Amce analysis project

ACME ANALYSIS PROJECT www.theevansgroupllc.com

By Brian Wax, Business Consultant.

ACME ANALYSIS PROJECT PHASE 1 REPORT

Table of Contents

Project Scope and References .......................................................................................... 3

In-Process Project Modifications ..................................................................................... 3

Data and Information Collection ............................................................................................4

Contract Review and Analysis .................................................. Error! Bookmark not defined.

Best of Bread EMS Contracts .................................................................................................5

Organization .............................................................................................................................6

Core Business Process Mapping .............................................................................................8

XYZ CORP./ACME SYSTEM VIEW ........................................................................................................8 INITIAL IDENTIFICATION OF CORE PROCESSES ...............................................................................9

Demand Flow: ................................................................................................................................................. 9

Pricing Approach: ...................................................................................................................................... 10 Payment Process: ....................................................................................................................................... 11

Business Flow: .................................................................................................................................... 12

PURCHASE PRICE VARIANCE ................................................................................................................. 13 Systems View: .............................................................................................................................................. 13

PPV Reconciliation: ................................................................................................................................... 14 Identified Feeds to Reconcile PPV: ........................................................................................................... 15

FINAL IDENTIFIED CORE PROCESSES .............................................................................................. 15 Component Inventory PPV (Feed 1) .......................................................................................................... 15 Component Inventory PPV (Feed 1) .......................................................................................................... 16

CTO Value Add (Feed 2) ............................................................................................................................ 17 Component Inventory Revaluation (Feed 3) .............................................................................................. 18 Blanket Purchase Agreement Adjustments (Feed 4) ................................................................................. 19 Reversals for component revaluation from prior quarter (Feed 5) ........................................................... 19

Sales order cancellation credit to ACME (Feed 6) .................................................................................... 20 Non-ACME supplier PPV to Sunnyvale (Feed 7) ..................................................................................... 21 Accounts Payable Approval Process (Feed 9) ........................................................................................... 21

CCBOM/BPA Variance Posting Process (Feed 10) .................................................................................. 23

Financial Reconciliation ........................................................................................................24

Process Analysis .....................................................................................................................25

KEY OBSERVATIONS ............................................................................................................................... 25

Information Systems ..............................................................................................................26

Interfaces and Communications ...........................................................................................26

Recommendations ..................................................................................................................26

PROCESS ...................................................................................................................................................... 26 CONTRACT IMPROVEMENT AND ENHANCEMENT ....................................................................... 26

ORGANIZATION OPTIMIZATION ........................................................................................................ 27

FINANCIAL RECONCILIATION ............................................................................................................. 27

Summary .................................................................................................................................27

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Project Scope and References John J. Doe & Associates (ABCD) (XYZ Corp.) to provide an independent analysis of portions

of the business relationship and supply chain issues between ACME and XYZ Corp..

Additionally, the lack of ability to provide management with a complete understanding or

prediction of the reported “ACME PPV/Variance(s)” was a major triggering event for the

launch of this project.

The work product was mutually agreed and defined by the following documents:

> Letter ABCD to XYZ Corp. dated June 19, 2006 o Business Process & Financial Flows for Contract Manufacturing

o M. Wais email “ACME Analysis, Attachment A to June 19th

letter

> Letter ABCD to XYZ Corp. dated June 25, 2006 o Project Outline for ACME Business & Financial Flows: Revision 2

o Project Outline Revision 2, page 2 of June 25th

letter > Project Flow chart, presented at kick-off meeting July 17, 2006 > Statement of Work dated July 17, 2006

All PowerPoint review presentations are an integral part of this final report are attached for

reference. The three members of the ABCD team that participated in this project were John J.

Doe, John F. Doe and Brian Wax.

In-Process Project Modifications Modifications to the project scope were made during the project with agreement by both

parties. The following are the significant changes to the project as defined in the above

referenced documents:

> Phase 1 was specifically specified to “NOT include terms or conditions that may be

targeted for contract improvement” (Attachment B, 1st bullet). ABCD performed

significant work in Phase 1 to a) identify areas within the existing contract to be

considered for modification and/or negotiation and b) to provide Best-of-Breed terms

that are not contained in the contract or agreements for consideration by XYZ Corp. for

future contract negotiations. (Please see “Contract Analysis” section of this report).

