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 11, it was recommended that businesspeople engaged in the analysis of financial statements begin their studies with the balance sheet. It is all too easy to tuck problems away in the balance sheet, and analysts will never know what the income statement should really look like until they clean house.


The above is certainly true, but managers also need to be aware of what is going on with every line item on the income statement. Because each item represents a cost that detracts from net income, an intimate understanding of the activities that drive costs is fundamental to business management. In the long term, managers must create a balance between the short-term realities of how businesses are measured and the long-term strategic well-being of the organization. While NikoTech has temporarily abandoned management of the balance sheet, it has made some progress in keeping costs below the COGS line in order. If management can find the above-mentioned middle ground between the balance sheet and income statement, the company and its shareholders will be much better off.


If sales is considered the top line and net income the bottom line, then it would be appropriate to say that general, sales and administrative (GS&A) expenses form the "waste line." While there are many legitimate expenses found in GS&A expenses, when viewed with an eye toward the often reactionary nature of tactical supply chain management, this characterization is accurate.




It is the journey from gross profit to operating income that writes the final chapter on supply chain performance, and a nonchalant approach to GS&A expenses can turn strong gross margins into non-existent earnings from operations. In this sense, it is once again the responsibility of management to identify the second-order links between unnecessary GS&A expenses that are a product of poor supply chain execution.


A simple but effective method of monitoring GS&A expenses begins with a vertical analysis of each line item in the section. Each line item is taken as a percentage of the total GS&A figure in order to determine which items represent the highest percentage. More often than not, a vertical analysis will reveal that payroll, rent, communications, systems and travel expense are the biggest consumers of gross profit. Focusing on these items, a plant-level root cause analysis of the drivers of increases or decreases can be conducted, with corrective action taken on the former and best practices implemented from the latter.


Even though the NikoTech income statement is consolidated, extra inquiry and analysis can separate each line item and its corresponding contribution to GS&A expense. Actually, NikoTech was able to stabilize its waste line in Y2, only increasing expenses from the previous year by $18 million (5%). In addition to budgeting for these types of expenses, any extra effort to defray the pain suffered at the COGS line will be very well received. Control of GS&A expenses is important at all times, but especially so when COGS is trending upward. Some of the improvements implemented by NikoTech that slowed growth of GS&A expenses are discussed in the following sections.



Outsourcing



In one instance, NikoTech was able to outsource labor that had previously been on the company payroll. Each factory maintains a facility adjacent to the plant from which all shipping, receiving and warehousing activities are conducted. While the company still owns the asset (land and building), management outsourced all labor in the facility to a third-party logistics company. This created a variable cost environment based on throughput, which allowed NikoTech to manage costs as a function of activity. Although the company still had to pay for services rendered, worldwide savings of $2 million per year was attributed to this decision.



Systems



NikoTech had been using the same enterprise management system since its founding. Developed prior to the digital era, the system was not robust enough for use in a global environment and was especially difficult to integrate with the systems of suppliers, customers and strategic partners. A project was undertaken whereby NikoTech decided to employ the services of a Web-based applications service provider to run all of its enterprise-critical applications. The program was finally implemented in late Y1, and productivity gains and savings began to surface immediately, with an estimated savings of $3 million per year. In addition to the savings, the use of an applications service provider precluded the need for excessive expenditures on hardware, which gives the company the benefit of not having to carry more assets on its books or deal with their depreciation.



Telecommunications



Because NikoTech's application software was now Web based, the need for expensive electronic data interchange connections became less of an issue. In early Y2, the company was able to move to Web-based collaborative planning with two key customers, eliminating $1.2 million a year in costs related to electronic data interchange and value-added networks. This cost savings has also had an impact on the quality of demand information coming from the two clients participating in collaborative planning. As more customers come on line and suppliers are brought into the network, it is anticipated that forecasting will improve. The downstream benefit will be the leveling of raw materials purchases with demand and better capacity management in the plants.


Another key area of savings came from the global use of e-mail and local dial-up capabilities. As NikoTech's people traveled to meet with the plants, customers and suppliers, the need for timely access to e-mail grew. In the case of the plants, a wide area network was installed, which allowed all traveling employees speedy and inexpensive access to e-mail via their laptops. Although this savings was important, a big payback came from the solution applied to e-mail access for non-NikoTech sites.


Historically, when NikoTech employees were off-site, they had to dial into remote servers to download their e-mail. The equivalent of a long-distance call, late-night downloads from hotels were costing the company a fortune. Based on the suggestion of a new employee, NikoTech contracted the software services of a global telecommunications outfit to allow access to e-mail servers in almost every major city around the world. Now a local call, the cost of e-mail downloads was reduced considerably. Although difficult to quantify, considering the number of people traveling at any one time and the cost/time associated with at least one download per day by an employee, it was estimated that savings were in the neighborhood of $400,000 per year.


Because the lean philosophy recognizes that the best ideas come from people closest to the work, NikoTech management should build upon this one-off success. Perhaps a formal program for process improvements can be initiated to recognize people for the continuous improvement ideas they implement. The e-mail savings is an excellent example of how ideas come off the front line and should be well publicized throughout the company.



Travel and Entertainment



Although travel and entertainment (T&E) may seem to have the most remote relationship with supply chain execution, the fact is that T&E has everything to do with supply chain management. In a global arena, the natural reaction to a problem or opportunity is to throw bodies at the situation. Best articulated by Frederick P. Brooks, Jr. in The Mythical Man-Month, [2] the addition of personnel to a project without prior planning is pure folly and something that NikoTech engaged in with amazing consistency.


Related to many of the supply chain issues alluded to earlier, NikoTech management was dispatching teams of troubleshooters to every corner of the planet to deal with both internal and external problems. This unbridled commitment to supply chain excellence triggered a vertical analysis midway through Yl that identified T&E as consuming 23% of the total GS&A spend. It was quickly decided that the bleeding had to stop, with immediate measures to be taken.


The first step in reversing this problem involved a change in corporate culture. Whereas in the past any new business opportunity or operating problem precipitated unquestioned travel, NikoTech implemented a travel authorization policy that forced employees to seek travel approval with a written justification for the travel, as well as an estimated cost.


Second, NikoTech invested several hundred thousand dollars in videoconferencing equipment between corporate, the plants, key suppliers and customers. The ability to videoconference, with full graphics capabilities on a second screen, eliminated the need for many trips, which decreased travel time for NikoTech's people, increased their productivity and drove down T&E. The combination of the travel authorization policy and the use of videoconference equipment reduced travel in Y2 by $1.5 million.


In the grand scheme of multi-billion-dollar business operations, the above examples may not appear to represent significant savings or even be related to supply chain execution. As already noted, however, all line items on the income statement are the product of a cause-and-effect relationship, most of which can be associated with supply chain execution. In the case of GS&A expenses, it may not be a first-order cause and effect, but the links can be traced back to either some best practice or malfunction in the model. In a global operation, it is the base hits that win ball games, and the constant pursuit of incremental improvements is what will create savings at the GS&A level of the income statement.



[2]For an excellent explanation of the organizational and communications-related challenges inherent to any organization, see Frederick P. Brooks, Jr., The Mythical Man-Month, Addison-Wesley Longman, 1995.


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