CFO to CFO: Finance and Supply Chain ManagementBy
Senior finance executives at Walgreens Boots Alliance and Meritage Homes discuss how finance supports supply chain management.
The COVID-19 pandemic; a container ship that blocked the Suez canal in March 2021; and geopolitical conflicts this year, including Russia’s invasion of Ukraine, have roiled the global supply chain and left procurement and supply chain specialists scrambling for solutions. In a conversation with Strategic Finance, Jessica India, vice president of finance for retail products, supply chain, and marketing at Walgreens Boots Alliance, and Hilla Sferruzza, executive vice president and CFO of Meritage Homes Corporation, offer best practices for the finance function to most effectively support supply chain management.
SF: What are your current responsibilities related to supply chain management?
Sferruzza: Coming out of [the late 2000s housing crash], we decided we needed to hone our strategy. What were we going to be? What was going to be our differentiator? We had a strategy [meeting] with all the executives, and one of the big takeaways was, to be successful in the next iteration in home building, we needed to streamline everything. Our internal mantra was “Easy equals right.” A big part of that for home building, if you think about all the components that go into manufacturing an individual home—and we do this thousands and thousands of times a year—was to figure out our supply chain.
We attacked it with a two-pronged strategy. First was standardization of everything across all our geographies and limiting the number of SKUs [stock-keeping units] that we were purchasing to allow us to become more efficient. Second was aligning ourselves with partners that could deliver the product [and] had robust enough supply channels that we could get all the materials that we need. Home building, construction, is very linear—you need the pieces in a certain order—so making sure that everything’s coming on time as scheduled was critical when we were going through this new iteration.
Supply chain management is tangentially important in a CFO’s role, but we as an executive team became really immersed in it as part of the output of our strategic analysis. Fundamentally the role of management is procurement and purchasing, but [because of information technology’s] interaction with finance, under my CFO role, I also have the IT team, so I get to benefit in two ways. From the financial piece, we provide a lot of critical financial analysis on the supply chain channel itself, and then on the IT side, we provide all the technology that creates the data analytics, reporting, APIs [application programming interfaces] with our partners, whatever’s required to make the business run more efficiently and give us a competitive edge for the next stage.
India: At Walgreens, supply chain management covers all omnichannel retailing, which means getting products to our customer when and how they want it. There’s a lot of complexity in this model because we’re getting products into our distribution centers and stores to get product to customers—we’re operating more than 9,000 stores across a national footprint. We need to have the right products in the right place. [We start] with the merchandising team on setting the strategy for categories and suppliers, and then work closely with the inventory management teams to get the inventory and demand planning right so that we can make sure that we have the right inventory in the stores and in the right location, given our vast footprint.
We’re looking at different ways for how we get the product to the customers with our omnichannel solutions, including direct to home, so [we’re] looking at costs of shipping and how we’re sending things out of our distribution centers directly to customers, as well as the pickup channel and shipping from the store to home. There are many different components related to retail supply chain beyond the traditional supply chain, and our focus is really on how we serve the customer.
SF: What are best practices for finance executives to oversee and support their organization’s supply chain management?
India: It’s critical to look at the cost and manage the inventory from a distribution perspective. But some of the best practices that we’ve seen are more focused on understanding operational metrics (such as cost per package, cost per order, labor costs, etc.) and finding ways to drive efficiencies. We’re always looking at those operational metrics and using them as levers to understand how we can shift and shape the supply chain to be more efficient, rather than just focusing on the core financials.
Sferruzza: Understanding the operations is fundamental to being a successful partner to the purchasing and procurement teams. If we look at the financials, then everything becomes money and is either a cost or a revenue component. So we definitely need to understand the financial components, but doing that in a vacuum without understanding the operational components is meaningless. You need to provide leading early indicators, not just report the news. I think of my team as two groups: accounting that reports on what’s happening—that’s critically important so we can analyze it—and my predictive team, which is really the finance group; they need to be ahead of the game and understand what’s happening. And I always challenge the finance team to expand their horizon beyond just financial inputs and understand some of those intangibles that drive supply chain management. What’s the availability of the product? Is there analogous product? Was there on-time delivery? What’s the history and our experience with suppliers?
Understanding all those soft, nonfinancial components that eventually translate into financial components is really important, as well as the interplay between what’s important operationally and what are leading indicators to arm the operations part of the business with some intel. I really think that’s the core function of the finance team in supply chain management decision making.
SF: How do finance leaders partner with supply chain and procurement officers to make effective strategic financial recommendations?
