The supply chain is the foundation of every company! It consumes a sizable portion of your budget. Sound financial management is crucial to keep expenses in check and the supply chain operating efficiently. However, if your supply chain costs are high, they pose a risk to your financial stability and may even lead to the failure of your company. The problem is that these costs are uncontrollable if your finance department and supply chain executives work separately. What is the best way to align these functions? Continue reading to know the role of finance in supply chain management and the fundamentals of combining finance and supply chain into a single system.
Link Between Finance & Supply Chain- Everything You Need to Know
It may seem that supply chain management and finance have nothing to do with one another. Budgeting and risk management are the concerns of the former, whereas procuring materials, producing goods, and selling them to final consumers are the latter’s concerns. The suppliers, producers, warehouses, and distribution facilities involved in getting items to clients are all included in a company’s supply chain. But in reality, these two processes are interdependent; your financial situation is impacted by the performance of your supply chain and vice versa. Let’s examine various illustrations of the connections between the supply chain and finance.
Paying your suppliers less in exchange for early payments could jeopardize their dependability and stability. Due to your existing suppliers’ inability to deliver the items as per schedule, you might end up searching for alternative sources of supply. You will have to spend more than you had anticipated producing additional products if there is a sudden increase in demand. But if you have too many unpaid invoices, you won’t be allowed to do that, affecting your finances. On the contrary, a sudden decline in demand may result in higher inventory costs, which may also lead to a loss. Therefore, it is evident that financial executives must make decisions based on what is occurring in the supply chain to practice efficient cash flow management. It is possible with an integrated supply chain management and finance system—a real-time platform for information sharing, forecasting, and reporting.
An Overview on Integrating Supply Chain Management & Finance
Combining supply chain operations and finance your firm’s financial efficiency and operational expertise improves through:
- Optimizable and executable plans
- Potential risk exposure
- Sophisticated planning models to reduce costs and achieve profits and growth
- Streamline business procedures by combining S&OP and rolling forecasts
The great majority of firms still struggle with more fundamental supply chain concerns like managing demand projections using the S&OP plan, whereas successful organizations concentrate on a more comprehensive examination of finance, supply, and demand. Successful businesses:
- Take into account significant limits when balancing supply and demand.
- Integrate finance with supply and demand by conducting gap analyses and taking corrective action.
- Improve inventory management capabilities, resulting in setting the safety stock targets in S&OP cycles.
Therefore, it should be no surprise that most finance professionals believe that integrating financial planning and budgeting with S&OP is their most important strategic move.
Integration of Finance & Supply Chain Management- Best Practices
Making data available and usable for supply chain and finance departments may be challenging because they often use two distinct platforms. What you need to remember while integrating are:
- Find links and learn the way your financial executives view and conduct business.
- Understand them better by identifying a common taxonomy and permitting collaboration.
- Train your staff to cooperate and work to use the system properly.
Benefits of Integrating Supply Chain Operations & Finance
Any company’s ability to grow sustainably depends on its ability to coordinate its financial and supply chain operations. But how precisely would an integrated solution support the success of your business? Let’s examine the major advantages of such integration.
Flexibility
When there is a demand increase, integrating finance with the supply chain gives a good head start. Unexpected accelerations may make it challenging for suppliers to meet demand. It might also be profitable for your suppliers to make R&D investments. Businesses may track market changes and adjust with an integrated system. When proper software exists, it only takes a few minutes to respond to any difference.
Precise Forecast
The budgeting decisions of traditional accounting procedures rely on historical data without reference to the forecasts of the supply chain executives. Businesses can consider more factors by integrating supply chain and finance, including sales projections, purchasing costs, production expenses, and cash flows. By accessing these data, organizations can more effectively maintain their financial health and produce more accurate financial predictions.
Also Read: The Indispensable Role of Fintechs in Bridging the MSME Finance Gap
Reduction in Costs
Finance departments frequently are aware of the total supply chain overhead costs but do not link them to specific supply chain procedures. Financial executives may eliminate uncertainty from overhead analyses and deploy cash more intelligently when supply chain data is readily available.
The Takeaway
By now, you would have understood that the role of finance in supply chain management is major in every organization. Finance integration not only lowers the chance of a disturbance in the supply chain but also aids purchasers in maximizing working capital. When a supplier uses this service, buyers can minimize supply chain disruptions and maximize their working capital. Integrating an organization with financial technologies gives customers and suppliers various payment choices, hence reducing financing costs.
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