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S&OP, Inventory Levels, A/O, & Your Forecast….

October 29th, 2009 Comments off

            Lately we’ve started getting back into the heart of the earnings season and the scheduling of Quarterly calls to discuss results. With a keen focus on the Retail and Apparel sector, it’s been interesting to hear the shift in planning for many of the manufacturers.  Whether right or wrong, I’m hearing a consistency in the approach that we are taking, at my own company, relative to our peers in the industry. There’s clearly been a shift towards tightening the gap between inventory planning commitments relative to the PO commitment on the part of customers. With a decrease in PO commitment by customers, their shift to a reliance on A/O for the Holidays, how’s a manufacturer to plan if retailers are planning flat growth but PO submissions are noticeably down?

 

            Although this was not the quandary we were dealt at MGE, we had other significant challenges that forced us to implement a comprehensive Sales & Operation Planning initiative aimed at improving our supply chain, our demand & supply planning, as well as develop the indicators that would be used in the future to measure our success. For MGE, we were fortunate enough to have a team that believed in the potential of the initiative, but the support & involvement of our global executive team (ok…mandate) in the process. It was also a huge undertaking for our company due to the necessary personnel that needed to be involved. The scope of the project was truly impressive.

 

            However, most fail to appreciate the scope of such a process. “Oh…interesting – a new Sales & Operation Planning process. That must be some work….” Now there’s a simplistic view.

 

Let’s really break down what our S&OP process entailed:

Ø  Necessary involvement on the part of Sales & Marketing, Manufacturing, Product Design, Finance, and Planning & Logistics.

Ø  Development of Weekly, Monthly, and Quarterly planning schedules for all key areas.

Ø  Dissecting planning down to the levels of Lines of Business, Product Segment, Product Families, SKU’s, etc.

Ø  Identifying all the key variables that would affect the process, which included raw material lead times, manufacture lead times, freight times to key markets, processing times at destination port, etc.

You can quickly see that this is an incredibly involved and detailed process that will affect every area of the organization. This is not merely a Purchasing or Finance function, it’s an organization endeavor.

 

            When discussing a targeted improvement in your working capital, this process touches just about every portion. Let’s really break this process down:

Ø  The company engages in a data gathering process and determines the depth/detail of the reporting they want considering in their decision making.

Ø  All collected data will be used for the Demand Planning stage analyzing sales data, production data, and any other KPI’s or metrics currently in place.

Ø  All the data compiled and analyzed in the demand planning phase will be utilized in the Supply Planning stage. The need here will be to take into account any constraints in capacity analysis, the supply of existing product lines, introduction of new lines, and the review of factor supply plans.

Ø  The effort put forth in the supply planning phase will lead to a Preliminary S&OP Review, which essentially will be a nearly final supply plan, distribution plan, and the resulting financial plan.

Ø  The final stage is the Executive Review, in which the management team is reviewing the expected performance analysis, assessing the necessary investment decisions, resolving any potential conflicts, and escalating any necessary portions of the plan. At this stage, the Executive Team is expected to provided the necessary approval and support to execute.

 

            Need to cut your inventory levels a bit? Need to get a quicker delivery of your product? Need better terms from your vendors? All achievable with a rather simplistic approach. However, if you are truly working with a global entity with a complex design, manufacture, and distribution model, a half-ass piece meal approach isn’t going to work, nor will it give you the long-term sustainable advantage needed to get to the next level. If you want to create a truly competitive advantage then the effort needs to reach across the entire organization.

 

Thanks for reading . . . .

 

Jeffrey Ishmael

IFRS reporting & equality in reporting . . . .

October 6th, 2008 Comments off

I’m a bit off in the last week as I have not been reading all the info that has been getting published with respect to the pending IFRS standards. However, one of the primary drivers in the adoption of IFRS is to have standardized reporting for public entities, whether there in Italy, France, or here in the U.S.. So once these new standards have been rolled out then we’ll be able to view each company in the same light and make equal comparisons? Wrong. A reader of SEC reporting for a handful of companies in a similar industry can easily start to see the differences in the manner in which those companies report. Yes, there are standards that they all need to follow, but that doesn’t mean those standards extend to every section of a 10-Q or K.

Let’s jump into a very simple example, and with some brands that most consumers are pretty familiar with . . . K-Swiss, Skechers, and Heely’s. As I read through each one of their most recent 10-Q filings, I wanted to learn a little more about how each one of these companies was tracking their Cost of Goods. The observation that prompted my curiousity was the drastic differences in Gross Margins between these three entities.

The worst performer of the group appeared to be Heely’s, but they also took the approach of burdening their COGS with every cost element that touched the flow of product through the design & manufacturing process. These costs included all freight, warehousing, tooling, tooling depreciation, royalty expenses, shrinkage, quota fees, and agent fees/commissions. This same approach is also taken by Skechers. However, compare this to K-Swiss, who didn’t break out the different elements of COGS, but recorded their warehousing fees within their SG&A expenses. Ultimately, you have Gross Margin levels that range from the mid-30% to high-40% range. While some of the discrepancies can be attributed to performance levels and buying efficiencies, it’s clear from the K-Swiss example that not all margins are created equal.

