CFOs to oversee supply chain management to prevent cost blowouts
Chief Financial Officers across sectors are expected to grow their oversight of supply chain management in the coming months, as they seek to gain more control on spending and prevent cost blowouts, writes Raja Sahulhameed from engineering consultancy Hatch.
The Australian mining, manufacturing, construction and services industries consumer price index (CPI) rose 5.6 per cent from June 2021 to June 2022. This is the biggest increase since 2008 off the back of the global financial crisis.
Supply constraints for building materials and metals, a decrease in global crude oil supplies, high freight costs and labour shortages are all contributing to uncertainty with the planning and delivery of megaprojects. As a result, I believe CFOs will, through necessity, become more involved in supply chain management in the current volatile market of inflated costs.
When calculating the value of a project, CFOs have traditionally provided a fixed capital cost to the market. However, they must start normalising the concept of communicating a variable cost on projects to stakeholders – and will need to manage cost expectations ongoing by overseeing supply chain management.
The cost of megaprojects is becoming increasingly difficult to estimate, which is causing budget blow outs. An analysis by the Grattan Institute shows that governments in Australia spent $34 billion more on transport infrastructure than first estimated, and that there was a 21 per cent total cost blowout of $20 million-plus projects in the past 20 years.
This is a strong example of the need for CFOs to participate in managing the cost of inflation through improved communication with stakeholders across supply channels.
Decarbonisation will be another driving influence on the CFO role. With sustainability and net zero targets at the forefront of the mining and minerals sector’s key priorities, CFOs are becoming more actively involved across their supply chains to also gain greater control over manufacturing processes and materials.
Australia’s export revenue of lithium concentrates increased by 1,189 per cent in the year to June 2022. These astronomic price increases are seeing CFOs becoming more directly involved with their suppliers and customers.
For example, Elon Musk recently announced the possibility of Tesla becoming directly involved in lithium mining and refining business because the cost of metal – a key component in manufacturing batteries – has become so high. Similarly, Liontown Resources, an emerging battery minerals producer in Western Australia, recently signed agreements to supply lithium concentrate to Tesla and Ford.
A long-term trend I foresee is CFOs involving themselves across the entire project value chain. This will include procurement and supply chain policies. This will be a strategic advantage for organisations, to ensure costs expectations are met and the entire supply chain is green or carbon neutral.
At Hatch, we help C-suite executives of leading public and private organisations in solving complex business and technical challenges facing the metals and mining, energy and infrastructure sectors. Our multi-disciplinary team of consultants, industry experts, and operations leaders work together with clients in developing strategy, prioritising and optimising capital investments, executing large scale growth and energy transition projects, and improving supply chain and operations.
About the author
Raja Sahulhameed is the West Australian Principal at the advisory division of Hatch, an award-winning firm specialised in delivering engineering, operational and development projects in the metals, energy and infrastructure industries. Sahulhameed has more than 10 years of experience in management consultancy firms, including McKinsey & Company in the UAE, the United States and Australia.