> Phase 1 included the interviewing of ACME staff, which was removed as a requirement

, 2nd

bullet). It was the opinion of ABCD that interviewing of ACME staff was

premature based on the findings during Phase 1. These interviews should be

rescheduled for the beginning of the next project phase, after XYZ Corp. has the

opportunity to digest Phase 1 findings and develop an action plan.

> Additional analysis of payment data was stopped after the sampling of data stores did

not show any problems or inconsistencies. The significant problem of reconciling the

reported variances also inhibits or reduces the value of this effort. ABCD

recommended that this work be reconsidered after the completion of Phase 1 and after

XYZ Corp.’s ability to reconcile variances is consistently achieved.

> Detailed reconciliation mapping and analysis was added to Phase 1 as it was a

significant problem that was not initially expected.

> An additional project review was added to Phase 1.

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Data and Information Collection Per the agreed plan, ABCD used information and data provided by XYZ Corp. coupled with

over twenty-five employee interviews to obtain the information required, and to assist in

leading XYZ Corp. personnel to work solutions to noted and/or discovered issues.

Additionally, work group sessions were used to assist in the collection of pertinent

information on cross-functional problems and ownership. ABCD and XYZ Corp.

management had both planned and unplanned review meetings and conversations during the

course of the project. The following is the list of XYZ Corp. core employees interviewed and

involved in the project:

> Supply Chain Management o EMS

o Purchasing o Manufacturing Operations o Commodity Management

o Senior Management

> Finance o Accounts Payable o Cost Accounting

o Senior Management > Sponsors

The following is the list of documents provided for review and/or analysis:

> Contracts o

> Spreadsheets o

> Power Points

o

The EMS contract and supporting spreadsheets for pricing and variance determinations were

reviewed in detail. These documents were reviewed for two core purposes, 1) for foundation

information to understand the current business relationship and to help define how XYZ Corp.

and ACME routinely operate and 2) to find areas that XYZ Corp. can improve their contract

position with ACME. (Please reference first bullet on page one under “Project Modifications).

This report section deals with potential areas for contract improvement and enhancement.

In general, the XYZ Corp./ACME MSA is relatively standard in nature. ABCD did not find

any extraordinary issues that are of imminent concern. The approximately fifty notations and

comments made by ABCD can be located i (ACME MSA with “track changes” on) to this

report. The comments vary from minor “clean-up” issues to important concerns. Specific

concerns that should be addressed and negotiated with ACME (or any other supplier that XYZ

Corp. uses, or may use in the future) as soon as feasible are as follows:

> Epidemic Failure: The contract does not include any reference to epidemic failure that could be induced by ACME assembly, test or workmanship. Clauses of this sort are

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becoming more frequent as companies turn over more and more of manufacturing and

configuration to third party partners.

> Contract Pricing: In cases that XYZ Corp. has negotiated contract pricing with

suppliers, section 6.2 should “require” ACME to pay no more than the stated contract

prices. This provides protection in case of a later dispute if costs are exceeded without

having to justify a position by XYZ Corp..

> Profit Margin: ACME has guaranteed profit and/or operating margins independent of

performance. XYZ Corp. should consider language that ensures appropriate, measured

performance by ACME to mutually agreed XYZ Corp. requirements or ACME profit

can be limited or excluded. In addition, XYZ Corp. should ensure that they do not pay

profit on accounts that typically would be excluded, i.e. SG&A.

> Flexibility: The current flexibility clause is incomplete and potentially ambiguous.

Significant detail is required in defining flexibility coupled with specific time frames,

horizons, product priorities etc. Without clear definition, it is relatively easy for EMS

providers to under perform, without consequence to themselves, while potentially

causing XYZ Corp. or XYZ Corp. customers’ grave issues.

> Carrying Costs: The contract allows ACME to be paid carry costs regardless of

responsibility for the root cause. The contract should be specific that carry costs will

only be allowed if there is an action by XYZ Corp. that causes the event and ACME is

unable to mitigate the effect of the XYZ Corp. action within normal business

operations and expectations of an EMS partner.

