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Managing supply chains for competitive advantage
How can management accountants manage their supply chains to maximise resources?
Supply chain management is defined by the UK Department of Trade and Industry Supply Chain Networks Group as ‘the systematic planning and control of technologies, materials and services, from identification of need by the ultimate customer’.
Firms compete with each other on the basis of the relative merits of their supply chains. This article summarises the first three stages of the supply chain management model in the diagram below (the remaining stages will be dealt with in a subsequent article) and considers what organisations and management accountants must do to optimise resources.
Organisations must form a supply chain strategy that matches their objectives and competitive strategy. To do this, it has to evaluate its current strategic positioning. This stage involves competitive and market analysis together with risk analysis.
Porter’s Five Forces have been used by many organisations to respond to strategic challenges - particularly challenges like competitive rivalry. The Five Forces are:
1. rivalry among existing competitors2. threat of new entrants3. threat of substitute products or services4. bargaining power of suppliers5. bargaining power of buyers.
Mark Walton, partner in global head of operations consulting at PricewaterhouseCoopers, said that sometimes there is a lack of fundamental knowledge of how the supply chain works - especially at senior level.
‘It’s important to have the right data to hand, and also not to let egos get in the way. The people who will be enfranchised or disenfranchised by supply chain arrangements are often the decision makers. Organisations need to balance the stakeholders in the decision, as well as have the best possible information.’
Value chain performance is analysed to identify value from the customer’s viewpoint. There is no point in supplying goods or services if the organisation does not create value in the customer’s mind.
Traditional management accounting techniques involve efficiency measures and controls. They can help organisations to analyse supplier performance and company capabilities - but in isolation. Supply chain management includes each link in the whole supply chain, from producer to consumer. The object of value chain analysis is to view each link in the chain from the perspective of customer requirements.
A horizontal organisation will centre on processes and teams that support integration with customers and suppliers, and which build a value-adding culture. Its production processes will be structured around customers and staff initiatives to encourage a motivated and committed workforce.
A horizontal organisation will also use management accounting techniques – for example, activity-based cost management, integrated cost systems, target costing, life cycle costing, balanced scorecards, quality costing, theory of constraints, customer-focused accounting and open book accounting.
‘These techniques are very important once the company has established its basic operating model,’ said Walton. ‘Decisions have to be made on where to make the product, where to store it and where to ship it. If I move product A via location B on to customer C, how does that affect profit? Techniques such as activity-based cost management can help organisations to find answers.’
The model demands a proper evaluation of supply chain risk in terms of the organisation’s resilience and vulnerability. SCMA techniques are important here. They should look at both demand-side (customer) and supply-side (supplier) risk, together with supply chain vulnerability drivers.
Management accountants need to consider the level of supply chain maturity; the opportunities this offers; and its impact on requirements for supportive management accounting practices.
In a traditional, autonomous firm, ‘arm’s length’ relationships may exist in the maturity/development phase of supply chain relationships. Here, supply chain management accounting (SCMA) techniques look for the lowest cost option that meets required quality standards. Tendering and on-off supply agreements which need traditional management accounting techniques may be usual.
As relationships move through the maturity/development cycle, management accountants will be able to use different SCMA techniques. By the time the mutual dependence/partnership phase is reached, techniques such as open-book accounting become more acceptable. There will be far more scope for the relevant parties to benefit mutually from better cost and quality.
This article is based on ‘Supply chain management accounting’, a Management Accounting Guideline by John Cullen, published by the Society of Management Accountants of Canada, the American Institute of Certified Public Accountants and CIMA. CIMA members can access the full version in the CPD resources/ technical resources section of our CPD centre.
A follow up article will overview eight SCMA techniques that management accountants can use to increase competitive performance, and explain how these techniques can be applied in specific supply chain situations.
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