Chapter 14: NikoTech: The Income Statement - Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance نسخه متنی

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Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance - نسخه متنی

Daniel L. Gardner

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Chapter 14: NikoTech: The Income Statement


Overview



If one were to focus exclusively on the top-line growth of NikoTech from Y1 to Y2, it would appear that things are going well. In an industry where expansion has slowed over the last few years, 23% year-to-year top-line growth ($1.500 billion to $1.845 billion) is more than an acceptable number. Less impressive, however, is the change in net income from $25.2 million in Y1 to $12.6 million in Y2. Obviously, the challenge for NikoTech's management is to continue the acceleration in sales while reversing the 50% slide in net income. The answer to that challenge is to understand the underlying forces that accelerated sales, isolate the causes of returns and allowances, identify what really constitutes cost of goods sold and, finally, realize that when left unabated, general, sales and administrative expenses can be a voracious consumer of gross profit.

Once it is determined that a product has market appeal, the key factors that drive sales at an operating level are product availability and price. Given NikoTech's build-to-order model, product availability certainly relies on accurate forecasting and collaborative planning, but even more so on the rapid sourcing of raw materials, short cycle times and 100% accurate distribution lead times. Native to the build-to-order model is a minimum of finished goods inventory; therefore, aside from low costs, the key competitive factor for NikoTech is velocity across the entire supply chain. Considering the nature of the industry, as well as the relatively small size of NikoTech, controlling costs and reducing cumulative lead times are two of the most important competitive weapons the company has.

Looking only at the sales numbers, the initial indication is that the company is offering a competitively priced product, is keeping up with customer demand and is compliant with binding lead time agreements. Suffice it to say that customers find NikoTech's products and prices appealing (maybe too appealing); otherwise, sales would not have grown by $345 million in a single year. For this reason, it is important that NikoTech focus on what it is doing well in its supply chain and identify and implement best practices across geographies. However, when one focuses on the drop in net income, it is also clear that there is a big gap between doing the right things and doing things right.

Could it be that the company is pulling out all the stops to comply with the demands of its clients without considering profitability? In a situation where six customers represent 70% of sales, that is a very real possibility.

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