Jim

The Management Accountant’s Role in Today’s Retail Environment

Jim Gurowka Institute of Management Accountants January, 2007

Issues We Face • Moving from many small, independent stores to large multi nationals. Pressure on cost, quality, service, price. • Mega stores and shopping malls • RFID costs and benefits • FDI and pressure to perform • Perceived value of the management accountant versus the financial accountant 2

Today’s Management Accountant’s Challenge Managing multiple responsibilities without the right tools.

Speaking the same language as the rest of the organization.

3

Fish Tank Syndrome If each person described what they saw, would it be the same description?

3 Levels of distortion

4

Issues For the Management Accountant - Roles and The Profession • IMA / E&Y Survey found that over 90% of CFO’s feel their current systems do not provide adequate decision support information BUT 80% do not feel the need to change. • Sarbanes-Oxley (SOX) 404 shifts accountability from Auditors to management accountants - but … • To provide better decision support information the management accountant should implement … ???

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What is the role of the management accountant? • Successful stewardship of valuable financial and people resources that result in benefits to the organization and its stakeholders • Key Attributes: ÂSupport understanding of the nature and behaviour of cost ÂPromote, track and give feedback on value creation and continuous improvement ÂAssist management in wise use of resources Source: Essentials of Cost Management. Catherine and Joe Stenzel. Wiley 2003

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Cost Management Practices Improvement Initiatives • Process Improvement & Supply Chain Optimization • Cost Reduction • Downsizing & Organization Design • Business Process Reengineering • Project Management • Benchmarking

Decision Making • Product/ Cust. Costing • Capital Justification • Cost Estimation • Target Costing • Pricing Models

Managing Change Performance • Budgeting • Profit Analysis • Performance Measurements • Inventory Valuation • Capacity Utilization Source: Dan Swenson & The American Productivity and Quality Center

7

What is Missing From Current Cost Accounting? • Alignment of cost information to strategic planning • More meaningful methods to analyze and attach indirect costs to products, services and customers • Timely decision-quality cost information and feedback (plan, actual, scenario) • Better ways to analyze capital investment options • More measurement and reporting that makes nonfinancial performance visible and actionable • Understanding of real underlying cost drivers •

Source: Essentials of Cost Management. Catherine and Joe Stenzel. Wiley 2003. Extracted from leading thinkers articles in the Journal of Cost Management

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Issues in the Retail Environment • RFID cost and benefits • Efficient consumer response initiatives • Supplier / Store relationship • Supply chain management • Supplier/Store/Product/Customer Profitability

9

A Model to Deal with the issues – The Performance Architecture

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The Finance Function & The Performance Architecture Product and Market Segment Analysis Which processes/activities are necessary? What are the costs to produce a product or serve a customer? What is the profitability of a certain market segment? Are you profitable?

Process Analysis

Department Planning & Control

What are the process costs?

Which resources are assigned to which processes and Departments and with what budget?

Who consumes the outputs of the process? Are you efficient and effective?

What you spend

11

Corporate Strategy - Product / Market Matrix

4

1

3

2

12

Retail Corporate Strategy - Product / Market Matrix

13

Customer Contribution By Country GARMCO Customer Contribution Margin By Country (including sustaining allocation) Q2, 2003 Results

#

#

#

#

#

#

# #

#

#

#

## #

#

#

#

#

# #

#

#

#

#

#

#

#

#

#

#

Margin Ranges -2% + -2% to 2% 2% +

World Countries and Regions by Revenue

# ##

14

7,400,000 3,700,000 740,000

Customer Contribution By State GARMCO Customer Contribution Margin By State (including sustaining allocation) Q2, 2003 Results

# #

# # #

#

# #

#

# #

Margin Ranges -2% + -2% to 2% 2% +

#

#

United States by Revenue

# ##

15

1,400,000 700,000 140,000

Product/Service Evaluation Criteria Product/Service Evaluation Matrix Strategic Yes

Significant Yes

Profitable Yes

Yes

Yes

No

Yes

No

Yes

Yes

No

No

No

Yes

Yes

No

Yes

No

No

No

Yes

No

No

No

Recommended Action Steps

16

Customer Evaluation Criteria C u s to m e r E v a lu a tio n M a trix S tra te g ic Yes

S ig n ific a n t Yes

P ro fita b le Yes

Yes

Yes

No

Yes

No

Yes

Yes

No

No

No

Yes

Yes

No

Yes

No

No

No

Yes

No

No

No

R e c o m m e n d e d A c tio n S te p s

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Understand Your Suppliers - Supplier Profitability

18

Understand Who Makes You Money - Supplier Sales and Contribution

19

Ranking Supplier Contribution (Profitability)

