Advisor] Manufacturer. Logistics: Is It Anchoring Your Strategy or Weighing You Down? Managing Change Today and Tomorrow INSIDE.

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1 2010 Issue Three Advisor] Managing Change Today and Tomorrow [ Manufacturer sarah.banks@plantemoran.com sean.pattison@plantemoran.com Logistics: Is It Anchoring Your Strategy or Weighing You Down? Sarah Banks Manager, Operations & Supply Chain Management Sean Pattison Consultant, Operations & Supply Chain Management INSIDE On September 15, Plante & Moran held a webinar focused on the importance of a logistics strategy in an organization s success. This article is a brief overview of the information presented. To access the complete webinar, go to webinars.plantemoran.com. True or false: When you hear the term logistics, you think transportation. If you said, true, don t worry; the majority of organizations we encounter share this belief. If you said false, good for you, because logistics encompasses so much more than transportation. Logistics is the planning and execution of efficient and effective flow and storage of all goods, services, and related information to meet customer requirements. The concept is applicable to any organization in any industry. Although logistics strategies vary wildly depending upon one s business strategy, there is one common thread: a sound logistics strategy can make a difference in the success of any business. Logistics in Action Let s take Dell, for example. In the 90s and early 00s, the company was very successful with its direct model give the customers what they want as quickly as possible. Supplies were kept in inventory within 15 miles of manufacturing locations. It was a highly responsive logistics system that is, until the marketplace changed in the mid 2000s. Page 3 The Truth About Lean Accounting Page 4 The importance of an Investment Policy Statement (Continued on page 2)

2 [ Plante & Moran manufacturer advisor ] Logistics: Is It Anchoring Your Strategy or Weighing You Down? (Continued from cover) 2 Customers began to want to go into a store to view, tryout, and discuss the new technologies; thus, the retail channel market began picking up sales. In response, Dell changed its business strategy to target not only individual consumers but retail channels as well. However, the company did not adapt its logistics strategy to align with its new business strategy, which resulted in an inability to cost effectively maintain the appropriate inventory of products that retailers demanded. While late in responding, the company recently modified its logistics strategy, which has positioned it for success once again. It just goes to show the importance of logistics put simply, it positions your business s strategy for success. Nine Building Blocks There are nine building blocks involved in developing a comprehensive logistics strategy: forecasting, order processing, transportation, inventory control, distribution, packaging, production planning, material shortage, and procurement. It s important to have an approach for factoring each of these nine categories into a logistics strategy. The degree to which each is incorporated will vary depending upon your business strategy. Forecasting Order Processing Transportation (Raw, WIP, FG) Inventory Control (Raw, WIP, FG) Distribution Packaging Production Planning Material Storage Procurement Building Blocks Defined Determining the amount of product and services customers will require in the future. Process from customer order placement to triggering the logistics process and directs actions to satisfy order demand. Movement or flow of goods from point of origin to point of consumption and its return. Along with inventory, this is often the largest logistics cost. Balances cost and service levels to provide sufficient availability to materials/products to meet customer and manufacturing requirements. Processing and moving goods on to wholesalers, retailers, or consumers. Location is a critical consideration. Considers promotion and advertising but also can limit damage and provide easier storage, handling, and transportation. A decision on the future quantity to produce, based on customer orders, production capacities, often a demand forecast, and inventory levels. Management of the space needed to hold or maintain inventories, including location, own/lease/rent layout, product mix, personnel/productivity measures. Selection of supply sources, timing of purchases, price determination, and quality control. Real-World Examples Let s look at a case study featuring how two very different organizations prioritize and approach these building blocks. Company #1: Technology Company Focused on Innovation and Design Excellence This company has a strong focus on product development and project launch. Therefore, the top building blocks of its logistics strategy would be: Forecasting. Sales for this kind of company peak at product launch. This is by design. Therefore, forecasting has to be perfect. Projected demand must equal product in the queue, so that when the release occurs, the product is available. Order processing. It s crucial for an organization like this to be responsive to demand. Once a thought leader like this releases a product, competitors are immediately playing catch-up. Failure to approach this effectively could lead potential buyers toward competitors that will quickly catchup instead. Distribution. A company like this must have a well-planned strategy for the return/exchange process so that items can be serviced quickly and at the lowest cost possible to meet customer expectation. Company #2: Commoditized Product Manufacturer Think of a hula hoop; when you want to buy one, you want to buy one. The manufacturer isn t important. The goal is to produce as much as possible, as inexpensively as possible. (This could apply to a company providing a specific service as well; it s important to be able to provide it when it s needed.) Therefore, the top building blocks of its logistics strategy would be: Forecasting. Forecasting is critical because of the easily replaceable nature of the product or service. You might be shipping products from a low-cost country, resulting in a long lead time. Transportation. It s important to be able to rely on (Continued on page 5)

