Over the past two years, a series of shocks – including factory closures, skyrocketing shipping costs, material and labor shortages, and war in Ukraine – have created a extreme variability for companies in virtually every industry.
These rapid changes have shown that the supply chain, a notoriously complex and technical field, is not reserved for specialists. According to Kimberly Kirkendall, CPA, this is a topic every finance executive should know about as they prepare for years of prolonged disruption.
“I think we’re going to be in a very disrupted environment for a few years,” said Kirkendall, president of International Resource Development. “And in this disrupted environment, the finance-accounting team’s ability to say what the business can and cannot support financially – that’s going to be a critical part of all of those decisions.”
Kirkendall’s career has included a decade in China managing factories, years at a regional CPA firm in the United States, and today at a consulting firm focused on international operations and supply chain. .
“A lot of what I’ve done over the years is really at the intersection of operations, supply chain, accounting and finance,” Kirkendall said.
And the last few years, she said, revealed that there weren’t enough people working at that intersection.
The pandemic has brought obvious physical disruptions – like cargo ships piling up in ports and store shelves emptying – but has also affected businesses’ ability to balance books and manage tax liabilities, and it has created new demands for the financial profession, she says.
In separate interviews, Kirkendall and another CPA supply chain specialist, Al Paul, head of operating model efficiency for the Americas in EY’s national tax department, explained the crisis. chain and urgently advocated for finance leaders to build their supply chain knowledge and capacity.
How does supply chain disruption affect businesses?
The supply chain crisis has created urgent new demands for finance leaders. Businesses are being forced to change where and how they get their products, which means they are forging new business relationships and even new tax regimes. Meanwhile, uncertainty over logistics and pricing creates new challenges for forecasting.
With the supply chain likely to dominate leadership discussions in many companies, it behooves finance leaders to develop their expertise. It starts by looking at the roots of the problem, which extend far beyond the pandemic.
“COVID exacerbated a problem that already existed,” Paul said. In the early post-World War II period, companies “moved to a simple, linear supply chain with a focus on reducing costs, increasing speed, reducing inventory so that it was just in time”..”
This model resulted in supply chains that maximized profits through efficiency. But these arrangements have often sacrificed redundancies — such as inventory buffers or backup vendors — that can help a business through tough times.
Among the most recent major challenges, Kirkendall said, was the “whiplash effect” of COVID-19 — a sort of imbalance between supply and demand. It started when the early stages of the virus outbreak caused Chinese factories to shut down.
The shutdowns led to inventory shortages, leading to panic buying and pent-up demand in the United States. Then Chinese manufacturers responded by sprinting to higher production again. But by the time the goods hit the market, consumer demand had plummeted in many categories due to shutdowns in the United States.
These types of disruptions affect “businesses’ cash flow and how they manage their profitability targets for the year,” Kirkendall said.
Supply chains have also been impacted by rising tariffs in recent years, ongoing COVID shutdowns, as well as the extreme disruption of Russia’s invasion of Ukraine this year. In response to all the challenges, lead times for goods have doubled or tripled and shipping costs in some cases have quadrupled, Kirkendall said.
Extreme variance means finance managers need to adjust their approach to forecasting revenue and expenses. Businesses must now decide whether to spend more money on keeping larger amounts of inventory to minimize disruption. Many are also looking for savings elsewhere as shipping costs increase.
Beyond the short-term turbulence, Paul and Kirkendall see a long-term shift in how companies approach the supply chain. Instead of employing a hyper-efficient and minimalist chain, companies can increasingly rely on a more complex network of suppliers, appealing to manufacturers in many areas, including domestic and near-shore markets. . Companies that relied on products from a single source needed to quickly find additional sources, preferably in more diverse regions.
“Now you have to have something much more complex and networked,” Paul said.
Kirkendall also described a scenario in which companies move to “regional hubs,” with manufacturing and distribution hubs in multiple regional markets. Materials and finished products will be distributed “around the world” and many companies – especially in the tech space – will be more interested in owning or partnering more closely with their suppliers.
“So what does this mean for the business? More capital investments. More assets on your portfolio. Potentially more loans to support additional capital and more complex financing,” he said. she declared.
What does all this mean for finance?
These changes represent an opportunity and a challenge for finance teams and their members, whether they work in accounting firms or within companies.
For example, complex new trade agreements will raise new tax and remittance issues.
“So many times companies will think their problem is a logistics problem or a shipping problem,” Kirkendall said. “Actually, the issue is more complex: how do you move the money for this transaction? What does that mean for customs? … How do they account for the goods in their books?”
Finance, she said, needs to be involved early and often in supply chain changes. In an era of increasing complexity, Paul said, finance must also understand the legal, tax and global business aspects of the supply chain.
“It’s not just about the books,” Paul said. “It’s about how your books match up with what’s actually going on in the business, to properly reflect those activities?”
Each company’s supply chain will raise unique issues, such as force majeure issues in a particular contract. The goal for finance, he said, is to partner with experts in other areas – including indirect taxation and customs and duties – to examine all aspects of a scenario. before making a decision.
How can finance professionals adapt?
Both Paul and Kirkendall emphasized the need to learn the language of supply chain and bring in experts from other specialties. They suggested several ways to do this:
“It just makes you more of an essential resource,” Kirkendall said of networking. Additionally, she said, CPAs from different countries can help finance managers understand local standards for accounting and finance in various segments of the supply chain.
- Connect with expert advisors. For accountants, clients or professional associations can provide more in-depth education on the issues, Paul said. Kirkendall also stressed the importance of developing relationships with small- and medium-sized business advisors with relevant expertise — and connecting them with clients.
- Learn from other parts of the business. Internal finance teams can learn more about the supply chain from sales, production, and other units. “Spend time with them to understand what they do, why they do it, what their goals are, and how you can align with the business initiatives they pursue,” Paul said.
- Follow the news. More broadly, Kirkendall urged finance professionals to educate themselves on the subject by following industry-specific news and general international news, as well as taking continuing education courses.
“You don’t have to be the ultimate expert advisor in these areas, but part of the value you add is that you’re able to ask the right questions. How does that affect that part of your des business?” said Kirkendall.
For a topic as complex and rapidly changing as the supply chain, the two experts said, finance professionals must learn to navigate the broader business and tap into the wisdom of others.
“You can’t understand what people are saying until you understand their language,” Paul said.
— Andrew Kenny is a Colorado-based freelance writer. To comment on this article or suggest an idea for another article, contact Courtney Vien at [email protected].