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The Expanding Role of the CFO in Developing Sourcing Strategies

Global manufacturers are rethinking their sourcing strategies, which are traditionally led by the Chief Procurement Officer. However, another key player is now sharing the spotlight: the Chief Financial Officer (CFO). The past four years of supply chain interruptions have highlighted the CFO's crucial role in deciding where to source raw materials, components, and finished goods.

 

Businesses are increasingly considering shifting some manufacturing away from traditional sources like China. This shift is driven by concerns over geopolitical tensions between the U.S. and China and the need to diversify sourcing to reduce the risk of supply chain problems. CFOs are at the forefront, asking critical questions such as: How much production capacity should be moved? Where should it be relocated? What are the pros and cons of bringing manufacturing back to the U.S. versus nearshoring in Mexico or other parts of Latin America? And what are the financial implications of each decision?

 

A recent survey by Taulia highlights the CFOs' priorities and concerns regarding new sourcing strategies. Feedback from 550 CFOs reveals insights into their experiences in 2023 and their expectations for the future.

 

Inventory management is a major concern for CFOs, as it heavily impacts corporate balance sheets. Companies are moving away from single-sourcing and just-in-time models, opting to increase safety stock. This strategy, which proved essential during the COVID-19 pandemic, provides valuable redundancy when supply chains face disturbances, such as missile attacks on ships in the Red Sea or low water levels at the Panama Canal. Erik Wanberg, Taulia's managing director of inventory management, emphasizes the peace of mind that comes with built-in supply chain redundancy.

 

Building up inventory buffers incurs costs, which CFOs manage by pushing inventory upstream to suppliers through vendor-managed inventory (VMI) programs. In VMI arrangements, suppliers retain ownership of goods until they are needed, reducing the financial burden on the original equipment manufacturers (OEMs). However, over-reliance on VMI can strain suppliers, who often operate on thin margins and face working capital challenges.

 

The missing piece in VMI arrangements is liquidity and financing. Many VMI programs have failed because they lacked working capital solutions for suppliers. Today, techniques like accelerating vendor payments, sometimes in exchange for invoice discounts or third-party financing, are helping to alleviate supplier pressure. Suppliers may also access funds under buyers' favorable financing terms.

 

Achieving a balance between cost and resilience is key. A VMI-run warehouse should act as a shock absorber, ensuring reliable sourcing without excessive inventory buildup.

 

The CFO’s influence has grown as the pandemic and supply chain problems have intensified pressure on working capital. Every nearshoring decision involves careful financial consideration of infrastructure, technology, taxation, insurance, and legal environments in target countries.

 

CFOs are not merely guardians of company funds; they are driving the push for greater resilience and agility. They recognize that stock outages must not compromise revenue. As manufacturers make critical sourcing decisions, CFOs will undoubtedly have a significant voice at the table.

 

If you are a business owner or CEO within the San Francisco Bay Area or Silicon Valley, in need of an experienced fractional or outsourced CFO to help your company control costs, increase profit margins, improve cash flow as well as identify strategic growth opportunities, our highly skilled outsourced CFO services provide direct access to high-quality expertise in a cost-effective manner.

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