> Margin on Margin: The current XYZ Corp./ACME pricing model allows the

accumulation of margin on margin. A significant benefit from a single EMS and CTO

provider is that potential limitation or even exclusion of these costs to XYZ Corp..

Consideration should be provided by the EMS partner to XYZ Corp. for the significant

additional revenue generated by the EMS partner that this sourcing methodology

affords.

> Benchmarking and Validation: XYZ Corp. should ensure that lead-times, time

standards and component costs are highly competitive through benchmarking or some

other means with a requirement for reimbursement if the reported costs are determined

to be out of line with the industry and/or competition.

Best of Bread EMS Contracts This section is added based on a specific request by the Vice President of Supply Chain.

ABCD reviewed the current business and contract relationship between XYZ Corp. and

ACME, for the determination of “Best of Breed” terms, conditions and concepts that could be

utilized to enhance XYZ Corp.’s contract position and improve EMS performance.

Progressive OEM’s have been negotiating many of the following concepts into their business

agreements. Each of the items should be looked at for their individual merit as well as how the

combined deployment of these concepts will enhance the various areas of EMS performance.

It is likely that the EMS provider either will be initially resistive to some of the concepts, as

there is a shift of responsibility to the EMS provider or requires the EMS provider to improve

supply chain processes.

> Lead-time Management: This area is regularly under invested in by OEM’s. Lead-time

has immense impact on a number of critical performance areas; flexibility (both up and

down), product mix changes, excess and obsolete, cost take-down rates, cost

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reduction implementation, ECO implementation, etc. Terms controlling lead-time

management based on industry best lead-time, benchmarking and audit ability, supply

chain simplification, etc. should be considered.

> Flexibility: Most flexibility terms are not complete and provide many loopholes for the

EMS supplier. The actual definitions and associated algorithms for calculation and

performance measurement need to be well understood and agreed upon by both parties.

Additionally, clauses requiring the EMS supplier to take complete responsibility for all

the non-OEM controlled sub suppliers should be included. Inclusion of the sub-

suppliers should help ease the burden on both the OEM and EMS.

> Limits of Liability: Adding terms requiring the EMS supplier to be responsible for all

costs associated with standard off-the-shelf components should be considered. The

EMS provider generally has more leverage than the OEM, uses this fact for a sales

technique and then still makes the OEM responsible for costs associated with the

procurement, carrying, return, end-of-life transitions or excess material.

> Cost Reduction: Specific ties to industry takedown rates with plans for benchmarking and audit ability should be part of the agreement. Measurement to “best of breed” as

opposed to industry “standard” should be considered.

> Global Pricing and Costs: Requiring the EMS supplier to provide component pricing at

the lowest global cost in any geography will provide lower costs and reduce the cost

management effort of the OEM.

> Most Favored Customer: Most favored customer clauses are universally disliked by most EMS suppliers. The clause requires that the EMS supplier not charge the OEM any more than the lowest cost or rate, offered to any of their other customers.

> Pay at Final Delivery: As more and more of the operation are transferred to EMS providers, it becomes easier for the third party providers to obtain profit on individual portions of their business (i.e. board assembly to CTO). A consideration for having a limited number of “partners” should be the cost avoidance offered with the “four walls”

of the supplier.

> Quality Performance: Quality performance is rarely defined well. Appropriate

definitions with defined metrics, audit ability coupled with regular, accurate

measurement tied to specific and consequential rewards or penalties should be

deployed.

Organization

The capability and performance of the EMS commodity management team has broad and

significant influence on the entire supply chain organization and therefore on the Company.

Defining clear roles and responsibilities for the EMS commodity team is critical.

As expected, the current organization is highly focused on the “number one” goal of ensuring

product delivery. This singular focus, and organizational performance measurement, may be

causing a lack of development in other critical areas. Short-term delivery performance must be

coupled with long-term strategic initiatives that will continue to support XYZ Corp.’s

growth and performance goals long into the future. Proper organizational structure,

leadership, staffing and strategic planning are paramount for the EMS commodity team to

become a high performing organization. As XYZ Corp. continues to grow and likely sees

pressure on gross margins, management of the third party providers will become even more

critical, and the commodity team will experience increasing performance pressure.

