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CIMA shares supply chain forecasting strategies

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As part of our investigation into recent supply chain disruptions, AccountingWEB asked CIMA what companies affected by these issues could do to keep their teams prepared.

20th Oct 2021
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Following recent supply chain disruptions, CIMA came forward with suggestions for new approaches that companies could adopt to anticipate and react to supply chain problems when they first pick up initial warnings.

The pandemic has been a catalyst within the business world, condensing years' worth of change into a matter of months. Financial processes such as reporting and forecasting were forced to accelerate to adjust to such demanding conditions. When businesses are less certain, they need to take more frequent data samples and and review them more frequently; instead of quarterly and monthly reports, weekly and even daily management reports are becoming the norm in many sectors.

In response to these fast-changing scenarios, the management accounting association offered practical tools and tactics to help finance teams cope.

A long term crisis

According to CIMA, the recent gas price rises and petrol shortages repersented short term impacts of a much longer term productivity crisis that was exacerbated by Brexit and the Covid-19 pandemic. While these issues aren’t going to be solved overnight, there are a variety of actions that businesses can take to mitigate their impact.

CIMA research found that businesses often struggle to reallocate resources in the face of changing priorities, which in turn reduces their responsiveness. When uncertainty grows, business leaders will naturally want to hang on to their cash. While this response is understandable, boards that rein in investments on what they see as low-return initiatives may put their resilience at risk.

The current business environment demands agility and flexibility, so businesses should instead review their resource allocation approach to see where their current limited resources could be redistributed to boost effectiveness.

Planning for the future

CIMA also found that businesses often fail to address risks that they have long been aware of. The past 18 months deomonstrated how quickly long-held assumptions and rules of operations can be made redundant by events. Even in the depths of the pandemic’s economic impacts, efforts to make organisational processes more agile and resilient will pay long-term dividends.

That means paying more attention to a range of long-term planning scenarios and outcomes, so the organisation can understand the potential impacts of changes in technology, supply chains and customer behaviour. Each of those scenarios requires alternative forecasts to model and compare the impact of different factors on the underlying business model. 

To enhance the responsiveness and relevance of forecasts on management decision-making, CIMA advises finance leaders to:

  • Set clear objectives
  • Provide the right level of detail
  • Leverage enterprise systems and data.

The CIMA Strategic Scorecard

To identify how long-term performance and strategy may be affected by disruption, CIMA’s strategic scorecard sets out a process for addressing strategic issues to drive better business performance and value creation, without bogging the organisation down in too much detail. Prompted in part by the corporate collapses (Enron, WorldFirst) at the beginning of the century, the scorecard was devised in collaboration with the Professional Accountants in Business Committee (PAIB) of the International Federation of Accountants (IFAC) to ensure finance leaders in the future didnt repeat the mistakes of their predecessors. 

The core framework involves thinking about four elements:

  • Strategic position: What does the external environment look like? This means looking at elements such as global and economic outlooks in the countries where a company operates, the marketplace and how competitors are evolving.
  • Strategic options: What new bets could the company take? This is focused on future development and value creation, including identifying service or product gaps, assessing opportunities to create new income streams and engage with new customers.
  • Strategic implementation: What projects is the company implementing? This requires the organisation to re-evaluate current projects and carefully consider which ones should be prioritised.
  • Strategic risks: What new risks is the company facing? This requires companies to look at new risks they may now face and how to best manage them.

The scorecard methodology then works through a sequence of actions to help boards of any organisation carry out effective in strategic reviews.

CIMA Strategic Scorecard
CIMA

Risk heat map

CIMA also created a companion risk heat map to demonstrate the risk assessment process in a visual way. 

The 5x5 heat map diagram below shows how organisations can map probability ranges to common characteristics of risk event livelihood, and a ranking scheme for potential impacts.

CIMA heat map
CIMA

This approach provides a larger, holistic view of organisational risks to inform decison making, and should help managers risks that would otherwise have gone undetected. It also came with a useful list of dos and don'ts when undertaking risk assessments: 

Dos

Don'ts

Use risk self-assessment workshops. Don’t rely on surveys to capture initial thoughts about risks.
Prepare an initial ‘straw-man’ risk library to use as a starting point. Avoid getting stuck in root cause analysis.
Get consensus on risk tolerances. Don’t forget to quantify risks in terms of potential financial impact on the organisation in terms of cash, earnings etc.
Clarify terms used to establish probability estimates. Don’t forget to consider the state of controls and other risk management practices in place in the organisation.

Artificial intelligence

CIMA urged finance managers to maintain the balance between capital and labour. Capital needs labour to operate, create a return on investment, and grow. With the growing emphasis on technology - notably artificial intelligence and machine learning - within modern business, it’s easy to overlook the role that engaged and productive workforces play in a company’s success.

AI can be great at dealing with business as usual and within the finance sphere, intelligent analytics tools can can generate insights from masses of data that even the most engaged and productive workforces cannot. But when normal workflows are disrupted and there is no data - as so many businesses experienced during the onset of the pandemic - human intelligence still trumps AI. 

Visit CIMA’s Topic Gateway series for more information on how to effectively plan and forecast for the future of your business.

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