While all of this ultimately flows to the bottom line and it’s only a mapping issue prior to the EPS calculation, there’s the management of perceptions when it comes to comparisons with your peers. “You’ve got a lower Gross Margin so you can nearly be performing as well as Company XYZ….”. Not necessarily the case so make sure you know how you’re presenting your financials in comparison to your competitors.

Thanks for reading . . . .

Jeffrey Ishmael

Sales & Operations Planning – why should you care?

August 26th, 2008 Comments off

In a more recent topic of discussion last week, I touched on one of the more significant efforts that we had kicked off – an extensive S&OP initiative. In my opening commentary I touched on the reasons that caused, and in some cases, necessitated our commitment to this process. But for those that had not gone through this process previously, myself included, we needed to have a clear understanding of what the process meant and the efforts we would need to commit.

S&OP 101: As a group that had a a high number of newbies, we had to know the basics. At the most basic level, S&OP is an Executive Decision making process that involves all key areas of the organization, including Sales & Marketing, Manufacturing, Design / Engineering / R&D, Finance, and Logistics, which are then coordinated to optimize the planning and forecasting efforts of the organization to efficiently utilize available resources. Depending on the size and nature of the organization, some of the functional areas may change, but bottom line, it involves EFFECTIVE communication among all functional areas. It comes down to an achieving an effective balance between the Supply and Demand forces placed on the firm.

For the firm and the participants involved, this is not a project that involves capturing some improvements in cost, but a firm commitment to the changing of processes and almost retooling the input process in your forecasting. But this should involve only a few areas….right? Let’s take a look at some of the areas that will likely be targeted for review in this process:
1. Statistic, Marketing, and Management Analysis.
2. Review of the Analysis for use within long-term and short-term forecasting efforts.
3. Review of the demand plan, supply plan, shipments, deliveries, and scheduling efforts.
4. Review of bills of materials, bills of resources, and capacity constraints.
5. Assessment of materials and resources in support of short-term and long-term capacity planning.

So when it comes down to Sales & Operations Planning, any member of executive management should care that their resources are being deployed in the most efficient manner. Although results might be good, and on Budget, how much better could company be performing if this effort were undertaken?

Thanks for reading . . . .

Projects: Sales & Operations Planning

August 12th, 2008 Comments off

During a career we can look back & recall projects that shaped our experience level and positioned us better to take on new challenges presented in our career. Some of those projects also involve pulling together such a large group of folks that it simply eclipses any “projects” you might have encountered during your B-school stint. For myself, one of these projects was the Sales & Operations Planning (S&OP) implementation that was started during our integration with APC. This was a project that was kicked off with a North American meeting that pulled together approximately 40 key individuals throughout NAM and was introduced by the company President. There were also other global kick-off meetings that happened in the other regions. This was a major corporate effort.

As the company moved farther into the implementation process, it became clear that there were going to be some major challenges to effectively integrate our two entities and leverage our operational resources. However, in the short-term, there were a number of issues to address. At a consolidated level, there were a number of potential concerns in this $6.5b merger. Primarily:
1. The potential for declining customer service levels.
2. Inaccurate sales forecasts.
3. Declining product margins.
4. Rising inventory levels.
5. Misaligned performance metrics.

Any one of the potential areas of risk listed above had the ability to materially effect our results and compound an already difficult integration process. As we kicked off the meeting, this was a process that many were not familiar with and there were only a few that had gone through a similar situation with previous employers. The meeting was focused on covering some key areas such as:
1. Why were we implementing S&OP? What are some the signs that would signal such an effort?
2. Conduct and overview of S&OP and the efforts we should anticipate would be necessary.
3. We needed to review the common terminology that would be utilized globally in this effort.
4. We need to review the necessary roles & responsibilities for this effort and individuals assigned.
5. What was the anticipated timeline?

It’s pretty apparent from just this topline synopsis that this is not a multi-week project. This was a project that was anticipated to take the better part of a year to complete and fully implement. This was a project that was going to involve just about every functional area in the organization and had an equally opportunistic ability to improve our financial results and improve our working capital performance. I do plan on covering the elements of this implementation in more detail in further postings. If you have participated in an S&OP implementation I’d love to hear from you…

Thanks for reading . . . .

Increasing product margins without increasing prices. Can you?

August 5th, 2008 Comments off

How many executive meetings have you attended and heard that mandate “I want product margins increased by 5%” or “We need to cut our product costs by 10%”?
There’s a few potential outcomes. If you don’t have the reporting you might think that these might be reasonable achievements, but lacking the ability to affirm or deny. If you have the appropriate reporting in place you can pretty quickly play to your role of advisor indicating whether the goal is achievable, but with certain risk contingencies, or that the goal is unachievable due to current market conditions and/or internal considerations.

In order to provide the necessary level of advisory support, the information systems you have in place are critical. The considerations need to start at the structure you have in place for your general ledger and the granularity it will provide you in your reporting. While some of the itemizations below would seem elemental to most world-class manufacturing operations, I’ve been surprised by the number of firms that need to work towards this level of detail.