20

Product Profitability – What Products to concentrate on

21

Store Profitability – What to Do With the Information

22

Product Profitability Within A Store

23

Product Profitability Across All Stores

24

Product Profitability By Supplier

25

Management Process

Understand Processes Development/ planning

Management Decisions and policies

Plans, projects developments

Finances and new business

Payments to suppliers Payment s

Primary Process

Recep invoices

Information for invoice matching

Payment

New products Prices sales

Validation / Verification and matching accounts

Manufacturing

Preparation for sale

Promotion/ advertising

Layout management

Promotions, adv., Presentations, sale offers

Invoicing and collection

Pricing and product mix

Raw Materials and finish goods Neg. Prom, advertising, merchand., etc.

Negotiation

Order placement

merchandize management Reception

Classification and quality control

Storage / exhibition Distribution and transfres

orders

Requirements

Invoices, collections services, products

To suppliers

Requirements Products

Orientation, services parking, order taking, etc.

Customer service

Merchandise delivery

Claims, recommendations, requirements

Requirements and needs

SW and hardware maintenance

To customers

Needs, Requirement satisfaction

Req.

Merchandises / Docs.

Support Process

Marketing

Production

Negotiation with suppliers Agreem Shelf esp PO

PROCESS RELATIONSHIP MAP E. WONG

Investment

Request attended or service provided

Employee management Treasury

Comunications

Accounting

Legal support

Maintenance of buildings and equipments

Provide infrastructure

Control

Selection

Training

Administration

Safety

Supply of supplies and equipment

Benefits

Marzo 20,1999

Focused Management Information

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Costed Process Relationship Map Trabajo en Proceso Gerenciales

Procesos

2'398 4.3 %

Gerencia

921 1.6 %

1'410 2.5 %

Pago a proveedores Información para cuadre de facturas

Pago 301

Pagos

916 6.6 %

Producción

Validación / Verificación / Cuadre cuentas

Facturas

Procesos Primarios

Producción 1'907

615

Acuerdo s espacios O/C Prod. nuevos Precios ofertas

Tra to con proveedores

6'498

Prom oción y publicidad

7'115 12.6% Manejo de Layout

Promociones, avisos, presentaciones, ofertas

1

Manejo de precio y s urtido de productos

Requerimientos

Fa cturación y cobra nza

Entrega MP y Prod. Terminados Tarifas, planes, necesidades

Negociación

Ma ne jo de mercaderias

1098

Em is ión de pedidos

Req.

1'885 5'886 Devoluciones 1'772

Recepción Alm acenaje y exhibición Dis tribución / trans ferencias

12'320 21.6% Clas ificación y Control de Calidad Entrega de pedidos 2'406

Requerimientos

201 0.4% Tesoreria

454 0.8% Contabilidad

Atencion de 105 0.2% comunicacione s

21 Legal

4'285 7.6% Mantenimiento de instalaciones y equipos

a clientes

Necesidades, satisfacción requerimientó s

Instrucciones

Wong pedidos

Facturas, cobros 26

Información facturación servicios y devoluciones

8'454 14.9%

Atención a clie ntes

a proveedores

Orientación, servicios, estacionamiento, toma de pedidos, etc. Sugerencias, reclamos, requerimientos

