Poorly managed or disrupted supply chains can directly affect profitability. Factors such as geopolitical tensions, extreme weather events, regulatory shifts and tariff changes are unavoidable. But supply chain impacts can be mitigated so businesses do more than survive, during challenging times. In fact, they can thrive. Finance teams must re-evaluate how supply chain friction erodes bottom-line performance, and how technology can turn a historical cost centre into a driver of value.

The costs of supply chain friction

Nick Wildgoose, independent supply chain risk consultant at Supplien Consulting, says the supply chain friction points typically fall into three buckets.

1. Revenue loss from disruptions and lack of multi-tier visibility

This is when products simply cannot be built or shipped, leading to immediate missed sales and customer churn.

Friction frequently lurks at Tier-2 or Tier-3 supplier levels. A business may have a solid relationship with its direct (Tier-1) supplier, unaware that a vital sub-component is sourced from a facility facing a 50% tariff penalty or embargo, for example. This lack of visibility can be a painful cost driver, leading to businesses often raising consumer prices to make up the shortfall.

2. Strategic supplier relationship management

Failure to appropriately manage your most important suppliers can lead to the loss of value generating opportunities from areas such as innovation. Research indicates the enhancement opportunity to be around 4% of the contract value.

3. Approved contract use and cost drift

Poor contract governance and resourcing can lead to unmanaged costs, risks and failure to hold suppliers to agreed pricing schedules.

“Even more mature companies might have a great contract, but they don’t put in the resources or use technology solutions to manage it,” Wildgoose cautions. “So obviously, the supplier over time thinks, ‘Oh well, maybe we’ll just slip in this price rise or this additional cost in the contract’ – these costs can just get slipped in if people aren’t managing contracts properly.”

Key financial metrics

Historically, finance departments have mostly evaluated supply chain management from a cost and quality perspective. However, this narrow view introduces blind spots. In a standard manufacturing environment, third-party expenditure can account for around 70-80% of total company costs, says Wildgoose. Failing to apply appropriate financial metrics to a supply chain has an impact on profit.

To protect cash flow and profitability, Wildgoose advises accounting teams and financial controllers to consider tracking three further pivotal metrics:

• Value at risk: This quantifies the financial impact of a supply chain disruption on your most profitable product(s), establishing this measure allows the assessment of risk management measures such as buffer inventory, multi-tier analysis or dual-sourcing.
• Strategic supplier management: Is your supplier base appropriately segmented in that you know who your strategic suppliers are from a value perspective? Have you put in place the appropriate performance and management measures?
• Contract leakage rate: Wildgoose stresses the importance of monitoring the percentage of spend occurring outside of negotiated corporate contracts, including off-contract purchasing or unsanctioned supplier price creep. Losing track of these expenses along supply chains can prove costly and introduce new risks.

“Contract discipline creates benefits at multiple levels and doesn't cost a lot of money,” says Wildgoose.

The role of technology

Digitising the supply chain does not have to involve a risky, multi-year overhaul of core systems. Analytics and targeted supply chain risk management software, sometimes powered by AI, can be integrated smoothly in conjunction with solid staff training and appropriate process changes.

For finance teams aiming to move from reactive firefighting whenever supply chains are disrupted to proactive revenue driver status, key entry points include the following.

• Multi-tier mapping and risk tracking for visibility: Using risk tracking software gives teams early warning indicators for likely supply chain disruptors, such as regional weather, port delays or geopolitical events. Companies with real-time multi-tier mapping can secure alternative inventory before global markets react and prices spike, which keeps supply chains moving and can mitigate price increases to consumers.
• AI spend analytics and contracts: Implementing AI-driven spend analytics quickly reveals invoice discrepancies and off-contract usage, curbing contract leakage immediately. Wildgoose says that implementing this depends on the size and circumstances of an enterprise, but using AI for these purposes can make supply chain management much easier.

Implementation for finance leaders

Any implementation of a more sophisticated supply chain measurement process should be based around solving a business problem with a proven potential financial payback. Approaches could include the following, depending on your current status.

• Starting small and scaling up: Rather than going all in on AI solutions without due diligence, a better strategy might be to start deploying lightweight spend analytics and contract management tools before looking to invest in more complex predictive AI models.
• Re-evaluate supplier relationships: Move away from segmenting suppliers purely by total invoice amount. Instead, identify suppliers based on value at risk they represent and how the relationship is contributing to profitability.
• Select multi-tier supply chain transparency solutions: This allows near real-time supply chain updates directly into rolling cashflow models. In turn, this allows inventory buffers and working capital targets to adjust dynamically in alignment with profit optimisation.

By combining improved visibility with appropriate financial metrics along multi-tier supply chains, financial teams can protect margins, optimise working capital, and build a resilient enterprise capable of thriving through global market volatility.