C-Suite Spotlight Series: What is Zero Based Budgeting and What Does It Mean For Your Supply Chain?

"In manufacturing, zero-based budgeting doesn't just look at materials, but it challenges all the services and functions that are performed by the company."

Charles_Kunkel.jpgAs the chief financial officer of Harris & Ford LLC, a major chemical distributor, Charles works to improve the firm’s global distribution and logistics services to leading Fortune 500 companies in the food, pharmaceutical and industrial sectors.

One business trend Charles often now sees is zero-based budgeting -- a method of budgeting in which all expenses must be justified for each new period. We interviewed Charles about zero-based budgeting and how it's affecting supply chain.

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Tell us a little about HARRIS AND FORD – WHAT DOES YOUR COMPANY DO AND WHO ARE YOUR CUSTOMERS? 

Harris & Ford is a major distributor of chemicals, ingredients and related products and services to food, personal care, cosmetic, pharmaceutical, water treatment and industrial customers. Our mission is to provide consistent, high-quality, low-cost, value-added distribution services. Having more than 20 years of successful, diverse and progressive experience, I've operated in global, high-growth, corporate, Fortune 500, and Big Four accounting firm environments. I've always enjoyed working on the operational side of the business, and Harris and Ford needed someone who could take the business to the next level. It was a logical fit.

What trends are you seeing in distribution?

Our customers are craving strategies for how they buy their products, and we're seeing a lot of supplier diversity.  Many companies are taking Apple's lead in this respect. But when you cross borders, the arrangement becomes complex. That complexity necessitates lean process discipline to create stability and standardization. 

We're also seeing companies shift to zero-based budgeting - an aggressive method of budgeting in which all expenses must be justified for each new period. Starting from a "zero base," every function within an organization is analyzed for its needs and costs. Last year’s results aren’t as relevant. It applies to people, facilities, supplies, etc.

Basically, you're "cutting the crap," as they say, out of the cost. Companies are not only practicing it for materials, but they are challenging all of the non-core competent services and functions that it performs. They're asking, "should we be doing this function?" 

Supply chain is usually one of these functions.

if you're Stripping away supply chain from a company, THERE SEEMS TO BE A SHORT TERM GAIN. Are there long term risks? How are companies mitigating against those risks?

Absolutely, there are risks. You have to be careful about the companies you partner with, and ensure they have the right systems, processes, and people to support your business. Look for a long track record of success. I recommend spreading out the pieces of supply chain - relying on several distributors, suppliers, etc. and not putting all of your eggs in one basket. 

There aren't many companies with a full suite of end-to-end competencies beyond their core one. So when they outsource supply chain, the third party provider should fit into the client's existing core process. The client shouldn't deviate from its existing process due to the investment and infrastructure behind it. 

What parts of the business keep you up at night? What's driving you forward?

We're continuously improving our skillsets and systems. This requires a heavy emphasis on culture change. Another heightened area is supply chain financing. Many companies are looking to the supply base to finance the organization. Some companies have arranged a supply chain mechanism where they’re asking for 90-120 day terms. They will buy our receivables, while we pay a discount for a 60-day arrangement. We need to be doing the same with our suppliers. Inventory can be turned faster. Working capital management is a response to how certain customers are pushing their suppliers.

IF COMPANIES ARE Moving supply chain ofF their books AND onto other books, cost MAY RETURN aS a tidal wave. will that be DETRIMENTAL FOR COMPANIES? 

There are two types of improvements companies see when this happens: one type is the superficial improvement that looks nice on paper, but didn't remove the waste. Then there is the formal, functional improvement (removing inventory, reducing lead time, etc.) That's a tangible benefit. When companies move supply chain problems from entity to entity, there's a short, one-time benefit. The problem didn't go away, but you’ve moved it to another entity to manage it better than you did.

It’s an exciting time for supply chain. Decentralizing supply chain activity increases competition among value-add organizations and drives the need for better supply chain management on a faster basis. The competent supply chain managers in these organizations are going to win in the long run.


 

Posted by Derek Browning

Derek has ten years of supply chain and logistics experience, including transactional transportation management, performing logistics network and route designs, supply chain and facility assessments, lean cross-dock and distribution center projects, people development, and the deployment of lean principles and practices in cross-functional areas. These areas include: logistics and warehousing, purchasing, human resources, creative design and marketing, accounting and finance, sales, and executive leadership teams. Derek has trained thousands of students and professionals in lean, six-sigma, and supply chain through LeanCor’s Training and Education courses as well as the University of Kentucky, Saint Louis University, Georgia Tech University, and Monterrey Tec’s Extension Campus in Mexico City, Mexico.

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