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04 Jun 2021

Mastering Cost of Goods complexity in multinational manufacturing

Five key aspects of Supply Chain Business Finance transformation

Cost of Goods Sold (COGS) and product costing do not have to be pain points of the finance function. There is an opportunity to turn them into a competitive advantage – whereby an agile and technology-enabled Supply Chain Business Finance function adds value to the business through upgraded analytical capabilities, and supports corporate controlling by connecting business steering and accounting “worlds”.
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Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.

H. James Harrington

The challenge

Today we still see a significant number of organisations lacking sufficient transparency and insights into their COGS, restricting their ability to control costs and limiting optimisation opportunities.

Especially with globalisation of Supply Chains, many businesses have evolved since the time they have setup their systems, data flows, processes and organisations. Over the years, quick fixes have often been made in order to resolve pressing needs, which eventually added complexity and disconnect to data flows and financial processes.

Navigation through these complexities now requires dedicated financial experts with in-depth knowledge of these custom-build frameworks.

The opportunity

The Supply Chain Business Finance function plays an important role in an organisation, covering the following areas:

  • Supporting commercial performance management by providing product costs
  • Partnering with Supply Chain function to drive business performance
  • Enabling accurate Group financial consolidation of COGS and inventories

Leading organisations transform their Supply Chain Business Finance functions by reducing complexity and adopting leading practices. This allows them to improve COGS transparency, upgrade analytical capabilities and refocus efforts from day-to-day data gathering and troubleshooting of accounting or technology issues, to Business Partnering with Supply Chain leaders, adding value to the business.

Five key aspects of Supply Chain Business Finance transformation

Supply Chain Business Finance plays a key role in helping Supply Chain leaders to steer the business. Despite this close partnership, financial information is not always well connected to business KPIs – limiting its use by the business.

Our advice:

Reshape financial framework into a business steering instrument by connecting it to operational performance drivers

Accounting data at local legal entity level reflects product costs on a statutory basis, including intercompany profits, often making it unsuitable for commercial business steering. Excluding these intercompany profits to enable accurate business steering and consolidated inventory reporting is a common challenge.

Our advice:

Set up a parallel management set of product costs, aligning it with legal product costs in order to enable commercial see-through profitability and upgrade corporate finance analytics

Typically companies employ two inventory valuation methods: MAP and FIFO, based on Standard Costing. Businesses may underestimate the transparency and analytics benefits that the Standard Costing provides, also because it may not be easy to see how the two options it offers can fit into their existing model.

Our advice:

Leverage a standard costing method which fits your operating model in order to improve COGS transparency and financial business steering

Supply Chain Business Finance activities are sometimes considered as best performed locally due to a need of business proximity, restricting centralisation opportunities.

Our advice:

Set up a Product Costing CoE to drive continuous process optimisation and quality improvement, supporting the function’s focus on value-adding Business Partnering

Supply Chain Business Finance capabilities are highly dependent on the technology landscape, spanning ERPs, data platforms, Product Costing and Financial Planning & Reporting tools. A single-instance ERP platform can bring major improvement in data transparency and process automation, but requires time and significant investment.

Our advice:

Build an integrated technology landscape to boost automation and upgrade analytical capabilities…and dare to look into new technologies such as Blockchain

If you want to gain further insights on the five key aspects of Supply Chain Business Finance transformation, download the full article now (10 minutes read).

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