1. Do you have your general ledger segregated according to the individual product lines? This should be at both the cost of goods and revenue levels.
2. Are the labor costs also segregated by department and can you effectively track labor absorption & OT at both a product line & consolidated level?
3. Do you have the ability to allocate costs according to the product lines and do you have an appropriate allocation method in place?
4. Are you capturing all peripheral costs in your product costing? Are you able to tie service or warranty expenses to the appropriate product line?
5. Do you have a product offering that is project-based, and if so, are you appropriate tracking change orders and 3rd party cost elements accurately?
6. Are you able to accurately track your monthly variances on prices, material, and labor? What are the trends?

This is by no means a comprehensive list of what needs to be considered for determining if you can achieve certain forecast targets, but if you can answer these then you likely have the tools to answer the other questions that will likely be raised. Unless you’ve adopted a system that is already in place and only needs ongoing maintenance, the work to get to this point is extensive, and often a bit painful. However, knowledge is the key and with the appropriate info we can continue to play our effective role of trusted advisor and make recommendations that are based on hard data and not gut instinct. Do you have the necessary data to accurately answer the question – Can you increase your margins without raising prices?

Thanks for reading . . . .

“How much is that little widget in the window?” – Part II

May 21st, 2008 Comments off

     I left off after Monday’s commentary with a summary of the activity based system we had implemented at a prior company and how our Controller was a good friend and colleague who I had learned so much from.  But we weren’t a single method system at that company, which necessitated the need for a bit of a hybrid system.

     Since approximately 40% of the revenues were project-based systems, a simple ABC structure was not going to do. These were complex projects that involved individual and custom bids for each customer. These bids might range from the mid-six figures to as high as $10-$15 million.  While we had to have a basis for the bid, which typically reverted back to our activity based system, we still had to develop custom bids that were constantly fluctuating with what our competitors were doing.  We encountered some pretty significant differences in margins, which ultimately depended on the customer as well as the product family that was involved in the bid.

     What we were lacking when I had first arrived at the company was a reporting structure that allowed us to track the progression of our margins from the bid stage of the project until the time we shipped the product to the customer. Make no mistake, it was a painful process to put this in place and gain the cooperation of all parties involved. This was not just a Finance function either. It took the cooperation of Finance, Sales, Engineering, Technical Solutions, Services, and a number of other key individuals. It also took quite a bit of time to put the discipline in place to be able to obtain the information.  In the end, we had reached a point that if we had a margin variance at the time of shipment versus what was originally bid, we could tie it to customer change orders, non-performance on our part, increases in material pricings, installation issues, or whatever other action caused a change in our margins.  For the better or worse.

     We were able to accomplish this level of reporting because we had an excellent costing structure in place, clearly understood our manufacturing process, and pressed ourselves to improve our performance. Unfortunately, much of this reporting was not considered a priority during the merger. While it was considered a priority in discussion, the reality of following through on the effort was overshadowed by the energy required in the merger.

     What prompted me to write the last two entries is the lack of comprehensive costing information that most companies have to work with and the valuable information they provide for making strategic decisions and operating as a “world class organization”. 

What is the state of your costing structure? Do you have the information you need to make appropriate business decisions and drive better performance in your company?  Only you know the answer to that one……

Thanks for reading,

Jeffrey

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“How much is that little widget in the window….?”

May 19th, 2008 Comments off

     Not sure about you, but I am constantly amazed by the number of companies that do not have a firm handle on their ability to successfully cost product and understand what the true cost of their manufacturing operations are.  These are not smaller companies who are working on some home-grown spreadsheet or an ERP system that was implemented by consultants and they never got a firm grasp on the intricacies.  No, these are “world class” organizations that are using massive “buckets” to just dump in their costs and see what comes out the other side in their Operating margin or EBIT calculations.

     I originally took a prior position as I did not have any cost accounting experience and a business mentor of mine advised me that this would be a key area for me to fortify on my resume.   I was fortunate enough to hire in to a company that had a Controller who had a solid 25-years of cost accounting and controllership experience, who was also gracious enough to teach me what he knew and to help me apply it in my ongoing analysis and forecasting. Eventually, I was promoted to the North American CFO position, and while he reported into me, we had a fantastic working relationship that was very complimentary to our mutual skillsets.

     In this particular company, he had been a key factor in developing a rather comprehensive ABC (activity based costing) system that provided us tremendous insight into each one of the product families we manufactured in Southern California. Come the end of the month, when it came time to draft our monthly management letter, we would review each one of the product families and could specifically identify each of the contributors to the variance within each product family. While we were constantly being challenged and questioned by our corporate team in France, our reporting always withstood the scrutiny. 

     We tended to be our own worst critic and were constantly striving to increase the accuracy of the reporting and using the data to identify areas of opportunity for further improvements.  Under an environment of drastically increasing metal prices, this constant effort allowed us to actually increase our margins, when if all things were held constant, they should have declined in a rather material way. 

     What I learned from my friend and colleague, I was able to roll into a Project-based costing system to track our large systems.  These were the custom bid systems that could take anywhere from a month to a year to complete, after we successfully bid the project.  But more on this approach tomorrow……

Thanks for reading.

Jeffrey

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