Furniture retailer IKEA has a target of always having 96 percent of its products in stock. Before COVID-19, around 98 percent of products were typically available. But when the pandemic struck, stock levels in Hong Kong fell to just 77 percent. “In pre-COVID days, if stock levels dropped from 98.4 percent to 98.2 percent that would trigger questions. But during COVID, more than 30 percent of our shelves were empty. All of our bestsellers were either out of stock or had incomplete parts. We had kitchen cabinets and wardrobes but no hinges, and bed frames but no cross beams. The impact was vast,” says James Liu FCPA, Finance Director, at IKEA, which is part of the Dairy Farm Group.
IKEA is a vertically integrated business with consolidated hubs across the world that supply particular markets. Hong Kong’s hub is Shanghai, meaning it was hit hard by COVID restrictions in late March. “In the end, the decision was made to use air freight to supply hinges to Hong Kong, as the lost revenue from not being able to sell these products outweighed the higher cost of air freight,” Liu says.
The situation is a good example of the benefits companies can gain by having their finance and supply chain teams work closely together. There are many advantages to be gained from having the two functions collaborate, according to Florence Tang CPA, Senior Manager, Supply Chain and Operations, Consulting, at EY. These include optimizing planning, managing risk, driving sustainability and cost reductions, and helping to incorporate new technology-based solutions. “Companies often have quite a siloed approach and teams don’t really talk to each other, but it is important that finance and supply chain teams sit down together and communicate, and understand each other’s visions, key performance indicators (KPIs) and pain points, as well as how they can work together,” she says.
Nelson Chow, Partner, Supply Chain and Operations, Consulting, Greater China, EY, thinks it is important that finance teams take the time to share company goals such as increased revenue or margin, new product launches or capturing additional market share, with supply chain teams. “If finance wants to drive down costs, they need to define what costs they mean, such as the cost of goods sold, or sales, general and administrative expenses. Without sharing those common goals or having a common language, employees may just revert to their own job description and follow their own KPIs,” he says. Chow adds that people working in finance also need to make the effort to spend time on the shop floor talking to people in operations and understanding the issues they face. “Informal communications, such as having lunch together, are useful, as most people connect better in an informal way, rather than at a meeting,” he says.
Lawrence Leung CPA, a certified Internal Auditor at a consumer goods company, thinks having the finance and supply chain teams working together enables companies to do more accurate forecasting and manage lead times. “The first piece of the puzzle is understanding demand fluctuations and planning for certain scenarios to avoid either an excessive build-up of inventory or running out of stock.”
He points out that supply chains require frequent, and ideally real-time, monitoring. “If finance plays a bigger role and acts as a good business partner to the supply chain team, the process can be made much more efficient, and both teams’ perspectives can assist with real-time monitoring as much as possible.”
John Yang CPA, Non-executive Director of Tsui Wah Holdings Limited and Chief Financial Officer of Hailan Holdings Limited, points out that in the food and beverage sector it is very important that the two functions work closely together. “The finance team has an important role to play in processing payments and monitoring that the goods and services have been received by the company. Meanwhile, the supply chain team needs to ensure that everything is properly documented for the finance and audit teams,” he says. Yang adds that the finance team can help the supply chain to become more efficient by putting in place monitoring systems, and finding ways to cut costs or labour. “Finance nowadays is not just bookkeeping, they are more involved in areas such as supply chain, monitoring processes and identifying risks.”
“The finance team has an important role to play in processing payments and monitoring that the goods and services have been received by the company.”
A different skill set
Finance professionals, including accountants, have a number of skills that can help supply chains operate more efficiently. Tang suggests their strategic planning skills can be used to set priorities, strengthen operations and ensure employees and other stakeholders are working towards common goals. She adds that finance teams can also use their analytical skills and forecasting skills to help make accurate predictions for product demand, seasonal variations, and pricing differences, as well as anticipating future revenue and expenses, enabling the supply chain team to plan resources and allocate their budget ahead of time. Chow says: “Finance and supply chain teams usually have different knowledge and skills. Finance might be more focused on numbers, meeting compliance and internal audit requirements, while supply chain may be more focused on operations, so it is important to have open dialogue and share common goals.”
