Up to this point, the NikoTech discussion has focused on the utilization of current assets. Although important, any discussion on current assets should never overshadow the importance of plant and equipment (P&E) in the evaluation of a business model. In light of the fact that the capacity to produce is what eventually creates inventories and accounts receivable, equal weight should be given to the utilization of fixed assets in any model characterized by manufacturing activities.With four plants and a corporate building in San Diego, California, NikoTech showed a Y1 fixed asset value of $540 million in P&E. Apart from investments the company made in wide area network and videoconferencing equipment, this number consists of physical plant (factories and adjacent warehouses), production lines, materials handling equipment and the corporate building in California. Even with the explosive sales growth at NikoTech, the investment in fixed assets from Y1 to Y2 grew a nominal $60 million, or 11%. As noted on the balance sheet, net investment after depreciation showed an increase of $24 million, or 4.5%. This growth came in the form of additional lines in the plants in Hungary and China, as well as upgrades to existing lines in Brazil and Mexico. Compared with NikoTech's sales growth, this investment appears to be minimal and could cause bottlenecks for future operations should the business continue to grow.This statement may or may not hold water, depending on how well the company manages its production capacity across plants. Although this requires more study, the overabundance in raw materials and work-in-process inventory might be an indication that production capacity can be better managed. Regardless of how well capacity is currently managed, one point that the company should consider before any further P&E investments is the adoption of lean manufacturing techniques in the factories. It must be pointed out, however, that the feasibility of consolidating warehouses and staging and production areas depends almost exclusively on NikoTech's ability to level its inbound flow of raw materials and production. With so much money tied up in raw materials, work in process and finished goods, it would be pure folly to make space-related decisions or consolidate production lines prior to rectifying the inventory problem.Once the inventory issue is resolved for good, management can then focus on economies to be found in physical plant. For example, with the inventory problem out of the way, there should be more space in the warehouses. If analysis reveals that NikoTech is in need of additional production capacity, that floor space can be dedicated to more lines instead of warehouse racks. If not, perhaps management can sublease it to strategic suppliers that could then feed production in a true just-in-time fashion. If the supplier idea does not work out, NikoTech can always rent the space to an unrelated third party.The reality may be that none of the above ideas will come to fruition. However, management will never know until it fixes the inventory debacle once and for all. Only then can brainstorming sessions take place that allow for such creative thinking. Whatever happens, uncovering cause-and-effect relationships in every facet of NikoTech's operation should serve as a reminder of how seemingly discrete decisions find their way into every corner of a company.
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