3 The Truth About Lean Accounting Ken Julien, CPIM Manager, Technology & Process Consulting It s easy to see why lean accounting has generated so much interest, given the advancement of lean concepts on the shop floor and beyond and the backlash from the many overly complex activity-based costing (ABC) implementations of the past. The idea that an alternative approach exists that supports/complements lean manufacturing initiatives a simple, streamlined system is alluring. However, putting the word lean in front of something doesn t automatically make it worthwhile. value stream cost. Most manufacturing value streams, however, aren t that clear cut; therefore, product costs can be distorted using the lean accounting approach. What lean accounting does do well is focus on and highlight value stream costs and how they re affected by improvements to the value stream, something that traditional accounting has been criticized for not doing. Can we get the best of all worlds? Cost information that supports strategic decisions such as product/customer rationalization, as well as accurately reports value stream cost performance? Yes! What Is Lean Accounting? Lean accounting is a method that focuses on value-stream costing. A value stream is a network of related activities required to design, produce, and deliver a product or service to a customer. Lean accounting looks at the direct cost associated with operating a particular value stream; the output is typically a value-stream income statement. Is Leaner Better? Not necessarily. Not when it means that not only has the waste been eliminated, but so too has much of the value-add. Critics of the lean accounting approach point out that specific product costing is not supported, nor is customer cost/profitability analysis. The assumption is that each product within a value stream carries the same labor/overhead cost. This oversimplification is inherently problematic. If a value stream is dedicated to either one product or multiple products with little variation in how they consume the resources of the value stream, this isn t an issue. For example, a manufacturing client of the firm has an automated machining line that takes engine heads through several rough and finish machining steps. Though there are several product variations that run down the line, the difference in machining requirements is relatively minor. In this case, each head variation could be considered to carry the same amount of The Best of All Worlds Many approaches exist to generate meaningful management accounting information, from traditional standard costing, ABC, and through-put accounting to resource costing and, most recently, lean accounting. Each has a group of staunch supporters claiming that their approach is the best approach. The reality is that no single approach has the corner-market on useful management accounting concepts. There are useful concepts offered by each of these approaches. The key to success is in their application. It s important to thoroughly understand your operations and develop a tailored costing approach that reflects your operating environment. Just as the failed ABC implementations of the past had more to do with faulty implementation versus faulty concepts, so, too, the failed lean accounting implementations we re beginning to see have more to do with the inappropriate application of some helpful concepts. In Conclusion While a lean approach has its place, blindly applying these concepts often cuts too deeply into the meat that a good accounting system can provide. The key is to borrow from all available accounting concepts and develop a tailored approach to support all the decision making needs of the organization. For more information on how to develop a tailored approach for your organization, contact Ken Julien at

