Understanding Management Concepts

Aggregate Demand

noreply@blogger.com (The Consultant) — Mon, 31 Aug 2015 11:13:00 +0000

Aggregate Demand – Concept

We’ve studied the Law of Demand, we know it is a negative relationship between the price of a commodity and its demand. We also have studied how it affects the consumer and subsequently how a change in the consumer’s behavior encourages a firm to alter its decisions in and around the market. In effect, demand not only sets the tone for supply alone, it also shows how supply of a specific commodity influences demand.

No matter what type of commodity (referring to both; goods and services) we may choose to discuss as economists, a commodity will continue to be demanded as long as it has the power to satisfy the need (or in other words, have utility to a particular consumer or a group of people; goods that may appear luxuries to one group of consumers may for the other group be, bare necessities). The economy of the country, produces, or at the least, makes available such goods and services for all.

Now tilt your head slightly and allow the next paragraph to sink-in.

Goods and services, in total, for a given period (one year, usually) are demanded at prevailing prices in a country, this is known as aggregate demand.

Mathematically, this is

C + I + G – (Net Exports)

Where,

C = consumer spending/expenditure
I = Investments by firms/capitalists
G = Government spending/expenditure
Net Exports = Total Exports minus Total Imports

Now if you look closely at this equation, you’d notice this is no different from the Gross Domestic Product ‘GDP’ equation, demand for your GDP is, in other words, your aggregate demand ‘AD.’

The AD curve shows an inverse relationship between AD and the price level. The AD is assumed left to right because all the components of AD, other than imports, are inversely related to the price level.

The downward slope of the AD curve reflects a 'normal' macro-economic condition of the economy (an economy with generally favorable cross sectional economic indicators) and that in a recession, the AD curve could become vertical.

Understanding the Application of the concept

AD is used to explain how national income is determined. This model is derived from the basic circular flow concept, which is used to explain how income flows between consumers and firms.

C = Consumer spending/expenditure
I = Investments by firms/capitalists
G = Government spending/expenditure
X = Net Exports
S = Savings
T = Tax on income
M = Various dimensions/dynamics

Trade, Liquidity and Wealth Effects

Price changes have a number of important effects on aggregate behavior of a consumer and firms. There are three main effects to consider.

The Trade Effect

The first effect, overseas trade, is perhaps the most noticeable. A rise in domestic prices raises the total costs of production, making it harder to find buyers in the global market (at these new higher prices) and imports on the contrary seems a better option viz-a-viz soaring local costs of production, hence exports 'X' are likely to fall on one hand and imports 'M' are rise on the other. This see-saw of rise and fall creates a trade effect; low AD at the higher price level.

The Interest Rate Effect

When the price level increases, consumers and firms need more money to spend so as to continue to purchase commodities they need. This relative shortage of cash linked to a rise in the price level forces some consumers and firms to borrow from banks, which in turn reduces the liquidity levels of banks. In response, banks are likely to raise interest rates as compensation for this lost liquidity along with the country’s central bank raising interest rates as part of its monetary measures to curb inflation. Furthermore, banks also are required by the central banks to maintain a reserve ratio to meet any unexpected increase in demand for cash.

As a result of the lost liquidity, interest rates are forced to rise and both consumer and firms' spending may fall. Hence, AD is lower at the higher price level.

The Wealth Effect

As financial markets readjust to the higher price level there are effects that eventually pass on to the consumer and firms’ wealth. Higher rates may lead to a reduced activity if not a possible fall in real estate, for example, resulting in negative wealth effect (by virtue of loss in value of the real estate/property). Likewise, those consumers and firms that rely on income from shares, rising interest rates eventually lead to shrinking corporate profits and lower share values, again creating a negative wealth effect.

A lower price level will, of course, have the inverse effect, it creates a positive wealth effect on AD. When combined, the above effects explain why aggregate demand responds inversely to changes in the price level.

These effects should not be confused with other exogenous affects, which actually, will shift the AD curve.

Social Entrepreneurship

noreply@blogger.com (The Consultant) — Wed, 20 May 2015 19:01:00 +0000

Corporate Social Responsibility 'CSR' is the new hip in the business world. More and more companies around the globe talk of being more responsible towards the environment, their contribution to the society and so on.

CSR is the dedication of resources by a commercial entity towards developing and sustaining social value in the society it exists in. Repaying, or more specifically sharing its profits with the community/society as a whole.

The idea is to provide a better life to the people that help it make money/profits; more like repaying its moral debt to the community. Companies that operate across geographical territories and manage such projects on a global scale, at heart, have the same spirit like for example the Coca Cola Happiness Booths in the UAE - now were the Coke bottles handed out free to the blue collar populace, is in itself another discussion.