Yang points out that the finance team’s critical thinking skills can be used to spot any suspicious or abnormal transactions in the supply chain, helping to protect this area of the business from fraud. Meanwhile, Liu says they can help those working in the supply chain with governance and data protection. “We are also able to add return on investment and the financial perspective into the mix.” He adds that he has also learned a lot about the business from the supply chain team, particularly about customs regulations and how goods need to be labelled. “This knowledge helps with planning. Sometimes if we, the finance team, provide feedback to the franchisor to add certain text to the label, it can meet compliance requirements, clear customs quicker and reduce the cost to serve,” Liu says.
The benefits of finance teams and supply chain teams working together have been brought into sharp focus during the challenges created by the COVID-19 pandemic. Liu points out that when IKEA did not have the hinges it needed, the finance team analysed the potential business loss on sales of the whole product, and the impact this would have on meeting its annual sales targets, if it failed to fly these components in. “We looked at the situation holistically, forecasting what stock would be available and what stock would not be available, looking at warehouse capacity, how many containers were still on vessels and how many had been unloaded at ports,” he says. Having made the decision to fly in certain critical components, the finance team was also able to look for where efficiency savings could be made to offset these higher costs.
At the same time, Liu says they were also able to allocate budget to new areas of need that emerged during the pandemic. “We set aside money to look after our co-workers, promising not to make lay-offs nor ask for unpaid leave, providing them with face masks and rapid test kits, and organizing for people to get tested. It was important to build up a level of trust.” He added that when 30 percent of IKEA’s Hong Kong workforce was off work due to COVID-19, it was able to help with staff rotas and ensure those able to work were deployed in the most efficient way. “We also took the opportunity to invest in automation as well as put money into fleet management software, enabling customers to track orders on their smartphone to alleviate some of the pressure on our frontline staff on the logistics side,” he says.
Yang agrees that the finance team has had a particularly important role in helping the supply chain during the disruption caused by the pandemic. “Communication between the finance team and supply chain team to make sure both goods and payment arrive as scheduled is very important. If payment is delayed, the supplier will stop delivering.”
COVID-19 is not the only disruption that companies face, with many also impacted by issues such as the conflict in Ukraine, geopolitical trade tensions, and even cyberattacks. Chow says finance teams can help the supply chain overcome these issues by acting as a business partner. “If your supply chain set up is too reliant, for example, on Mainland China-based suppliers, oil from Russia, or raw materials from Ukraine, the finance team will need to work with supply chain people to find both short- and longer-term fixes.
“In the short term, finance may have to loosen KPIs, such as margin improvement, to fix the supply problem, ensure sales orders are met and the company does not lose customers. Longer-term solutions may require an investment plan or capital expenditure, such as digitizing their systems, or plant relocations to diversify your sources and avoid disruptions,” Chow says.
Leung agrees that the finance team can also help respond to potential future disruptions through helping the supply chain diversify its supply base, taking into account not only location, but also the speed and capabilities of the supplier.
Tang points out that finance teams also need to help build resilience in the supply chain. “The disruptions may be short-term crises but they have long-lasting implications on the way people work and how different teams collaborate. There is a need for the business to build long-term resilience into its supply chains to manage future challenges.” She suggests finance teams should work with the supply chain to build data platforms and incorporate technology, such as data analytics, artificial intelligence and machine learning, and blockchain, to increase end-to-end transparency across the supply chain. At the same time, they should put in place risk responses to potential disruptions as part of their business as usual protocols.
The need for collaboration has increased with environmental, social and governance (ESG) reporting requirements. With the finance team responsible for gathering data and writing reports on this area, they need to work closely with their supply chain counterparts to get the information they need. Yang thinks the finance team can help ensure companies’ supply chains operate in an ethical way through increasing their transparency and the level of documentation available. “It is very important that there is correct documentation at every stage throughout the process. Ensuring everything is easily traced can help to reduce ethical issues in the supply chain,” he says.
Leung points out that an important element of improving sustainability is having a level of accountability and a way of measuring success. “It is a long-term process. Finance is typically well versed in data reporting, creating metrics and frameworks, communicating, and reporting to a wide range of internal and external stakeholders. This skill set and experience can translate into supply chain KPIs and measuring success to motivate and encourage progress over a long period of time.”