Autoservicio

mercaderias y servicios Servicio prestado o requerimiento atendido

Requerimientos y necesidades

24.9%

5'959 10.5%

5'934

1'159

14'038

Mantenimiento de hardw are , SW e Informacion

Preparación para venta 1'096

2'394 4.2%

509

1003 1.8%

Merca de o

3'003 5.3 %

616

Mercaderias/ Documentos

Soporte

E. WONG S.A. 56'705

70.8 %

Procesos de

MAPA DE RELACION DE PROCESOS

Planes, proyectos y desarrollos

Decisiones , politicas y directivas

40'162

67

Inversiones en 0.1 % otros negocios

Planificación y Desarrollo

512 0.9% Proveer Infraestructura

1'898 3.3%

Manejo de personal

Control

Selección 114 Administración 619

3'391 6%

Capacitación 1'163 Bienestar 1'495

1'729 3% Seguridad

543 1% Proveer y almacenar equipos y suministros

Julio 19,1999

Focused Management Information

27

Managing the Supply Chain -Supplier Management Actividad

Costo

Inductor

Costo unitario

Trato con Proveedores de mercadería

3,261

# horas/ monto

5.29

Preparación de mercadería para venta

1,577

Volumen preparado

0.12

Cambio de Precios

830

Codigos a cambiar

0.59

Tramitar cambios y devoluciones

655

Unidades devueltas o cam

0.72

Recepción de facturas

165

# de facturas

Trasbasado de mercadería

102

Consumo frutas y verdura

0.02

Abastecimiento de insumos para producc

75

Cantidad insumos requer

0.30

Atención reclamos de proveedores

41

# Horas

30.55

Manejo de la producción

26

# horas

21.51

Manejo de emisión de facturas

23

# de facturas

2.64

Emisión y autorización de pactos

14

# Codigos en promocion

3.75

Administración de letras

13

# letras

57.57

Cobranza a proveedores

13

# Horas

39.65

42.54

Total supplier activity costs are 20.1 m s/. January – March 28

x 100 unidades

x 100 unidades

Managing The Supply Chain - Supplier Product Management Actividad

Costo

Inductor

Costo unitario

Llenado exhibiciones

5,186

Unidades vendidas

5.70 x 100 unidades

Preparación de productos

2,204

# preparados

8.79

Almacenar mercadería

1,159

Unidades recibidas

0.89 x 100 unidades

Recepción de Mercadería

1,009

Unidades recibidas

0.77 x 100 unidades

Modulación

769

Unidades recibidas/despa

0.59 x 100 unidades

Control de calidad de productos recibido

602

Unidades recibidas

1.62 x 100 unidades

Liquidación de Concesionarios

523

# transacciones

0.75

Codificar Mercadería

501

# de stickers

Recoger exhibición de vitrinas

133

Consumo

0.062 0.15 x 100 unidades

Estiba

56

# horas

11.44

Programación de pagos

25

# de facturas

Manejo de importaciones

18

# importaciones

Manejo con concesionarios

14

# Transacciones de conc

Control de distribución de mercadería

12

# Unidades

2.90 86.64 1.94 x 100 unidades 25.47

Total supplier activity costs are 20.1 m s/. January – March, 1999 29

Activity & Process Based Budgeting

Activity Identify Materials Required

Order Materials

Output Materials Identified

Materials Ordered from Supplies

Output Quantity This Year Next Year 1,750

2,000

Equivalent # People This Year Next Year

2,200

5

4

2,400

2

2

Total

Total Cost This Year Next Year $7.5m

$2.0m

$9.5m

$7.0m

$1.8m

Actions to Improve Productivity 1. Simplify order form 2. Develop networked computer order process 3. Work with upstream process partners to simplify process 4. Eliminate quality errors 1. Introduce new automated shipper invoicing system 2. Train sales people to complete order forms properly 3. Change sales people’s incentive scheme to account for receivables

$8.8m

Current Year Actual / Forecast

Next Year Budget

30

A Flexible Budget View Example department results – month 2 Customer Service

2 month's actual results y.t.d. Driver Units: Budgeted Actual Cost

Activity

Driver

Enter customer orders

# of Orders

700

772 $ 102,580

Enter credit notes

# of Credits

400

380 $

55,093

Answer Customer Queries

# of Queries

3,000

3,400 $

37,758

Schedule Deliveries

# of Shipments

767

834 $

29,619

Process Special Orders

# of Special Orders

37

32 $

16,576

Invoice Shipments

# of Shipments

767

834 $

8,931

Update Price List

# of Price Changes

53

120 $

6,822

(Actual Units X Budgeted Cost) (from General Ledger) (2 / 12 X Department Budget)

Work done at "standard" cost

$ 257,378

Actual Expenses

$ 247,983

Year to Date Budget

$ 241,783

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BAD?!

GOOD?!

Where To Begin? Start by asking the right questions of the right people … 1. If financial data does not significantly help make better decisions then it is not of much use to decision makers.

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Do managers trust and see the current financial reports as helpful?

2. A fundamental shift in thinking is required if financial analysis is going to be used within a measures framework.

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Do we know the cost of what we do as opposed to what we spend?

3. If you are going to manage your business, it is critical to know what you spend, how you spend it and on whom/what you spend it on.

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Do we know the true cost and usage of support activities to other departments?

4. Accurate and detailed profitability information by customer and product is necessary to ensure you are selling the right products to the right customers at the right price.

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What is our profitability by customer and by product?

5. Financial data must be used as the key linking mechanism between operations and strategy.

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Within the organization, are costs managed at the activity/process level or at the P&L level? 32

Delivering Exceptional Results

Recognizing what to do & what not to do: High impact support is the way to get to the top – great leaders don’t reinvent the wheel, they find someone who has conquered the cliff before and leverage that person’s experience to ensure they succeed with greater efficiency. What experience do you need to help your organization reach the top? Where could you get this experience? (internally and/or externally) 33

Thank You. Jim Gurowka Institute of Management Accountants [email protected]