That saying is the mantra of most forward-thinking CFOs. Instead of resorting to knee-jerk reactions to the downturn with across-the-board job and expense cuts, the CFOs who navigated the economic storm took a different approach. They looked at each strategy, business process and program and sought to selectively cut expenses.
These CFOs worked to create value by cutting expenses—they were after a lean enterprise—not just slashing expenses from their balance sheets. The companies with strong earnings, profits and soaring share prices used the crisis to cut unprofitable programs that had become financial deadwood on their balance sheets. A crisis gave these forward-thinking CFOs the perfect scenario to trim back unprofitable product lines while saving the precious knowledge and intelligence of the teams working on them.
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What happened? Their return on investment went positive because all that expertise was applied to high-growth projects bringing new innovation into next-generation programs.
A three-prong approach to recession success
The crisis also forced a very high level of urgency into making core business processes as efficient as possible. Cash became king, and the power to change processes became much more focused and urgent. One of the best writers to capture this change is Tim Reason, editorial director, CFO Magazine, who in January 2008, wrote that a three-prong attack for positioning a company for the recession and beyond was by far the best strategy. While the majority of writers blindly advocated across-the-board expense cuts, Mr. Reason focused on a slightly different strategy. His strategy was based on three major activities.
- Seeking permanent changes in the area of cost savings
- Maximizing the cash position of the company
- Obsessively measuring the metrics that really count
In retrospect, this seems like great advice, and it’s probably just as applicable today as it was then. However, what does the CFO have to do to move this agenda forward?
In order to accomplish any of these three goals, the CFO will require accurate, relevant and actionable information. What are not needed are huge spreadsheet reports from disparate sources over various reporting times. The spreadsheet may well be banned. We’re talking tightly defined, focused reports delivering the necessary KPIs to facilitate effective decisions.
This requires manufacturing analytics, which will give the CFO the needed access into the manufacturing process. Rather than looking at historical data and drawing up reactive plans based on that history, manufacturing analytics enable the predictive management of the enterprise.
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How do CFOs put this into practice?
If you want to accomplish permanent change in cost savings, you have to get surgical and forget about just lopping off huge chunks of your workforce or product offerings. These are one-time fixes that do nothing about the revenue side of the equation. A transformational change only occurs with ongoing improvements; those that boost revenue and reduce cost simultaneously and repeatedly over time.
Here are ten areas where CFOs using manufacturing analytics will get their companies moving in the right direction.
1) Inventory control – This isn’t earth-shattering news, however, it is extremely effective. You simply can’t afford to be left holding massive amounts of unsold product that’s left over because of a change in the market. Increasing inventory turns represents money that remains in play as opposed to spent funds. Tighter control means lower risk and less exposure.
2) Supply sourcing – Consider all aspects of this carefully. The answer here is not always found in Asia. Your inventory expense begins on the loading dock at the factory. You’re paying for stuff that is in transit as well as what’s in your warehouse. Globalization carries the added cost of transit time.
3) Regulatory issues – We live in an era where everything that happens can be looked at from the standpoint of blame or credit. When a drill rig explodes, a plane crashes or a stock plummets, the first order of business is to determine whose fault it is. The knee-jerk solution is frequently regulatory in nature. Tie this into a globalized market, and the complexities are enormous. The CFO must stay on top of this and must be prepared to address those business processes that must be modified in light of new regulations.
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4) Fully embrace appropriate process-improvement methodologies – Whether you are using Six Sigma, TQM or any other methodologies, you must make sure that your decisions are driven by the right data and the right metrics. Manufacturing analytics accomplish this effectively by pulling only the data necessary to focus on any given process, department, product or other unit.
5) Evaluate receivables – Who is paying on time, who is late and why. This includes those who pay early. However, more important than the “who” is the “why.” When you understand why companies pay when they do, the ability to predict and improve receivables performance is greatly helped.
6) Tax management – Deloitte maintains that CFOs frequently overlook tax-related issues when looking at bottom-line improvement actions. Like regulatory matters, it can be expected that various taxing authorities will turn to modifications in tax regulations as a method of addressing their own budgetary issues. There is huge potential here for improvement or disaster.
7) Green and sustainability strategies deliver cost savings too – Green initiatives offer huge opportunities for competitive advantages in terms of product offerings and from operational improvements as well. Looking at internal processes, supplier sourcing and resource utilization practices are all areas where the CFO can affect process improvements and changes.
8) Prioritization of expense – For the CFO, this is what it’s all about. Manufacturing analytics does this effectively. This is where the big picture must displace the politics and siloed decision-making that costs companies billions in terms of mismanagement.
9) Risk management – Effective management of risk starts with accurate information. If you are evaluating potential products, policy changes, suppliers or process improvements, CFOs must base recommendations on accurate information.
10) Making currency fluctuations as profitable as possible – One aspect of this recession is the dynamic nature of the value of one currency against another. CFOs in organizations that deal with international customers, suppliers or manufacturing operations need to pay close attention to this area.
Bottom line: Manufacturing analytics is the key to getting the information that you need to do your job—not to react to the past, but to direct your company toward a prosperous future.
For more, visit Cincom CONTROL.
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