Anybody here speak Finance?

By Dr. Alejandro Serrano, Professor and Dr. Spyridon Lekkakos, Assistant Professor at ZLC.

How often does this happen? The Operations or Supply Chain Director proposes something – perhaps a new inventory policy, or an investment in increased production, or a more efficient distribution network. The benefits are obvious. Yet the Finance Director just shakes her head and rolls her eyes. She might as well be speaking another language.

Actually, she is, and one that few operations people have been taught. Hot off the MIT presses is a new book by ZLC staffers Alejandro Serrano and Spyros Lekkakos that will help translate finance-speak, and give insight into the sometimes very different way in which Finance sees the world.

Practical Finance for Operations and Supply Chain Management explains the essential financial concepts and shows how these play out at a practical level. It is aimed both at students and at current practitioners, and importantly, it assumes no prior knowledge of finance and accountancy.

Alejandro explains the book’s genesis. “About ten years ago I had to prepare a course in ‘Finance for Supply Chain Managers’. I thought I could just go to market and buy a couple of books, but there was nothing devoted to this topic: there was ‘Finance for…’ almost everyone except the supply chain. Time has gone by and still no-one has written that book, so Spyros and I have written it ourselves. As far as we know this is the first such book written specifically for the operations and supply chain arena”.

Spyros adds “We’ve built on our experience of working with operations and supply chain practitioners who have little knowledge of financial language, and don’t understand the impact of practical decisions on financial statements. We’ve built a syllabus up by trial and error and that has given us the confidence to put on paper an effective approach to finance for the supply chain”.

Chapter by chapter, with accompanying exercises and worked examples, the book guides the reader through the financial arena from scratch, focusing on the three main statements: the balance sheet, income and expenditure, and cash flow, showing how these are prepared, what they mean, and how they come together to give a complete view. As Alejandro says “The linkages are complex and our book tries to disentangle them. As an example, a move to ‘cheaper’ Far Eastern manufacture may look very positive on the income statement, but the effects of longer supply chains, longer lead times, higher inventory levels, poorer demand forecasting may have a very different appearance on the balance sheet. “We want readers to say ‘Aha! That’s why the balance sheet and the cash flow statement matter’ “ says Spyros.

So the book, unusually, devotes a whole chapter to inventory, and two chapters to operating working capital. It also highlights the KPIs and key ratios that are most useful to the COO (rather than the CEO). Two chapters look at investment decisions, highlighting for instance the impact that changing inventory levels have on the Net Present Value of investments (and of course the book also explains what NPV actually means).

Cost and management accounting concepts are also introduced, illustrating for example how to assess ‘contribution’ and what this really means, and how bottlenecks – “the bread and butter for supply chain people” – show up in finance and accountancy. “we demonstrate the power of managerial accountancy and explain the links between financial planning and production planning”. Throughout, the book draws real life examples from companies such as Inditex (the parent of the Zara brand).

Real life financial statements can be intimidating: the authors present simplified versions of the three core financial statements with just seven items in each—which they name the “triple seven financial statements”. Alejandro says “We’ve tried to select those that are most important for supply chain people, while removing the unnecessary ‘noise’. These seven items are enough to give the picture and help readers make much better decisions”. As one reviewer has already said, this book “will help supply chain students and practitioners hit the ground running and link their knowledge of operations processes to the impacts they can have on the bottom line of the business”.

Practical Finance for Operations and Supply Chain Management, Alejandro Serrano and Spyros D Lekkakos, MIT Press, ISBN 978-0-262-04359-5