Sferruzza: First of all, the data has to be clean. We can’t have different metrics; they have to be consistent. We have 19 divisions and 15,000 houses projected for this year. We need to make sure that we’re all using the same metrics in the same way, we’re measuring everything in the same way, and we’re understanding what the ultimate goals are. Then we can build the models effectively, always gut-checking and making sure that we’re understanding where the roadblocks are so we can get ahead of them and clear the path for operations to run forward. Our job is to run ahead of operations and move all the obstacles out of the way so they can be the most efficient going from point A to point B.
India: It’s a balance between challenging the business and supporting the organization so that they can be making the best decisions possible. So we’re helping them and providing the underlying data so that they can really understand what the financial ramifications are. But it’s critical to understand how the business and operations work and what the strategic outlook is for the organization so that finance can both help the business get to exactly the right outcomes and really push them to think more broadly but also be critical from a cost and financial perspective.
SF: What are the most important elements and stakeholders of supply chain management and procurement?
Sferruzza: Supply chain management affects the purchasing and operations teams, but it’s much deeper than that, at least in our business. We sell what we build, so if there isn’t a clear vision of the supply chain or a clear understanding of the construction build and when things are going to be ready, then the customer ultimately is the most impacted.
I’m hyperfocused on early leading indicators these days. What’s happened with COVID worldwide and [the pandemic’s impact on] home building has really sent a shock reverberating through our system, and it’s forced us to start to analyze data much earlier in the process. Now we’re asking, “Why isn’t lumber arriving on our job site? What’s causing issues further up the supply chain? Is there an alternate product, or if there isn’t, how are we adjusting that?” We’re getting a crash-course education. We’re starting to question [the availability of] components earlier in the process.
We aren’t vertically integrated in our sector, so it’s difficult because you have to challenge yourself and think through where your suppliers’ challenges are going to be so you can kind of anticipate [delays]. Because typically by the time your supplier calls and says, “I’m not going to make next month’s shipment,” that’s way too late for the house with no windows. So you need to really get ahead of that process, try to understand the inputs and outputs, and have contingency plans.
India: Obviously there’s a big focus on cost and efficiency, but we’re also looking at quality and sustainability and making sure that we’re getting the right and diverse set of products and being a good partner. There’s also a very strong requirement to make sure we have an ethical and diverse set of supplier partners that we’re working with as well.
SF: What are the main causes of supply chain disruption?
India: During these unusual times of the pandemic, there’s been continued disruption on the supply chain. At the beginning of the pandemic in February and March of 2020, customers were stockpiling. And then there’s been a consistent challenge to get back in stock a lot of products and making sure that we have access to new items that customers need. We’ve seen supply chain issues driven by shortages of labor, as well as major issues in the global supply chain getting access to raw materials, challenges with shipping channels, etc. There have been so many different challenges that we’ve come across over the last couple of years that created significant challenges from a supply chain and business-continuity perspective.
Some of the things that we’ve been doing to help solve [those challenges] are finding alternative sources where that’s possible and being very proactive in our discussions with our suppliers to make sure that we’re getting prioritized as much as possible and getting some of those products onto our shelves. As the focus over the last 20 years or so has been on having Lean inventories and Lean manufacturing processes, it took any of the shock absorber out of the system. So every bit [of supply chain disruption] that we saw over the last couple of years, we felt it because there isn’t a lot of excess capacity or excess inventory in the system.
Sferruzza: We break hindrances or disruptions into two categories. The first kind are unavoidable, not within my control, such as tariffs on a lot of the products and the inputs that we use, national disasters, like fires, floods, and hurricanes, that directly impact the whole building sector, overheating the market. There isn’t enough labor or certain materials to make the products. All you can do for that is have a contingency [plan] B, C, D, E, F, all the way down to Z and start executing those.
The [second and] worst kind of hindrances are self-inflicted, such as when you’re poorly anticipating your own demand or when you aren’t in communication with your supplier and you aren’t realizing that they switched a product line that you’re continuing to sell and then it doesn’t arrive. This is a life lesson: Focus on the things that you can control and make sure that you’re really good at those, but don’t ignore the ones that you can’t control. They aren’t within your control, but the contingency plan is. Role-play contingencies frequently enough so that when you have to execute, you know what to do. It isn’t “Oh my gosh, no one but the CFO and the head of procurement has ever thought this through,” or when the team actually looks at your plan, they say, “That isn’t doable in real life, so we can’t do that.” So role-play and make sure that you’ve got those processes in place, and when you do have to press the go button, everybody knows what to do.