Like my previous post Why Supply Chain Management is Better than Marketing, this is only a clickbait title. I don’t think any discipline is superior to any other. But having said that, the goal of this blog is to cheerlead for SCM, so let’s take a shot at the bean counters.
Short-Term Focus
It is tempting to focus on profits when you prioritize financial numbers over operations. With a few exceptions in venture capital, private equity, and value investing, finance is generally short-term focused. Not only can focusing on quarterly and annual results hinder long-term strategic thinking but trying to meet certain short-term financial targets can be disruptive to the actual operations of the business. For example, many professionals and managers have experienced or made suboptimal spending decisions themselves near year-end due to budget cutoffs.
Narrows Definition of Value Creation
Finance gives you a picture of the health of your business and your ability to execute and create value. It is also important in accessing and comparing potential capital investments. However, profit is not synonymous with value. Focusing too much on profits has been an indirect yet major source of the environmental and social problems we face today. Just because something is profitable doesn’t mean we should do it. In the worst cases, an organization may commit and/or become a victim of nefarious activities in the name of profitability. Companies increasingly require a social license to operate (or an old-fashioned good reputation) in order to be successful.
Diluted and Lagging Information
Financial reporting is used to measure a company’s performance and it is in large part a summary. Operational KPIs are arguably better because they are closer to what is happening in the real world. The combination of revenue and operational KPIs should be leading indicators of financial performance. This is even more pronounced in the era of big data. Long-term discrepancies between operational and financial KPIs should raise some concerns and alert you to look deeper into what is happening that may provide valuable insights into your business.
Summary
I have urged supply chain professionals to deepen their finance knowledge in post Road to the C-Suite for SCM but it should not be in isolation from their own field expertise. It is almost impossible to have a proper strategic focus when you look at numbers without context. A common theme of this blog is breaking function silos. When you combine functions and perspectives, you will have a much more powerful understanding of your business. One tool that expands upon financial metrics is called the Balanced Scorecard which I will cover in a future post.