Translating SCM into P&L

If you want to get the attention of your company's top executives, you need to speak their language, and that means finding a way to show the impact of supply chain management (SCM) on the profit and loss (P&L) statement. For many managers, that's far from easy.

In the CAPS Research report Measuring Purchasing's Effectiveness, author Roberta Duffy points out that financial statements tend to follow strict time-period increments (for example, "quarter one" or "fiscal year 2007"). Supply chain and sourcing activities, however, don't always fall into those neat increments. For example, the P&L statement may report revenues from the sale of certain products, but the materials used to make those products may have been purchased several time periods ago.

"At any given time," writes Duffy, "various goods or services could have been negotiated for cost savings, but each might be in a different spot in the pipeline. The result is a final product comprised of all those total-cost aspects, each of which might have been realized or credited during various time periods."

How, then, can supply managers make savings visible to top executives? One way is to take advantage of the three separate opportunities supply management/purchasing has for creating savings: 1) during contract negotiations, 2) when working with a business unit, and 3) when resolving problems.

Placing savings into one of these categories can help managers show some time-period-specific savings, even if they don't always coincide with the P&L period.

[Source: Measuring Purchasing's Effectiveness (pdf), CAPS Research, 2008, www.capsresearch.org]