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Additionally, with the enormous continuing growth experienced by XYZ Corp., the third party partnership and associated spend will require excellence in all aspects of performance and execution.

Companies that have high performing EMS commodity teams typically have the team

separated into three functional capabilities regardless of actual organizational structure. Core

responsibilities for these key areas are as follows:

Administrative: Responsibilities include all aspects of basic day-to-day business

activities, both internally and externally. Responsible for all reports, business

documents, engineering documents, data collection, inter-departmental information

flow, etc. happens in a routine, timely and accurate manner.

Fulfillment: Ensures delivery of product to end customer through EMS/CTO partner,

inclusive of capacity planning and assurance, short-term ramp (up or down)

achievement. Responsible for cost reduction implementation, assurance of

component supply in tandem with other company commodity teams and

implementation of forecast to order process.

Strategic: Has strategic responsibility for development of EMS/CTO commodity

strategy, sourcing, contract negotiation, cost and all executive cross-functional

interaction both internally and externally.

In companies of comparable size to XYZ Corp., it is common for the commodity team to

consist of five to seven people depending on product volatility (both number of SKU’s and

volume and/or mix changes). The appropriate structure and number of people is critically

associated with where the organization is currently in functional capability and maturity, and

whether the development and deployment of a long term, strategic commodity strategy exists.

From our limited contact through this project, it appears that the area of fulfillment is the key

focus area, and achieves the desired results in product delivery. Strategic direction and

administrative areas should be assessed for performance enhancement. A skills assessment in

conjunction with an organizational analysis should be a completed with the assistance of an

outside independent third party. When the organizational and skills assessment is complete, a

development transition plan can be put in place.

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Core Business Process Mapping ABCD team members initiated the core process mapping effort by identifying key process

stakeholders through referral from senior managers. Initial interviews with these stakeholders

lead to other individuals who had content knowledge of the core processes or who could

provide information used in these processes. We did not engage ACME employees who

interact with XYZ Corp. supply chain personnel. External interviews during phase 1 were

considered premature at this time of the investigation. Phase 2 should include the ACME

counterparts who complete the supply chain relationship.

Process mapping, contrary to conventional belief, requires participants to succinctly and fully

describe the business models and methods in a logical and disciplined manner. At the highest

level, several iterations will be required to identify key relationships and interdependencies and

gain consensus on exchange of knowledge or work product. While conducting the process

mapping interviews it was difficult to obtain the needed time and priority from some

individuals or small teams required to complete specified steps. Numerous meetings were

missed or quickly ended due to conflicting priorities or absence of key participants. At times,

the participant’s level of interest was low or he/she was facing other distractions.

At the beginning of the process mapping stage, core, or key processes, were identified that

culminated in the analysis and reporting of ACME purchase price variance or compensation.

As definition progressed with the core processes, we discovered a set of reports and activities

that were crucial for completing variance analysis.

XYZ Corp./ACME System View

The following process chart represents a graphic depiction of the high-level system that

controls the XYZ Corp. and ACME business, inclusive of the three different portions of a

supply chain; information and data (including interpersonal communication and verbal work

direction), financial and material movement/flow.

The process is semi-complex in nature but not significantly different from other similar

companies and their relationships with third party EMS and CTO providers. There are

significant numbers of email and verbal communications that should be considered for process

documentation and possible system automation.

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Initial Identification of Core Processes

The core processes were identified by XYZ Corp. participants. Consensus was reached at a

system level, but as the flow suggests, there are process activities that are not described. The

process flow illustrates that interdependencies exist but does not go into sufficient detail to

provide a robust description of the actual event triggers, services or products and the sequence

of activities.

Demand Flow:

This illustration shows how operations planning

generate demand requirements for either ACME or

XYZ Corp. Sunnyvale. Information systems are

noted but not completely understood by the various

cross-functional organizations. A complete

understanding of the forecast to order process is

required as the conversion from forecast to orders

happens within this process, with no real-time

feedback or adjustment for financial planning.

Reconciliation of forecast to actual is after a quarter

end.

