts with Business partnering supply chain their supplier base and, if the price of raw materials increased or currency rates changed, it would be the responsibility of the Gaining visibility and control over secondary and tertiary suppliers supplier to absorb the consequences . requires significant levels of time and investment. Although More recently, however, some companies have recognized that, companies will always find it difficult to get the same degree of rather than mitigating risk, this approach simply transfers it control over their external suppliers as they do over the internal elsewhere in the supply chain . In addition, it is often then borne network, they can put processes in place to get as close to that by smaller companies that are less able to manage the risks as possible . This involves having quality indicators in place and effectively . The effects of this approach became painfully clear tracking them carefully so that, when issues do come up, the in 2010 and 2011, when a significant spike in commodity prices company is able to deal with them quickly . meant that many smaller suppliers could no longer absorb the increases under their fixed contracts and fell into bankruptcy. 32 Partnering for performance Part 1: the CFO and the supply chain

With the supply of components or products abruptly cut off, many companies suffered severe financial damage as a result. Better risk management through hedge optimization Craig Kennedy, Partner at EY in the UK argues that, rather than For several years, the International Accounting Standards passing on hedging risks to suppliers, large multinationals should Board has been working on a new standard on general hedge assume that risk themselves because they are better placed to accounting, which forms part of Phase III of IFRS 9. The aim of manage it . “To take on more risk is not a bad thing if you can the standard is to give companies the ability to form stronger manage it in a more efficient way,” he says. “If companies can links between their risk management activities, the rationale hand responsibility of these risks to their treasury or procurement for hedging and the impact of hedging on financial functions, not only is that team better resourced and more statements. But with a final standard yet to be issued, knowledgeable about how to manage these risks, they can also it seems likely that the effective date for that standard is make the process more cost-efficient by aggregating trades and likely to be pushed back until 2018. benefiting from economies of scale.” For now, companies need to adhere to the current accounting rules . But the way they are written means that there are Knowledge of your suppliers’ risks is power to manage it significant penalties associated with certain derivatives. More broadly, better flows of information and improved In essence, these derivative contracts are seen as trading collaboration with third-party suppliers can help to identify risks positions, rather than legitimate risk management tools . early and avert the possibility of supplier failure . In addition to Given that the penalties associated with these positions can relying on backward-looking credit ratings and other financial introduce significant P&L volatility, many treasurers choose information, companies need to be more proactive and put in place to avoid more complex derivatives altogether or take out processes to identify the risks of supplier failure and ensure that accounting hedges to offset the impact caused by their mitigation plans are in place . “By sitting down with their suppliers economic hedges . Either way, the result is that they tend to and discussing the planning process in a more collaborative way, select derivatives on the basis that they work favorably from companies can build stronger relationships, reduce risks and an accounting perspective, rather than provide an optimal risk ensure a smoother flow of inventory through the supply chain,” management solution . says Mr . Morris, EMEIA Working Capital Advisory Leader at EY . Hedge optimization aims to resolve this dilemma by assessing a company’s current exposures and derivative positions, and then determining an appropriate set of contracts that will minimize P&L volatility . This might involve decomposing trades into two or more synthetics, or exploring other options to optimize hedging portfolios and ensure that they are correctly designated for accounting purposes . Partnering for performance Part 1: the CFO and the supply chain 33

Ten steps for CFOs toward a business partnering relationship with the supply chain Take the pulse of your relationship with the supply chain. How collaborative is it? Is finance perceived as a gatekeeper or policeman? If so, these steps will help you to put the relationship on a more collaborative footing to drive higher performance . Make time for the supply chain . Business partner CFOs 6 Help drive supply chain performance through 1 spend an average of one day a week working with the an integrated operating model. Ensure that supply chain or on supply chain issues . direct taxes, indirect taxes, transfer pricing and the legal entity are integrated to the model . Allocate finance resources to the supply chain . 2 Determine whether the right finance resources are 7 Focus the supply chain on the metrics that matter. in the right places to enable a business partnering KPIs should consistently encourage the behaviors relationship . This may require a combination and outcomes that drive value . of “embedding” finance executives within the supply chain function and closer collaboration 8 Identify performance incentive misalignment. with the main finance function. Performance incentives across functional areas should be consistent and should support the broader Review the S&OP process . Your involvement can help business strategy . 3 to build stronger bridges between the commercial and operational sides of the business, and ensure that their Consider centralizing business functions. objectives are aligned . 9 Centralization of functions, such as procurement, can reduce costs, enhance risk management, Ensure business decisions are driven by a data- streamline processes and increase tax efficiency. 4 based single version of the truth. Discourage multiple interpretations of master data by different functional 10 Look deep in the supply chain for risks. Risks that lie areas. Position finance as the owners of the data. in secondary or tertiary layers are more difficult to manage, but they can be just as damaging . Support investment decisions. Business partner 5 CFOs are involved throughout the investment life cycle, from choosing an asset for investment through to managing its performance, retiring it or reinvesting in it . 34 Partnering for performance Part 1: the CFO and the supply chain