Chow explains that supply chains also play a critical role in helping companies reduce their carbon emissions, particularly in terms of scope three emissions under the Greenhouse Gas Protocol. While it is not compulsory to report scope three emissions, many leading companies have started to do so. Scope three emissions are generated by activities from assets that are not owned or controlled by the company. Supply chains account for more than 90 percent of companies’ greenhouse gas emissions, with supply chain emissions 11.4 times higher than operational emissions, according to the Carbon Disclosure Project’s Global Supply Chain Report 2020. “Finance will need to collect these data from the supply chain, including information on first tier and their Tier-N suppliers,” he says.
Chow adds that the two teams will have to collaborate on how to reduce these emissions, such as through changing their procurement criteria to align with their carbon reduction goals. “In the past, if finance wanted to drive down costs, they may go for the cheapest bid at tender. Now, if the goal is sustainability, the scoring method may be different, with non-price goals. Finance and supply chain teams will have to collaborate and modify their internal processes and policies to find ways of working to capture these requirements.”
He points out that finance teams will also have to collaborate with supply chain teams if they are applying for sustainable finance, such as green loans, which require certain environmental targets to be met. “If companies are not sustainable, it is going to get harder for them to obtain finance,” Chow says. IKEA has set the target to become climate positive by 2030. As a result, Liu says the finance team is working closely with the logistics team to find ways to reduce supply chain emissions. “We are also investing in solar panels to generate electricity to reduce our carbon emissions, and we have invested in software to consolidate orders and minimize the number of journeys delivery trucks make.”
“It is very important that there is correct documentation at every stage throughout the process. Ensuring everything is easily traced can help to reduce ethical issues in the supply chain.”
Gaining a competitive edge
Leung thinks the key advantage of having the teams work together is being able to reduce risk through identifying risk indicators early and reacting to them. “Risk is reduced, and reaction speed is increased if finance teams and supply chain teams are involved closely, helping organizations respond to the changing business landscape. You can only deliver value if you are not disrupted by circumstances and maintain the ability to respond to consumers’ needs,” he says.
Liu agrees it is critically important that the finance team is more involved in the supply chain to help manage risk. “IKEA’s engine is its supply chain. If we don’t have stock, we won’t have a business. Under the worst scenario, not only would we not get stock to customers, which has financial consequences, but there are also environmental ones if we have to write off that stock and send it straight to landfill.” He adds that working together can also help the finance team produce more accurate forecasts by gaining a better understanding of the company’s cost base, pricing, and its ability to reinvest into the business. “We need to look at stock and mobility, as well as costs to forecast accurately. We need to consider stock ordering from the beginning all the way through to whether we have sufficient warehouses to store our stock in, and the cash flow impact if we have over-ordered stock,” he explains.
The finance team also needs to plan for the future, both in terms of capacity, and future investment that might be needed to improve the efficiency of the supply chain, such as setting up warehouse automation. “We are currently working with our Greater Bay Area (GBA) network to conduct a study on the arbitrage on warehouse rental for stock capacity between Hong Kong and the GBA, looking ahead to 2030 and beyond. We are projecting how many cubic metres we will need, how things will fit together and the different technologies we can use to increase efficiency,” Liu says.
Tang thinks collaboration between the two functions is particularly important as companies digitize their operations to enable them to make best use of the data they collect, with the finance team supporting the supply chain in using and analysing this data. “If companies have an integrated solution, it can help them to address traditional challenges, such as speed, efficiency and cost accuracy. It also enables them to be more agile and make informed business decisions.”
“If companies are not sustainable, it is going to get harder for them to obtain finance.”
She adds that working together can also help make companies more resilient to change. “The world is dynamic and everything changes in a short period of time. Finance teams and supply chain teams have to cope with ever-changing requirements and regulations. Working together can help make companies more sustainable and agile.” Chow agrees: “Everyone needs to work together to achieve the company’s goals. It will increase the competitiveness of the entire organization if different functions are more coordinated and less fragmented.”
Supply chains account for more than 90 percent of companies’ greenhouse gas emissions, with supply chain emissions 11.4 times higher than operational emissions, according to the Carbon Disclosure Project’s Global Supply Chain Report 2020.