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Pricing Approach:

The methods that XYZ Corp. uses to calculate pricing and cost standards cause confusion and

create variances that are not truly PPV as compared to industry standard definitions. These

amounts however, are included as “ACME PPV” and cause consternation as that portion of the

“variance” is regularly misunderstood. The methodology deployed is unique to XYZ Corp., but

not necessarily a “bad” approach. More cross-functional education is required to ensure that all

participants are truly on the same page; understanding and comprehension of XYZ Corp.

semantics and definitions.

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Payment Process:

The payment flow identifies the core relationships between XYZ Corp. and ACME. In brief,

XYZ Corp. provides the build forecast. EMS and CTO pricing is managed through reports

exchanged between the two entities. Monthly and quarterly reports are created that identify

pricing issues that require adjustment. Adjustments are made and ACME eventually invoices

XYZ Corp. for product and services.

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Business flow:

The following flowchart is representative of the business systems view. It identifies business

relationships. It does not describe complexity of the relationships. Beginning and end-

points are not defined nor are actual business requirements that drive this system. As the

investigation progressed into the core processes, it was discovered that the embedded

processes for Blank Purchase Agreements, ACME forecast and BPA are not documented nor

controlled by a clearly defined processes.

This is an associated factor in why it was difficult to define the processes and process

interdependence. The business management methodology is not generally uniformly or fully

understood by any group or individual. Many of the actions that occur are functional methods

that have been passed down from prior employees or created by individuals with core

functional responsibility but without consideration for cross-functional implications. Evidence

suggests that a comprehensive business plan and method for managing the ACME relationship

is critically needed.

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Purchase Price

Variance Systems View:

The financial and accounting tools and practices exist that allow XYZ Corp. to manage cost

accounting, forecasting materials, sales orders and subsequent financial adjustments. With

these tools and business practices, XYZ Corp. employees should be able to estimate PPV and

all of the PPV elements.

Interviews were conducted with the identified owners of the reporting processes. We

interviewed owners individually and in small teams where data or information hand-offs were

occurring. We discovered a minimal degree of consensus existed on data actually reported

from each process feed. Cost accounting and Supply Chain personnel had to work through the

numerous details to validate the data or information and how it is collected and finally

reported. The Q4 variance was the initial target as it was a substantial amount of money and

there was an apparent inability to describe how the total variance was derived. The following

is the initial variance derivation and reconciliation model.

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PPV Reconciliation:

Twelve feeds were eventually mapped into flow charts. There are flow charts representing of

nine of the twelve feeds (the Decru feed is no longer used and two are direct outputs of Oracle

accounts) noted in the spider diagram below. These 12 feeds/calculations are generally

independent of the PPV reconciliation and serve other primary purposes. The feeds are utilized

to extract PPV when an issue or problem arises. There is no defined method or process for

conducting PPV reconciliation.

Calculating PPV is currently conducted by gathering information or data from numerous

sources. How and what the data represents in each flow has not been considered important. At

times, when asked about the source of any given processes that came from outside the function

of the reporter the answer was, “that is not my concern or functional responsibility”.

The PPV reconciliation method is not a documented process. As it stands currently, the PPV

reconciliation is not scalable, sustainable and repeatability of the same method is unlikely.

Therefore, trending or analysis based on past efforts will have a potential for being inaccurate

and without substantial validation of data.

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Identified Feeds to Reconcile PPV:

Each of the feeds were individually identified and described by the owners of the activities that

roll up in to the reconciliation. These are very high level and do not solidify into a documented

or formal method of practice. During the interview process, it was apparent that little

orchestration had been done by the owners to understand the relationships and interdependence

of the data, and how it was actually was gathered and reported.

To this date, we do not have formal consensus between the owners on what the data is, or how

it is actually transacted. An agreed upon conclusion is critical in defining requirements and

specific products that are passed on through the value chain. This evidence re-enforces the fact

that the process is largely based on tribal knowledge, and passed along by “word of mouth”.

(None of the actual reports or tools used by the designated owners were provided during the

mapping of the processes).

The described core processes (variance feeds) were created by. The Accounts Payable processes were created and published in the Procure to Payment process engineering initiative. This process has been validated by the P2P team.

Final Identified Core Processes

The following are the final set of core processes that were identified by the participants as the

ones that were critical to managing ACME, and for reconciling the “ACME variance” that is

reported to executive staff. (These are “core” processes, and will be used for as-is mapping in

phase 2, and not a deliverable for phase 1).