Partnering for performance Part 1: the CFO and the supply chain 35

Survey respondent demographics The following charts show the profile of the 423 CFOs and heads of supply chain we surveyed and the organizations they represent. Job title (in %) Between US$100m and US$250m 8 Company revenue (in %) CFO (including Group, Deputy and Divisional) 50 Between US$250m and US$500m 18 Heads of supply chain 50 (including logistics, transport, ﬂeet, Between US$500m and US$1b 23 operations, production, manufacturing, purchasing, procurement) Between US$1b and US$5b 23 Location in which respondent is based (in %) Between US$5b and US$10b 17 USA 16 Between US$10b and US$20b 7 China 9 Greater than US$20b 3 Brazil 8 Argentina 7 India 6 Singapore Primary industry (in %) 6 South Korea 6 Technology 14 Hong Kong 5 Oil and gas 14 UK 5 Consumer products 13 Canada 4 Spain 3 Life sciences 12 South Africa 3 Automotive 12 Russia 3 Telecoms 12 France 3 Mining and metals 12 Benelux 3 Germany 3 Manufacturing 6 Italy 3 Retail, distribution and transport 4 Nordics 3 Aerospace and defense 1 UAE 3 Australia 3 36 Partnering for performance Part 1: the CFO and the supply chain

Other titles for CFOs This is one of a series of studies from our CFO program, which provides insight and guidance on aspects of personal interest to the CFO as they seek to develop themselves, their teams and learn from others within their community . Other publications from the program include: The DNA of the CFO series EMEIA Americas Asia Pacific The DNA of the CFO Views. Vision. Insights. The DNA of the CFO Finance forte CFO and beyond A study of what makes The evolving role of Shifting up a gear: from The future of finance The possibilities and pathways a chief financial officer today’s CFO core finance to corporate leadership outside finance strategy The Master CFO Collection Back seat or center stage? What lies beneath? A tale of two markets Drought or drowning? Vol . 1 Vol. 2 Vol . 3 Vol . 4 CFOs and the media The hidden cost of entering Telling the story of investment Cash challenges for CFOs at both ends rapid-growth markets across developed and of the liquidity spectrum rapid-growth markets For further information on these titles and our program of investment in CFOs, please visit www .ey .com/cfo or contact Katherine Brinkley on [email protected] or + 33 1 46 93 56 12. Partnering for performance Part 1: the CFO and the supply chain 37

Contacts For further information, please contact: CFO program Supply Chain and Tax Effective Supply Chain Management Operations Advisory Katherine Brinkley Matthew Andrew Senior Manager, EMEIA Andrew Caveney Leader, Asia Pacific Tel: + 33 1 46 93 56 12 Leader, Global Tel: + 65 6309 8038 Email: [email protected] Tel: + 44 20 795 18571 Email: [email protected] Email: [email protected] Robert Brand Lisa Lim Director, Americas Brian Meadows Leader, Americas Tel: + 1 201 872 5692 Leader, Americas Tel: + 1 212 773 4756 Email: [email protected] Tel: + 1 703 747 0681 Email: [email protected] Email: [email protected] Gregory Gruz Joost Vreeswijk Marketing Program Director, Asia Pacific Sean Ryu Leader, EMEIA Tel: + 852 2849 9413 Leader, Asia Pacific Tel: + 41 58 286 2409 Email: [email protected] Tel: + 82 2 3787 4125 Email: [email protected] Email: [email protected] Frank Thewihsen Leader, EMEIA Tel: + 49 211 9352 16805 Email: [email protected] 38 Partnering for performance Part 1: the CFO and the supply chain

Finance Transformation Advisory Tony Klimas Leader, Global Tel: + 1 212 773 5949 Email: [email protected] Tom Cucuzza Leader, Americas Tel: + 1 216 583 4381 Email: [email protected] Christian Mertin Leader, EMEIA Tel: + 49 89 14331 13590 Email: [email protected] Paul Mitchell Leader, Asia Pacific Tel: + 61 29 2485 110 Email: [email protected] Partnering for performance Part 1: the CFO and the supply chain 39

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Partnering for performance Part 1: the CFO and the supply chain 41

EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services . The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over . We develop outstanding leaders who team to deliver on our promises to all of our stakeholders . In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities . EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity . Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients . For more information about our organization, please visit ey .com . © 2013 EYGM Limited. All Rights Reserved . EYG no . AU1907 EMEIA Marketing Agency 1000153 ED None In line with EY’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content . This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice . Please refer to your advisors for specific advice . 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 . ey.com 42 Partnering for performance Part 1: the CFO and the supply chain