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Are You Striving For Improvement or Optimization?

July 16th, 2012

     As my prior colleagues can attest, my pursuit of improved financial performance has never been focused on our results versus a prior year, or even a competitor, but in striving for the optimal position for our business relative to our goals. While I will always report our position relative to a Budget and the promises made to key stakeholders, we know Budgets are a static view in the midst of market dynamics that are constantly changing. Improvement in an of itself can very often be characterized as mediocrity, while a sincere drive for optimization implies a focused drive on pursuing the highest caliber of result. You might say that’s a rather general statement so let’s put this in a more specific context.

     Let’s take one of the more significant categories relative to working capital management…Inventory. Let’s make the assumption that a company is growing at 15% and has determined that there is a goal to keep inventory growth to no more than 5%. In this situation, you’re essentially going to realize a higher velocity on that inventory, thus a lower amount of inventory days on hand, and theoretically, a more “optimal” position. Right? Not necessarily. You reach the end of the year, pat yourself on the back for achieving the revenue growth and keeping inventory growth to only 4%. Hitting your goals doesn’t imply that you’ve achieved an optimal position. It could easily be the contrary.

     Have you taken the time to run a more detailed analysis of your revenue stream, what those trends are in the most recent 4-8 Quarters, and how that compares to the anticipated growth in the coming year? Have you taken the time to run a more detailed analysis of your on-hand inventory relative to the revenue statistics to ensure that you have an appropriate pairing between the two? What’s even more challenging is to add the complexity of multiple seasons, product categories, demographics, or even regional elements, and you have a very challenging situation to manage.

     This is the analysis that is so critical when it comes to not only the management of working capital, but the management of resources throughout the entire organization. Whether you’re the CFO, CEO, or the Director of a key functional area, have you taken the time to analyze how headcount or marketing resources are allocated throughout the company? During my time with MGE, this would have been a question for not just our own operating division, but a question that Schneider Electric would have been tabling across all their brand divisions. These are the tough questions that need to be pursued when you’re really striving for optimized results.

Thanks for reading…

Jeffrey Ishmael

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