In this episode of Lehigh University’s College of Business IlLUminate podcast, we are speaking with Zach Zacharia, director of the Center for Supply Chain Research at Lehigh, and Steve Scala, executive vice president of corporate development at DiCentral, a leading global provider of business-to-business integration and application and system integration solutions. The topic: What Every CFO Needs to Know About Supply Chains. That’s also the title of a recent research report resulting from a year-long study by the Center for Supply Chain Research and DiCentral that focused on uncovering the impact that supply chain digitization has on a company's bottom line.
Dr. Zacharia is an Associate Professor of Supply Chain Management in the College of Business, where he teaches graduate and undergraduate courses in supply chain operations management and logistics and transportation. Scala is responsible for identifying strategic priorities, building partnerships, executing mergers, acquisitions, and divestitures, as well as integrating new business and partnerships into DiCentral’s organizational structure.
They spoke with Jack Croft, host of the ilLUminate podcast. Listen to the podcast here and subscribe and download Lehigh Business on Apple Podcasts or wherever you get your podcasts.
Jack Croft: Let's start at the beginning. How did this partnership between DiCentral and Lehigh University Center for Supply Chain Research come about?
Steve Scala: It basically started when Zach was actually starting the Center for Supply Chain Research at Lehigh. At the same time, DiCentral was looking for a partner to do some research. Obviously, I think we all today use the internet as our primary research tool for major purchases. Our clients, we think, go out to the internet and research a lot of available solutions for supply chain problems before they even invite a vendor in. So as a vendor for supply chain solutions, we were looking at trying to get content out on the internet that actually was backed by leading research institutes because obviously, if we just put it out there as marketing material, it's highly discounted in terms of the way people look at it, think about it, believe it, etc. And whether you're buying a car or a dishwasher or going on a vacation, I think people today just go to the internet to research a lot of their material.
So I approached Zach when he was starting the center and asked him what his vision was for the Center for Supply Chain Research. Then, I talked to him about the fact that I wanted to do research and fund that research, and that really fostered this partnership between the two of us.
Croft: The report that came out of that research is called What Every CFO Needs to Know About Supply Chains. What would you say are the key things for CFOs to take away from it?
Zacharia: So if I could perhaps jump in and answer and then Steve can finish. When we did this study, we identified a number of benefits of being able to digitize. And here are some of these benefits. Number one, and this is a really good thing for CFOs to learn, is that it reduces days sales outstanding, the cash-to-cash cycle. Getting that cash available and active, that part of the cash flow of your system, is a huge benefit. Second, you increase the cash flow. The available cash that a company actually has. Third, you can actually improve the accuracy and the frequency of your cash forecasting.
Now, some of the CFOs we surveyed did say that the price of cash is so low, that to borrow money the interest rates are so low. But that's not always going to be the case. So it always makes sense to figure out how to keep available cash. You digitizing will obviously improve gap compliance. You'd also reduce any need to reconcile or restate your results and thereby reduce the errors that are associated with it. And finally, it reduces manual data entry. All of these are the benefits of digitizing both on the customer side and the supplier side.
Scala: For me, what I think I took away from this was, at the end of the day, the financial performance of the company is not going to improve without collaboration between the people that are running the supply chain and the people that are running finance. There's a vocabulary difference between the two. If the CFO calls down to the supply chain guy and says, "Hey, did we ship that product?" Maybe not implied in there specifically, but maybe he is asking a revenue recognition question. Which is, he wants to know whether he can book that revenue or he doesn't. And yet, neither party really understands what the right way to ask that question would have been, or not. Maybe the guy down the supply chain only sees that the product shipped and maybe he says, "Yes." But maybe it's got a 10-day journey associated with it and maybe the revenue gets booked incorrectly as a result of that. So I think there's a vocabulary, there's a set of objectives the supply chain people have. And there's a set of objectives the finance people have. But at the end of the day, everybody's motivated to try to improve the financials of the business.
The research paper obviously highlights many of the intersection points, I think, between supply chain and the finance group. One was revenue recognition. The second is days sales outstanding. The third is cash. Collecting it, getting it in, getting it booked back on the ERP [Enterprise Resource Planning system], and then just digitizing things because there's a lot of manual costs in the process. And I think that really for me, it just reaffirmed that there is a disconnect between organizations, many times, within businesses. And we're trying to highlight areas where two of these, at least, organizations can get together and talk about it in a common way, such that the objectives are better understood.
Just to give you a view of how bad that revenue recognition issue is, I mean, two-thirds — two-thirds! — of the people in our survey basically said that they had to make manual revenue adjustments in their financial statements based on confirmations of when the customer actually took possession of the product. So if these things were working well, there's just no way there'd be two-thirds of our companies having to go in and readjust, if you would, entries that were already made to a financial statement. And that just goes to show how much misinformation exists within the business that we would have that level of activity still taking place.
Zacharia: If I could add one more aspect of what Steve said, he reminded me of the idea of collaboration. A very large customer went to a 90-day payment term, and the CFO that I talked to said, "We realized that our suppliers were going to be in trouble, so we arranged to get a line of credit for them at a lower rate than what they could get so that we could make sure they're going to survive in time to get paid properly. Because you do have to look out for your suppliers."
And the key underlying message there is that collaboration — talking to your customers, talking to your suppliers, sharing this information — is a huge and very critical part of being successful in the long-term and it needs to be reemphasized when you're really looking at running a successful company.