CFO to CFO: Gap’s Supply Chain ManagementBy
Supply chain disruptions or problems can cost companies big money. CFOs play a critical role in managing the supply chain, identifying and mitigating risks to ensure stability and create long-term business value, while also overseeing their company’s budgets and, in many cases, data analytics. Strategic Finance talked with Teri List-Stoll, executive vice president and CFO of Gap Inc., and Benjamin Stefancic, senior vice president and CFO of global supply chain and product operations at Gap Inc., to discuss the finance function’s role in creating more resilient, efficient supply chains.
SF: What is the CFO’s role in supply chain management?
List-Stoll: This depends a lot on the nature of the industry. But generally, supply chain is a big cost driver and value-creation lever for a company. And so, it’s something that a CFO needs to be deeply engaged in—both day-to-day operations and the impact on short-term financial results—but also strategically as you think about capital allocation choices and the direction of the company.
We staff specific finance support to sourcing and logistics; it’s a huge part of being a vertically integrated retailer. Ben [Stefancic] has a meaningful staff across the globe to support both sourcing and logistics management. Again, we focus not just on forecasting and cost management, but also on strategic direction, vendor identification, regulatory issues in country, etc.
Stefancic: The basic table stakes is ensuring good accounting and controls, especially in a supply chain operation. Depending on the company, you’re dealing with some pretty complex accounting principles, especially around international transfer pricing. In our function, we deal with international taxes, international transfer pricing, treasury, cash management, remote offices, legal entities, and governance.
Any CFO role these days has to be the financial conscience and the key business partner to leaders, helping them understand the implications of capital investment and return on investment. And in supply chain, that’s no different. We’ve done a lot of work in our distribution centers over the last five years to modernize them and increase automation as online shopping continues to grow.
Clearly, you’re talking about hundreds of millions of dollars of capital spend, and we want to make sure we’re getting a return on that spend, that the investments we’re making are the right ones, prioritized correctly, and that we aren’t overdoing it. Our team is extremely cost-conscious and productivity-minded. [We’re] that voice of reason asking, “How far out do you need to build? How much automation do you need to put in?”
We want to invest for a return on investment, but not overinvest. Especially on the logistics side, you have to ask, “What are we going to measure ourselves against?” Because there are tons of measurement tools inside of a logistics operation, be it distribution centers or transportation operations. You can establish goals that will be phenomenal from a service perspective: “99% of all calls answered within 30 seconds” or “We’re going to deliver everything to our stores within a 30-minute delivery window.” The more you push those operational metrics, you’re going to potentially increase your costs.
So you have to balance out what is operationally acceptable, what’s best in class, and how far you want to push that needle. Because there’s a balance between cost and service. We need to deliver really good service, and there are some areas where we need to deliver extremely good service, especially when it’s directly customer-facing, and understand the implications that the harder you push your operational metrics and service, you may be increasing your costs.
What’s that trade-off, and is that worth it? In some cases, it is. And in some cases, it probably isn’t—there’s a “good enough.” But balancing goals, asking what we’re evaluating our operational teams against, is very important for the CFO to have some input into.
At Gap Inc., Global Supply Chain (GSC) and Product Operations (PO) has two major arms. One is our logistics operations, which include basically all of our transportation function—everything from origin operations in Asia, getting goods across the water into distribution centers, and then directly out to customers through parcel shipments for their e-commerce and then out to our stores’ distribution network, out through line haul and poolers.
The second major arm is what we call our product sourcing function. That large team works with our brand design teams to take design to actual production and work with our factory partners and strategic vendors to get everything made and make sure it gets done on time. They do a lot of work on the innovation side on fabric platforming and yarns and so on. Rather than using an agent that gets things made for you, we have our own team because of our size and scale.
SF: How does robotic process automation (RPA) tie into supply chain management?
List-Stoll: There are many places within the operations of the supply chain where automation can create general process efficiency and opportunity to optimize costs. Certainly, there’s a lot of pressure on both labor costs and the need for process consistency, so there’s significant focus on automation to increase efficiency.
Stefancic: On the physical side, clearly, we’ve put a lot of automation in our distribution centers, especially in the online side. Look at online fulfillment vs. retail fulfillment. If you think about a retail distribution center operation, you’re loading up trailers full of product that are going to go to a pooler, who’s going to deliver thousands of units to each store. So if you’ve got 10 stores and 5,000 units of product, you’re talking about 50,000 units that are getting packed out, mostly in cartons. You can move a lot of goods.
