Sarbanes-Oxley-Making Supply Chain Visibility a High Priority for Executive
AMR Research Alert
April 15, 2003
Vinay Asgekar
Public companies are facing more SEC scrutiny than ever and top executives are not only worried about the financial performance of the company but also their liability for proper accounting and reporting of the fiscal activities, including off-balance-sheets. The federal Sarbanes-Oxley Act specifically mandates in Section 401(a) disclosure requirements of off-balance sheet transactions and other agreements that may have material effect on the financial performance and statements of a company.
The sweeping requirement puts CFOs and COOs on alert to scan pockets of information throughout their supply chains for things that fall under the act's definition but were never part of a balance sheet or a financial report in the past. Many components of sourcing and supply chain execution will now need to be tracked, evaluated for total financial impact, and included in public disclosure, including the following:
- Purchasing commitments toward material
- Actual material assets acquired by the supplier on the company's behalf
- User or pay capacity arrangements
- Minimum volume guarantees to vendors
- Contractual commitments to forecast and order
Although the act primarily affects public companies, the private sector will feel it because of the demands put on them by their public partners. Disclosure will also extend to risk and exposures from liabilities that arise out of other issues such as environmental legislature. For example, Europe's Waste Electronic and Electric Equipment (WEEE) legislation, which goes into effect in 2005, may require financial reserves to counter liabilities or processing costs of product recovery and recycling (see the AMR Research Report titled "Electronic Waste Processing: Manufacturers Running out of Time," February 2003).
The requirements are forcing COOs and CFOs to find ways to integrate the contractual terms and supply chain visibility across multiple layers on the buy side and sell side.
Such a platform will include the following components:
- Codification and translation of the contractual terms
- Supply chain visibility in the extended supply chain - through suppliers and sales channels
- Application of the terms to supply chain information to project a time-phased picture of liabilities
A number of vendors, including many well-known Supply Chain Management (SCM), Enterprise Resource Planning (ERP), Supply Chain Execution (SCE), and Supply Chain Event Management ((SCEM) vendors, address the total supply chain visibility requirements. However, none of them marries that information with the contractual terms and translates it to liabilities projections. But Fogbreak Software , a relative newcomer, is trying just that, codifying the contract terms, integrating them with inventory and demand projections, and presenting the outlying risk scenario.
The Sarbanes-Oxley Act doesn't have to be another federal mandate dragging down profits-forcing operations and finance to get a lot closer even in their daily execution and effort to improve visibility across the supply chain partners is a good thing. Companies that just see this as a reporting requirement will lose out. Companies that put together a supply chain risk management process with their partners will extract the biggest gain from their efforts.
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