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There is no closed feedback loop on issues

and does not have a measured corrective

action plan, or remedied part pricing. The

loop does not include a report back to the

Commodity Management Team leader

who should verify that a discrepancy was

actually fixed and prevented from

reoccurring. There is no automatic

tracking mechanism or system identifying

a price change. The only way to confirm

pricing is to review the next month’s report. Discrepancies will likely end up in the A/P hold report and adjustments made over time.

Errors of this nature will permeate the PPV reconciliation process (including quarterly BPA

adjustments).

Recommendations:

Part pricing issues should be tracked and reported in order to reconcile changes in the purchase price to actual changes in PO line items.

A PPV inventory review should be a scheduled event, within a defined process, that coincides

with payment on a fixed, regular basis. The report is submitted by ACME on a monthly basis;

however, it is not known when XYZ Corp. personnel complete the review.

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Component Inventory PPV (Feed

1) Identified Owner: Mark Shindel

Processes Scope:

Commodity Management reviews a PPV inventory report submitted by ACME

personnel. Commodity management

forwards the report to the commodity

teams for review and identification of

issues with part pricing. If no issues are

identified, payment is processed. If issues

are found, it is up to the specific

commodity manager to work the issue with

ACME.

Issues/Observations:

ACME ANALYSIS PROJECT PHASE 1

REPORT

CTO Value Add (Feed 2)

Identified Owner: Dustin Wang

Processes Scope:

This process identifies forecasted pricing

based on historical Blanket Purchase

Agreements. XYZ Corp. standard pricing is

contrasted and subtracted out leaving the

ACME compensation value. The same is

done with actual sales orders and XYZ

Corp. standard pricing. Cost accounting

prepares a monthly report that is distributed

to the XYZ Corp. financial community.


The primary reason for this process is to

report monthly payment to ACME in

contrast to actual cost to XYZ Corp.. This

process is independent of the actual method

and should be reviewed to determine if the

numbers reported are accurate and not

double counted in any other process report.

This is a “net” report and does not identify

any corrections, changes or adjustments.

Recommendations:

This process’s relationship to other financial reports that affect PPV needs to be fully understood. For example, how does the timing of inventory PPV impact

this report? (The belief is they are

mutually exclusive).

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Component Inventory Revaluation (Feed 3)

Identified Owner: Dustin Wang Process

Scope:

Cost accounting reviews blanket purchase orders by

consecutive quarters to identify price changes in contrast to

the XYZ Corp. standard pricing. These parts are described

as “3 by 5” components. Cost accounting identifies and

extracts specific parts that were impacted by the creation of

a new blanket purchase order. Materials on hand are then

multiplied by the cost difference from the new BPA. This

establishes the revalued parts on hand pricing. This process

is completed for each ACME location.


Through the interview process, it was discovered that

ACME sites might handle pricing adjustments with different

methodologies. This requires validation to ensure accuracy

of the component revaluation.

Recommendations:

Complete a comprehensive “as is” map of the attached

flow. Match to each ACME site pricing and adjustment

methods. This should be performed within unique part

families.

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Blanket Purchase Agreement Adjustments (Feed

4) Identified Owner:

Process Scope:

This process defines how cost accounting makes quarterly

adjustments to blanket purchase orders that begin and/or end

quarterly. Depending upon when a new BPA takes effect pricing

is adjusted to reflect the new BPA


Reversals for component revaluation from prior quarter

(Feed 5) Identified Owner: Dustin Wang

Process Scope:

The purpose of this process is to revalue component pricing

that have accrued for one fiscal quarter.

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Timelines and consistency may make comparing and analyzing quarterly adjustments difficult.

Recommendations:

None


Are accruals accurate given the number of adjustments that

happen over the fiscal quarter? Given that commodity

management is changing prices on a monthly basis, how

does this impact accrual reporting?