In October 2019, getting set up for Black Friday, we moved 25 million units in a week. On the online side, which again is really growing in the retail marketplace vs. brick and mortar, every single unit that gets demanded by a customer has to be picked unit by unit. The labor requirements to do that are tremendously higher because you’re literally picking one unit at a time. For Black Friday, we might have two million units demanded; every single one of them has to get picked.
In order to keep the building throughput, you’ve got to put in automation. Otherwise, you can’t get enough people in the building to actually get that done, and the time it would take would be astronomical. Because of our investments in automation, we’ve more than doubled our daily throughput in the last three years. We’ve done a lot of other things as well, like paperless invoices to try to get that out of the system. It’s a combination of physical capital and technology capital to [invest in] automation, which has helped. We’re still hiring people, but we’re hiring less than we would have to if we didn’t have automation and that would be untenable.
On the finance and accounting side, we’re starting to do a lot of work with robotics in our shared service center and building programs to automate tasks, like accounts payable. We just launched a project in Asia to basically centralize our accounts payable in India, and we’re using systems like intelligent capture to feed invoices. We used to have to do a lot of manual invoice processing, because you’re dealing with lots of small vendors in different countries, and we were able to automate a lot of that, scanning invoices in and having the system pick up all the relevant data. You can take massive amounts of human time out. And isn’t exactly fun work, either; it’s kind of soul-crushing to sit there and process invoices manually.
SF: What steps should finance professionals take to prevent supply chain disruption?
List-Stoll: There are the traditional ways of having some degree of redundancy, which is important. More and more, the risks are broader and more complex in nature, including the growing cyber risk and the interconnectedness of supply chains. AI and data science capability will aid in planning and detection. You can even anticipate Mother Nature’s impact with more advanced notice, and, therefore, have more ability to respond. The opportunity comes from how you can leverage data and technology to have more advanced notice and planned responses. And having a strong business continuity plan (BCP) in place, not just on paper but one that has been tested and is widely understood and able to be implemented, is critical. As we work through our response to the coronavirus (CORID-19), we’re seeing the importance of having had these plans in place.
Stefancic: In the supply chain world, as the CFO, you need to be the general business expert of the function, keeping up with what’s going on in current events and letting your operators understand, “It looks like this is coming down the pike, and we need to think about a contingency plan and a contingency plan for the contingency plan, making sure that we’re able to activate when it happens,” so reading the tea leaves around, “What are going to be the big things that are potentially going to come up and disrupt us and how are we going to make sure that we build in reaction time to that?”
Looking at our budget for 2020, there’s a lot of inflationary pressures in the supply chain, not as much on raw materials. The International Maritime Organization’s changing their standards for bunker fuel for the ocean carriers that are bringing our stuff in; they’re going to a low-sulfur model. This is something that we knew a good year out, but we need to plan for this because it’s going to increase our costs.
How can we think about ways to offset that? Are there things that we can do to get product produced a little bit earlier so we can go on to ocean carriers that might have more port stops, although it’s a little bit slower, but then is the cost per unit going to go down to help offset that bunker fuel anchor? You have to have your finance crystal ball around and make sure that you’re thinking ahead and talking to your operators about, “These are the things that are going to potentially haunt us in the future. How do we deal with them now?” Because on a supply chain, yes, you can react, but being proactive is better. It takes time to build automation. You can’t increase your online capacity overnight; it takes years to do it.
We see brick-and-mortar retail sales flat to declining while online sales will continue to grow.
Putting the best data that you’ve got forward and doing the analysis to show, “These are the things we need to be planning for,” and then being willing to commit financially to, as an example, building out another online distribution center that’s not going to go live until 2022 or 2023, but I’ve got to make that call now. How do you educate everybody and get to a place of comfort to say, “We’re going to make that call and commit the capital; this is a long-term decision.”
There are some tech projects and things in the supply chain that can take multiple years to get done. You can build out a store in 10 to 12 weeks and pivot your product sourcing actually fairly quickly, but building out physical capital and technology assets takes time, and you’ve got to be able to forecast the future to do that.