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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Top-Line Sales versus Net Sales

Although it is important to focus on what a company does well, it is equally important to continuously identify areas of potential improvement. To this end, a leading indicator of supply chain execution can be found on the returns and allowances (R&A) line of the income statement. This line item is ideal for a five why analysis and when properly conducted becomes a gold mine of information that helps to segregate many of the tactical errors that a company can commit. As first peeled back during the NikoTech days of inventory study, customer returns were inflating inventories. While sufficiently detrimental to inventory management, the double whammy of returns is that they are also subtracted from sales on the income statement. Therefore, operational waste not only manifests itself on the balance sheet and in important financial ratios but also appears every month on the income statement.

In both Y1 and Y2, R&A hurt NikoTech's top-line sales ($60 million and $147 million, respectively). Also, the growth in returns as a percentage of sales (4 and 8%, year to year) is a cause for concern and left unchecked could continue to eat away at revenues. Although most businesspeople agree that R&A grows as a function of sales, the dollars at stake dictate that additional analysis be conducted to determine if any external factors are exacerbating the issue.

Many of the root causes associated with NikoTech's returns and swollen inventories were originally uncovered using a combination of Six Sigma tools. However, this study was conducted within the context of inventory management, not the general subject of R&A. It is for this reason that the initial analysis only uncovered instances where returns led to goods being put back in inventory. Note that at no time during the days of inventory analysis was there any mention of allowances. Without any knowledge of the severity of discounted invoices, it would be prudent for management to finish the job it started with returns and focus on allowances as well.

At most companies, policies regarding invoice allowances either were prepared years ago or were never written at all. Either way, a lack of clear and well-communicated policy is eventually supplanted by one-off actions that quickly evolve into at-will unilateral discounts. Losses always seem to find their way into the dark crevices of operational ambiguity, rarely showing their head. It is these "phantom costs" that have to be taken out by the roots and replaced with clear policies and procedures.

Bearing the above in mind, perhaps the first question in the five why analysis should be: "What is the NikoTech policy on accepting allowances?" Based on the answer to that question, management can map the way forward. If there is a policy, it has to be updated with operational definition (what circumstances qualify for an allowance), disseminated to customers and enforced. In the case where there is no policy, one must be established that contains the same quantifiable operational definitions. The key to this exercise, however, is the client. The client is the one taking the allowances, and if a new policy and procedure cannot be mapped with input from the client, the entire exercise will be a waste of time. As such, another early step is to carry out a Pareto analysis that isolates which customers are taking the majority of allowances, with initial efforts focused on them.

At this juncture, it really does not matter if there is an allowances policy in place because nobody is following it anyway. In either case, the same operational definitions (missed ship dates, short shipments, wrong quantities sent, etc.) should be used to establish the defects per million opportunities and Sigma level for the process. From there, a detailed process map should be prepared for the current process and a subsequent version prepared that reflects the new operational definitions. All of this should be done in concert with the client, starting with a mutual understanding of what the operational definitions are and what act(s) qualifies for an allowance. Once designed and enforced consistently, NikoTech will see its percentage of allowances decrease considerably. Taken in conjunction with efforts to reduce returned inventories, the overall impact will be an increase in sales and better performance across the board.

The allowance discussion illustrates how seemingly isolated operational issues create a tremor that extends to the far corners of the supply chain, eventually showing up in a company's financial statements. NikoTech's ability to identify these issues is the first step in correcting its supply chain malaise, a process that requires a relentless questioning of everything the company does.

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