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Give your stakeholders a raise - increase asset productivity!
You have pushed your cost cutting measures to the limit. Competitive pricing still keeps a full-court press on every move you make. You have launched new products, but this initiative barely keeps you in the game. Clearly the explosive, seemingly easy, growth-rates of the 90's have drawn to a close. Finding more ways to drive profit appears daunting. Remember that capitalism requires two things - growth and profits from any business wishing to remain viable. As you enter the 21st century, how will your firm cope with the financial expectations of your stakeholders?
Improving asset productivity may be part of the answer.
Enhancing stakeholder value is tougher in a growth-restricted economy, however strong management of asset productivity will give most organizations more financial options. When many companies are pulling in their horns, seeking ways to protect profits, and basically trying to survive, finding ways to make idle or under-utilized assets work harder will strengthen the company's financial health.
Total asset productivity is basically sales divided by the average difference between operating assets and operating liabilities during a given period of time expressed as a percentage. Financial people understand this concept well, but somehow it doesn't easily translate into line management - the very people responsible for the effective use of corporate assets. Global Marketing finds that many companies work hard at portions of asset management such as inventory control, but this is more of a piece-meal approach. Asset management including improvements, timetables and expected results should be a key part of any company's on-going business strategy.
Case in point...
A mid-size industrial instrumentation company benefited from a new strategy that focused on increasing asset productivity. After a number of years of explosive growth, the sluggish economy significantly reduced the growth-rate of the firm. Profits came under pressure, cost-cutting measures were implemented, but shareholder value continued to decline. Together with senior management, Global Marketing benchmarked present asset productivity. The results yielded a stunner! Barely 40% of the company's assets contributed to 100% of the profits. Basically, 60% of their assets were idle or significantly under performing.
There is a strong reason to pay attention to, and better manage all corporate assets. Improving asset productivity infuses more financial flexibility into any organization. Stakeholder value improves, but many less obvious benefits occur. Can you imagine that an increase in customer service level will result and drive renewed growth-rates? It's all connected.
In the above example, the company worked hard in defining, tracking and increasing all corporate assets - not just those inside the company, but outside too,
along the entire value chain. Beginning initiatives moved inventory turns from a meager 3 to almost 15 in less than one year. This freed-up working capital and reduced short-term debt. By working with the firm's vendors, (real-time stock programs and moving to partner relationships) they were able to get more of the ‘right' inventory at the right time. This increased the firm's flexibility to deliver product to customers. Scrap levels were also lowered. Strengthening product life-cycle management (see Marketing Tip #106 Product Life Cycle Management - It Pays!) had tremendous impact on asset productivity. Raw material obsolesces went down by a factor of 10. Manufacturing was able to move to a build-to-order mode. This reduced finished goods inventory by 90%. At the same time, customer delivery went from less than on week to shipments of 85% of the firm's product offering in the same day with no margin penalty.
The company also put-into-play longer-term asset improvements as part of their business practices and new product design philosophies. Strategic decisions regarding engineering designs and manufacturing strategies (relating to build and quality levels) are now more coordinated and expected to yield on-going benefits.
Clearly, a paradigm shift occurred in the senior management's thinking. The company now routinely tracks their asset productivity gains. Asset management and improvement objectives are an integral part of their annual operational plans and a key aspect to their business strategy.
So far, this organization realized an increase in asset productivity of almost 19% - the equivalent of over $1M dollars of improvement in the first year. This financial flexibility allowed senior management to return more stakeholder value while more aggressively investing in additional, growth-oriented marketing, sales and engineering programs for the future.
Parting thoughts
Freeing up working capital is a significant by-product of strong asset management. Senior executives at well-run companies understand the value of working capital. The more you have the more flexibility for the company. Smart managers turn this flexibility into good choices that increase shareholder value and build future growth for the organization.
Be one of these smart managers and work on increasing your asset productivity today!
About the Author
Frank Williams is a marketer.
With many post graduate courses in management, leadership, marketing and technology to his credit, Williams is a widely respected speaker, author and technologist. He has significant knowledge in marketing strategies and is the founder and CEO of Global Marketing, Inc. - a leader in business, marketing and sales consulting
Other valuable articles can be found at: http://members.cox.net/glmarketing/glmarketing/index.htm
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