Recommendations:

None


Sales order cancellation credit to ACME (Feed

6)

Identified Owner: Lisa Bullis

Process Scope:

To ensure that product that is “configured to order

then cancelled” is tracked and restocked to

inventory. ACME and the XYZ Corp. PLM’s

report electronically the cancelled orders,

subsequent break down, and restocking activity. XYZ Corp. PO line items are adjusted and ACME

and the PLM’s are compensated for the tear down

process


None

Recommendations:

None

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Non-ACME supplier PPV to Sunnyvale (Feed

7)

Identified Owner: Dustin Wang Process Scope:

This process defines the PPV for non-ACME

suppliers.


This process has a noticeable difference in

contrast to the PPV for ACME. It appears that

cost accounting does the price analysis with out

closing with Commodity Management. Box 5.0

has no resolution. A price or percentage filter is

used to determine if a part is out of control from a

price perspective. The filter level is set on

“professional” judgment.

Recommendations:

Define a closed loop solution with Commodity

Management. Define a standard for professional

judgment. The price variation may be dynamic,

and the filter level may be ineffective for different

types of commodities.

Accounts Payable Approval Process (Feed 9)

Identified Owner:

Process Scope:

Management process for all transactions invoiced through Accounts Payable. Payment issues that are discovered end up in a hold file until discrepancies are rectified.

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(chart follows)


Historical data reveals that a large dollar amount is maintained in this location until issues are resolved. Revaluation and quarterly adjustments that do not reconcile will be placed on hold

and payment will be delayed

Recommendations:

None

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CCBOM/BPA Variance Posting Process (Feed 10)

Identified Owner:

Process Scope:

Process for identification of price variances and

adjustment with ACME. This Process appears to

be a derivative of process #1. A filter is used (to

determine at an aggregate) if the variance is out

of control.


Process #1 and process #9 appear redundant.

This exercise may be able to be completed at the

same time as process #1. The filter of 5% also

requires validation. The filter may be effective

for certain components and at the same time

could leak considerable expenditure on a

different class of components.

Recommendations:

Consolidate process 1 and 9 into one process.

Verify/validate the percentage/dollar amount is

appropriate for all commodities.

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The subsequent use of the chart,

and associated data, is in the

determination of the validity,

predictability, accuracy of each variance and its origination. Furthermore, the data should be

analyzed to be sure that it “makes sense” from a value perspective as well as an ownership and

process perspective. The use and analysis of this information is the core of understanding how

to improve performance and assist in making strategic decisions. As of this writing, ABCD is

unable to provide any further insight, as there has not been completion of the data by the

business owners. We believe that this must be made an extremely high priority by management

or it compromises creditability and impedes performance enhancement and strategic decision-

making.

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Financial

Reconciliation

Numerous attempts were made

by various ABCD staff to have

the main participants develop

a simple reconciliation chart

based on the identified

variance feeds. We were

unsuccessful in our attempts.

This may be indicative of a lack

of ownership or priority to the

variance issue and ensuing

project.

The chart (pictured at right)

(provided to the participants

in excel format) was

developed by ABCD for use

by the assigned owners. The

purpose of this chart and its

completion (as it applies to

this phase of the project), was

to confirm that all elements of

the identified “ACME PPV”

variance were completely

understood and that the

business owners could demonstrate to management that they can reconcile the

variance amounts reported to executive staff.


Process Analysis Throughout phase 1, it became evident that actual defined methods or processes to manage

ACME and all subsequent reporting do not exist. This is a systemic problem resulting from a

lack of definition of core processes, the interdependencies between processes coupled with

clearly defined roles and responsibilities. When a cross discipline effort is initiated, clarity of

purpose and direction diminishes and functional team members point at each other as the data

source. While trying to define the PPV process, the stakeholders would make statements,

“Where the number comes from is not my problem”. The reporting requirement now suffers

from validation and accuracy is suspect. The reports utilized to create a PPV report are XYZ

Corp. internally created except for the monthly report from ACME and sales order

adjustments. The actual methods or Oracle reports for gathering the data remain unknown. We

only observed Microsoft Excel spreadsheet data. Cross analysis and comparison happens

when cost accounting completes a monthly finance report that is delivered to executive staff.

This finance reporting effort appears to be the only PPV analysis that is done on a consistent

quarterly basis. The issue with this particular report is that is missing several processes to

complete a more comprehensive report. Additionally, all the data is post facto and several of

the reconciliation processes do not have closed loop reporting to ensure pricing variances were

actually corrected and reported.