Entrepreneurship is the process of starting a business or a commercial entity with a view to make money in a way that is either different or no one has thought about; that is why probably they call it innovation.

Innovative entrepreneurship is about bringing to life an idea/venture in a manner that is new and preferably simple and entails economic benefits to the person(s) directly involved in its conception.

Social Entrepreneurship 'SE' is the process of bringing about innovative solutions to problems people face on a daily basis in the society. Helping those in need in a manner that they work towards gaining independent sources of income and breaking barriers of poverty and even physical disabilities.

Social entrepreneurship programs are basically charity based or not-for-profit, having said that, please do bear in mind that not all SE programs are purely not-for-profit, some organizations may have tendencies of being a for-profit organization but the underlying concept is always community and social services and development; so much so that many of them may even share profits with those that are directly associated with the organization, take AMUL from India as an example.

Being a philanthropist was more of a religious affair and an individual matter. SE has gone to raising the bar from individual helping another individual to selfless actions directed at helping others. Helping people to help themselves to be able to live a better life.

SE was popularized recently by a book titled 'the rise of the social entrepreneur' by Charles Leadbeater. The term SE is relatively new it has been around for quite some time.

Below are few names history has silently recorded:

Florence Nightingale

(1820-1910)
England

Founder of the first nursing school
Robert Owen

(1771-1858)
England
Founder of the first cooperative movement
Vinoba Bhave
(1895-1982)

India

Founder of the Bhoodan Movement
Akhter Hameed Khan
(1914-1999)
Pakistan
Founder of the Orangi Pilot Program
Muhammad Yunus
(1940 - todate)
Bangladesh
Founder of the Grameen Bank

Porter's Five Forces

noreply@blogger.com (The Consultant) — Sat, 14 Mar 2015 11:19:00 +0000

If you look to understand the Porter’s model, well, good luck. It took me ages to get around the concept. Primarily, the person who taught me the concept made the same mistake while teaching it that most people make while learning it, trying to understand the concept in isolation. Each area one-by-one.

It doesn’t make sense unless you look at the big picture. The thing is, the Porter’s model is a tool, a practical tool and not merely a management concept. For anything that is practical and is a tool, cannot be taken out of its environment to be understood. This is a business world tool, not a science lab experiment.

I am going to make it as realistic as possible.

The idea of the Porter’s model is the same what the same as the SWOT analysis; understanding your organization viz-a-viz the business environment. The Competitive Business Environment and then, based on that analysis, how to devise a business strategy that ensures entry, survival and finally profits to holding substantial market share.

The Porter’s model is based on the idea of understanding own position, understanding competition and using the tools built on these five forces to determine the competitive market of a particular product in specific and an organization in general.

Threat of Substitutes

Well, there are two sides to it, affordability and availability. When users cannot afford commodities being offered by vendor A, the natural and perhaps the rational decision is to look for the same or at least almost the same. We all know, not everyone has the purchasing power to a German car, this is why we have so many Japanese and Korean cars on our roads.

Secondly, it’s the availability of a substitute. If there is a choice to buy something that is the same if not better, that too, owing to our desires, seems attractive. The world saw an iPhone 4. Nothing like it ever before. Sometime later, the Android came into existence. Today phones that may or may not be better than the iPhone, yet offer a good deal, good competition and at the same time are equally well priced for those that cannot buy the iPhone in markets where it is still sold is a luxury item than a utility.

The Rivalry between Existing Businesses

Rivalry between existing businesses creates downward pressure on prices, just like the Kinky Demand Curve concept in laid down in Economics. There is an increased competition for the same customers and product resources. There is greater competition for market dominance.

Threats of New Entrants

Now where we do not experience any sort of market concentration and the substitutes can be brought into the market with a lesser degree/chance of failure, new entrants are inevitable. These new entrants not only create a downward pressure on the existing prices and profit margins but they, now, themselves become a part of that rivalry between businesses.

Bargaining Power of Suppliers

The same concept of a perfect and imperfect market but with a twist. The twist in here is the supplier, if alone or maybe a couple, can and will control the supply of the raw materials, both, in terms of quantity as well as prices.

Bargaining Power of Customers

If you recall the Law of Demand; you will remember that the demand is affected by change in income as well as a change tastes of consumers. Likewise, in here, if the consumers choose to change their choices, tastes it creates pressure on the businesses to match the changes of their sources of income. Further, if the business is not delivering to the consumer’s satisfaction, these consumers will eventually be customers to another.

