What Every CPA Should Know About Disrupted Supply Chains – Journal of Accountancy

Over the last two years, a series of shocks — including factory closures, skyrocketing shipping costs, shortages of material and labor, and the war in Ukraine — has created extreme variability for businesses in practically every industry.

These fast-moving changes have shown that the supply chain, a notoriously complex and technical area, isn’t just for specialists, though. It’s a subject that every finance leader should learn about as they prepare for years of extended disruptions, according to Kimberly Kirkendall, CPA.

“I think we’re going to be in a very disrupted environment for a few years,” said Kirkendall, the president of International Resource Development. “And in this disrupted environment, the finance-accounting team’s ability to say what the company can and can’t support financially — that’s going to be a critical part of all these decisions.”

Kirkendall’s career has included a decade in China managing factories, years at a regional CPA firm in the United States, and, today, in a consultancy practice focused on international operations and supply chain.

“A lot of what I’ve done over the years is really the intersection of operations, supply chain, accounting, and finance,” Kirkendall said.

And the last few years, she said, have revealed that not nearly enough people are working at that intersection.

The pandemic has led to obvious material disruptions — like cargo ships piling up in ports and store shelves going empty — but also has affected companies’ ability to balance the books and manage their tax liabilities, and it has created new demands for the finance profession, she said.

In separate interviews, Kirkendall and another CPA supply chain specialist, Al Paul, Americas Operating Model Effectiveness leader in EY’s National Tax Department, explained the supply chain crisis and made an urgent case for finance leaders to build their supply chain knowledge and capacity.

How is supply chain disruption affecting businesses?

The supply chain crunch has created urgent new demands for finance leaders. Companies are being forced to change where and how they get their product, which means they’re entering into new business relationships and even new taxing regimes. Meanwhile, uncertainty about logistics and pricing creates new difficulty for forecasts.

With the supply chain likely to dominate leadership discussions in many companies, it’s incumbent on finance leaders to build their expertise. That starts with examining the roots of the problem, which extend far beyond the pandemic.

“COVID exacerbated a problem that already existed,” Paul said. In the period beginning after World War II, companies “marched toward a simple, linear supply chain that focused on minimizing cost, increasing speed, minimizing inventory so it was just-in-time.”

That model resulted in supply chains that maximized profits through efficiency. But those arrangements often sacrificed the redundancies — such as inventory buffers or backup suppliers — that can help a company navigate hard times.

Among the most recent major challenges, Kirkendall said, was the COVID-19 “bullwhip effect” — a kind of imbalance between supply and demand. It began when the early stages of the outbreak of the virus caused Chinese factories to shut down.

The shutdowns led to inventory shortages, which resulted in panic buying and pent-up demand in the United States. Next, Chinese manufacturers responded by sprinting toward higher production again. But by the time the goods reached the market, consumer demand had dropped in many categories because of lockdowns in the United States.

Those kinds of disruptions affect companies’ “cash flow and how they manage their profitability goals for the year,” Kirkendall said.

Supply chains also have been affected by rising tariffs in recent years, rolling COVID shutdowns, plus the extreme disruption of Russia’s invasion of Ukraine this year. In response to all the challenges, lead times for goods have grown two to three times, and shipping costs in some cases have quadrupled, Kirkendall said.

Extreme variance means that finance leaders must adjust their approach to forecasting revenues and expenses. Companies now must decide whether to spend more money holding greater amounts of inventory in order to minimize disruptions. Many also are looking for savings elsewhere as shipping costs grow.

Beyond the short-term turbulence, Paul and Kirkendall see a long-term evolution in how companies approach the supply chain. Instead of employing a hyper-efficient, minimalist chain, companies may increasingly rely on a more complex network of suppliers, using manufacturers in many areas, including domestic and near-shore markets. Companies that relied on single-sourced product had to quickly find additional sources, preferably from more diverse regions.

“Now you have to have something that’s much more complex and networked,” Paul said.

Kirkendall similarly described a scenario where companies move to “regional hubs,” with manufacturing and distribution centers in multiple regional markets. Materials and finished goods will be spread out “around the world,” and many companies — especially in tech — will become more interested in owning or coupling more closely with their suppliers.

“So what does that mean for the company? More capital investments. More assets on your book. Potentially more lending to support the extra capital and more complex financing,” she said.

What does it all mean for finance?

These changes provide an opportunity and a challenge for finance teams and their members, whether they’re working at public accounting firms or within companies.

For example, complex new trade arrangements will raise new tax and money transfer questions.

“So many times, companies will think their problem is a logistics problem or a shipping problem,” Kirkendall said. “Actually, the problem is more complex: How do you move the money for that transaction? What does that mean for customs? … How do they account for the goods on their books?”

Finance, she said, needs to be involved early and often in changes to the supply chain. Amid increasing complexity, Paul said, finance also needs to understand the legal, tax, and global trade angles of the supply chain.

“It’s not just about the books,” Paul said. “It’s about how do your books match what’s really happening out there in the business, to properly reflect those activities?”

Each company’s supply chain will raise unique issues, such as questions of force majeure in a particular contract. The goal for finance, he said, is to create partnerships with experts in other fields — including indirect tax and customs and duties — in order to examine all sides of a scenario before making a decision.

How can finance professionals adapt?

Paul and Kirkendall both emphasized the need to learn the language of the supply chain and tap experts from other specialties. They suggested several ways to do that:

“It only makes you more of a critical resource,” Kirkendall said of networking. Additionally, she said, CPAs within different countries can help finance leaders understand the local norms for accounting and finance in various segments of the supply chain.

  • Connect with specialist advisers. For public accountants, clients or trade associations can provide a deeper education on the issues, Paul said. Kirkendall also noted the importance of developing relationships with small and medium-size enterprise advisers with relevant expertise — and connecting them with clients.
  • Learn from other parts of the business. In-house finance teams can learn about the supply chain from sales, production, and other units. “Spend time with them to understand what they do, why they do it, what their objectives are, and how you can align with the corporate initiatives that they’re chasing,” Paul said.
  • Track news. More broadly, Kirkendall urged finance professionals to learn about the subject by tracking industry-specific news and general international news, as well as by taking continuing education courses.

“You don’t have to be the be-all, end-all expert adviser in those areas, but part of the value you’re adding is you’re able to ask the right questions. How is this affecting this part of your business?” Kirkendall said.

For a topic as complex and fast-changing as supply chain, both experts said, finance professionals must learn to navigate the entire company and draw on the wisdom of others.

“You can’t understand what people are saying until you understand their language,” Paul said.

You can find the original article, which was published on May 12th, 2022 here: https://www.journalofaccountancy.com/news/2022/may/what-every-cpa-should-know-about-disrupted-supply-chains.html