While conducting two process definition meetings the cost accounting function and supply

chain functions could not agree on the method for calculating the PPV. A subsequent follow

up meeting with cost accounting and supply chain functions was redirected by supply chain

not to include cost accounting.

What does exist is an informal set of actions that allow a knowledgeable participant to source

and put together a report on PPV when requested to do so. This series of actions has no

defined beginning or end-point. The key stakeholders still have not demonstrated consensus on

how to complete the PPV analysis.

Key Observations

> No clear ownership for reporting PPV exists

> Actual cross functional understanding of the reconciliation method does not exist

> The methods and lower level actions are not documented. > PPV analysis is a requirement for managing the ACME relationship. Currently

PPV is reactive only and has no front-end business impact.

> PPV and other supplier facing processes are not documented

> Core processes are now documented, but the interrelationship and dependencies of the processes are not well defined or understood.

> Repeatability is possible only through tribal knowledge, predictable results are questionable in quarter to quarter analysis

> Work product methods are not repeatable, sustainable or scalable

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Information Systems

ABCD was not provided insight into the applications or tools that are used to create reports

etc. that comprise the core process and subsequent variance reconciliation. Interviewee statements confirmed that Oracle and SAP were the critical applications that contained the pricing engines, blanket purchase agreements and the tools to produce a report. Consolidation

of reporting streams would benefit the overall effort in contrast to physically chasing down the numbers.

Interfaces and Communications

Common statement made by key stakeholders “Not my concern how they got their numbers”

is problematic in validating how all input streams culminate in a well-established answer. The comment also demonstrates a belief or position that how an individual stream may be of value to reporting is irrelevant or “not my problem”. Clearly defined PPV ownership as described in

the process section will ensure that all streams are understood and more importantly, how they actually impact PPV.

Recommendations In addition to the individual recommendations noted in this report, the majority of all

recommendations fall into the following four major groupings:

Process

> Designate a responsible business process and program owner with a set of performance expectations to monitor and report PPV on a monthly basis

> Formalize a team of participants to create the “As Is” process utilizing a

comprehensive process design approach such as “Six Sigma”

> The business owner will be responsible for driving and achieving consensus on the core processes and subsequent as-is mapping

> Obtain consensus on core processes so a more effective as-is process mapping project can be effectively launched

> Define and endorse project scope, executive sponsor, milestone driven plan with concrete deliverables o (DMAIC), Define, Measure, Analyze, Improve, Control.

o Formal progress reporting to management o Sustaining plan to institutionalize process

> Align newly defined processes and methods to company quality requirements > Develop methods for testing and sampling data from Oracle to ensure data

management is being addressed from a quality perspective

Contract Improvement and Enhancement

> Develop plan and timeline to obtain Best-of-Breed contracts and EMS/CTO

performance as previously noted in report

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Organization Optimization

> Align materials functions to complement EMS and CTO businesses frameworks > Conduct skills, capability and interest assessment to align workforce talent to

updated organization structure > Develop transition plan and timeline to fully staff and execute updated organization

and associated functional capability and strategy objectives

> Develop and deploy a cross-functional commodity strategy and benchmarking

activities to validate business strategy and direction

Financial Reconciliation

> Complete current reconciliation process to validate process feeds and financial data

> Identify gaps and issues to determine if the core processes require modification > Modify or re-engineer the reconciliation processes as required

Summary Phase 1 has started a critical effort to improve the management of XYZ Corp.’s EMS partner

and the associated financial controls and processes. It is our opinion that developing a plan to

implement the aforementioned recommendations will significantly improve the performance of

the XYZ Corp. EMS commodity team and the supply chain organization as a whole.

The understanding and acceptance of the cross-functional participants of the critical nature and

importance of this work product to XYZ Corp.’s future is paramount. Appropriate priority

should be placed on the development and deployment of a true action plan with timely

performance measurement to the plan. Based upon our observations, we recommend that the

plan be extremely formal with ties to both individual and team performance measurement and

review.

Setting an objective of developing a Best-of-Breed organization and functional capability, as

benchmarked against other top companies, would provide the required motivation for the

organization.

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Amce analysis project

Education

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