In this Supply Chain Matters Editorial commentary, this Editor makes special note of this week’s report by The Wall Street Journal’s CFO Journal: Bang & Olufsen CFO Sets price Range for Purchases of Microchips. (Paid subscription or metered view)

The report caught our attention because it indeed manifests how ongoing production supply disruptions, particularly the global shortage of semiconductors, is now the direct attention of C-Suite executives.

The report outlines how the Chief Financial Officer of Danish speaker and television products company Bang & Olufsen has become actively involved in assisting the company’s material direct procurement staff in setting guidelines and price range targets for acquiring semiconductors which remain in global demand and supply imbalance.

According to the report CFO Nikolaj Wendelboe provides a “mandate on how to operate from a price perspective” which is updated quarterly or when required, and includes an acceptable market price range along with the impact of such purchases on the company’s gross margin results. Procurement team members reportedly have the authority to acquire components when a buying opportunity arises within the stated price target range.  In addition to component price guidelines, this CFO is actively supporting efforts to sign longer-term component supply contracts with key suppliers along with efforts among product design groups to provide added flexibilities in component sourcing for products.

During the company’s latest fiscal quarter, there was a reported negative 5.5 percent impact on gross margins associated with higher costs for components as well as transportation. Despite such impact, gross margin was up 1.7 percentage points from the year prior period, most likely from other cost offsets. Similar to many businesses of late, Bang & Olfsen’s CFO indicated to the WSJ that the company could have sold more products if they were not supply constrained in key components such as semiconductors.

 

Supply Chain Matters Perspective

We are highlighting this report for Supply Chain Matters readers because we wonder aloud how supply chain planning and direct procurement teams would react.

Given the current global supply management challenges, many would likely welcome such direct C-level involvement with added guidance while others will possibly have other responses.

There may be arguments that such guidelines should rest with a company’s sales and operations planning process where all stakeholder functions have some voice in analyzing the tradeoffs and impacts of obtaining needed supply vs. impacts to expected business sales and financial outcomes. Here there is respite in a consensus based decision-making process.

There may be personal reactions relative to just let me do my job and work established contacts to secure the supply we need.  Perhaps we could categorize this as the hero approach.

Regardless of the response, what this and other likely similar revised constrained direct supply decision-making processes imply is that needs for revised thinking have arrived in this highly evolving new normal of business and supply chain management.  Decisions now require the most up to date information relative to market supply and pricing conditions. Prior key performance indicators of overall cost savings or component cost reductions achieved do not have meaning without broader context.  Broader context must now include elements of supply and other forms of business continuity risk.

The global automotive industry has likely now recognized that procurement policy driven singularly by cost has significant implications.

A further take away for this new normal is that various supply chain management functions can no longer be islands to themselves in terms defining functional or individual success measures.  Individually negotiating the lowest cost supply, transport or logistics services agreement without context to market and business risk factors no longer suffices.

There is also a technology message here. Some can successfully argue that today’s advanced technology can provide a range of procurement price ranges aligned to gross margin impacts, and that machine-learning can produce this data autonomously. Indeed it can. However, we must all remember that human based consensus alignment will remain a rather important part of key decision-making processes. That is because it remains very convenient to be able to blame a flawed decision on singular data produced by an applications system with lack of understanding to the context of such data.

As noted in a prior commentary, diligent and data-driven planning remains essential for all functions. Collaboration among teams, supplier and services partners will remains equally essential as will humans achieving alignment with humans.

What are your thoughts?

Bob Ferrari

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