4 [ Issue Three 2010 ] The Importance of an Investment Policy Statement dori.drayton@pmfa.com dori drayton Relationship Manager Plante Moran Financial Advisors According to the Employee Retirement Income Security Act (ERISA), every employee benefit plan should provide a procedure for establishing and carrying out a funding policy. Although ERISA only implies the requirement for developing a written investment policy statement (IPS), subsequent case law, Department of Labor (DOL) releases, and practices in the industry have clearly mandated the prudence of its development. In addition to providing manufacturing companies with a blueprint of their retirement plan s investment strategy, an IPS can be critical evidence used in defending against litigation or accusations of imprudence. As such, it is important to develop and follow an IPS that reflects the desired investment policies of the plan. What Is an IPS? An IPS is a blueprint of the retirement plan s investment strategy. It describes the realistic long-term investment goals of the plan s investment committee, trustees, and other fiduciaries. The IPS is viewed as the business plan and the essential management tool for directing and communicating the activities of the portfolio. It should detail the desired investment mix of bonds and stocks, provide for clear and enforceable performance standards for money managers and mutual funds, and define the duties and responsibilities for all parties involved in the management of the portfolio s assets. What Are the Benefits of an IPS? The IPS provides guidance from which to monitor investment performance of the overall portfolio, as well as the performance of individual money managers or mutual funds. When diligently applied, it negates second guessing or Monday-morning quarterbacking and ensures continuity of the investment strategy when there s a high turnover of committee members. The IPS also provides a paper trail of policies, practices, and procedures for investment decisions. One of the first documents that an auditor from the DOL or Internal Revenue Service (IRS) will likely check is the IPS. The lack of an IPS, or a poorly written IPS, is evidence that other aspects of the investment program may also not be in compliance with the law. What Are the Components of an IPS? In general, an ideal IPS should be in writing and describe: The investment decision making process, including the use of prudent experts. The intended diversification of assets with regard to specific risk/return objectives of participants and beneficiaries. The methods intended to control investment expenses and ensure the best execution of investment transactions. The procedures used to monitor the activities of all money managers and/or mutual funds and service providers. The IPS may be written in the following format: 1. Purpose and background of plan 2. Statement of objectives 3. Guidelines and investment policy a. Risk tolerance b. Investment (asset class) preferences c. Time horizon d. Expected returns 4. Securities guidelines 5. Selection of money managers/mutual funds 6. Control procedures a. Duties and responsibilities of investment committee b. Duties and responsibilities of money managers/mutual funds c. Monitoring of money managers/mutual funds Whom Should You Contact to Assist With Developing an IPS? Since no two retirement plans are exactly alike, it s necessary to have an IPS that reflects the unique investment goals and criteria of a specific plan. The IPS should be designed by an advisor (attorney, CPA, registered investment advisor) who specializes in retirement plan consulting and is knowledgeable about the prudent investment management process. The IPS should not be written by money managers or product vendors who may be interested in writing the IPS to the specifications of their product. For more information, contact Dori Drayton at

5 Logistics: Is It Anchoring Your Strategy or Weighing You Down? (Continued from page 2) [ Issue Three 2010 ] your transportation system, especially when working with low-cost countries. Knowing what s coming and when is crucial, because once that order is in process, it s not easy to modify. Inventory control. The longer the lead time, the more inventory there is to control and manage to ensure products are available and ready for customers. If a company like this is short on inventory, they might not just lose an order but an entire customer who could easily switch to another provider that has the reliability and service level they expect. Procurement. It s important to select the right suppliers, establish competitive pricing, manage purchase timing, and ensure overall quality. This is an interesting study in contrast. As different as these organizations are, forecasting is critical to both for very different reasons. One will use forecasting to take advantage of a market leader approach; another will use it to control costs and ensure its product is available despite the longer lead time facing the company. Getting Started Some organizations will be farther along in their logistics strategy than others. That s okay. Here s a brief overview of how to approach a logistics strategy. Understand/confirm your business strategy. What is it that makes you successful? Understanding, confirming, and refining your overall business strategy is the first step. Assess logistics strategy. To do this, consider developing a simple flow-of-goods/services map. For a manufacturer, this may be the flow from supplier to manufacturing/assembly to warehouse and distribution center to customers. Consider stapling yourself to an order. This term, taken from a popular Harvard Business Review article, simply means that you follow all of the steps an order goes through from inception to fulfillment. Finally, compare yourself against competitors or available benchmark data. How does your performance compare? If you ve noticed a change in your position in the marketplace versus your competitors, do a flow-of-goods map for those competitors. Find the areas where you may need to improve. Establish metrics to monitor performance. This goes for each of the nine building blocks. These metrics should be a predictor of business results and show improvement over time. Develop a plan to implement a new/revised logistics strategy and supporting tactics. For example, if forecasting is crucial to your business, what does it mean to be best in class in forecasting? What do you need to adjust to get there? Once a change has been made, use metrics to ensure you re trending in the right direction. In Conclusion Just like your business strategy, your logistics strategy is constantly evolving. Any time there s a change to one, the other needs to similarly evolve. For more information on logistics and its importance in running a successful business, contact Sarah Banks at or Sean Pattison at

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