Business Tenders: Tendering Process

noreply@blogger.com (The Consultant) — Thu, 06 Feb 2014 08:16:00 +0000

Procurement or making purchases of goods and services in smaller organizations or for that matter where value/quantities are smaller, the purchases officer calls for quotes from three to five vendors/suppliers from the market and does a comparison to choose which vendor offers more value for money. Shortlists and up on approval from the management goes ahead and places the order with the selected vendor.

Now multiply this activity to a bigger value/quantity. It is basically the same thing but something for a bigger value/quantity.

The article, tries to explain what a tender is and what are the steps involved. The main idea is go gain, as a buyer, the highest value for money.

What is a 'Tender'

Image from Google.com

To invite bids (or offers from vendors in the market place to provide their resources) for a project, or in other cases, to accept a formal offer (i.e. a takeover bid – however, in this article, we will not be discussing any take-over bids). Tender usually refers to the process whereby governments and financial institutions invite bids for large projects that must be submitted within a finite deadline. This is done not only to facilitate procurement of goods/services but to ensure the vendor(s) pass through a competitive process prior to selection have a fair opportunity to prove their ability to deliver as required/expected.

Most institutions have a well-defined tender process, as well as processes to govern the opening, evaluation and final selection of the vendors. This ensures that the selection process is fair and transparent.

Organizations cannot do everything on their own e.g. manufacture cupboards and shelving solutions along with various other stationery products that are needed on a daily basis; therefore, it makes business sense to collect different vendors and ask them to meet with the business’ stationery requirements at prices that are better than those that supply the same stationery products. This concept, can, be expanded into bigger projects like construction of buildings, roads, labor supply, appointment of consultants etc.

Today, almost all businesses somehow or the other depend on each other for supply of different goods/services and will select an offer or tender that meets their needs and provides the best value for money and that is the key, Value For Money!

Depending highly on the nature of the work/service involved, the tenders are generally widely advertised to offer opportunities to a number of suppliers, encourage competition and provide a greater pool of offers to select from.

Then What Is ‘Tendering’?

Tendering is the process of making an offer, bid or proposal, or expressing interest in response to an invitation or request for tender.

The organization, floating the tender is called, the buyer or the client/customer whereas the organization submitting the tender is called a supplier or a service provider (where the requirement is for a service).

The tendering process is generally utilized for procurements or contracts involving substantial amounts of money and is generally floated by:

· Government departments, offices and agencies

· Medium to Large private sector companies

How Does It All Happen?

The buyer will prepare a works package, also referred to as Requests for Tender (RFT), Requests for Proposal (RFP) outline what is required. The document also outlines the particular requirements, criteria, and instructions that have to be followed otherwise, the tender can be rejected by the buyer and the buyer may or may not call the tender bond. We will discuss the tender bond and calling the tender bond at a later stage in the article.

Interested suppliers will then prepare a tender clearly stating their technical expertise along with their financial strength to deliver on the project. They will outline their advantage over competitors; provide information on qualifications, competencies and experience. Further they have to demonstrate how their bid offers the best value for money. This tender will contain all technical information to show the buyer that the vendor has a clear understanding of the scope/criteria and will include all possible drawings and schedules not forgetting their pricing.

The submitted tenders are then evaluated in a manner that is free from bias or favor. The offer that best meets all of the requirements outlined should win the contract.

Most buyers prefer to pre-qualify a vendor. This constitutes a pre-audit of the possible vendors to understand their technical competence and their financial strength. This exercise is carried out to avoid any non-performance during the execution of the project or anytime after the contract has been awarded.

The Tendering Process

The main steps in the tender process are:

The organization requesting the tender will determine the type of tender that will be used, as well as what will be involved in the tender process; the value, complexity and business category determine how tenders are invited A monetary threshold generally dictates if it would be a open or a closed tender. Closed tenders are generally executed through the Request for Quotations document and the Open Tenders are executed through a Request for Proposal document.

Open Tender: A bidding process that is open to all qualified bidders and where the sealed bids are opened in public for scrutiny and are chosen on the basis of price and quality. These are generally advertised in the media.

Closed Tender: Wherein, a select group of potential vendors are invited, to provide their written offers by a specified date.

The specified date may or may not be extended. Extension of time can be for any reason, low interest in the tender or perhaps a vendor has requested more time. Ideally, time extension is not granted but then it is a subjective matter as is left to the tender committee to decide.

Buyers have pre-defined monetary thresholds for which these two documents are used depending what the tender committee decided on the specific tender. It should also important to note that open tenders are far more formal than the closed tenders and require extensive documentation vis-à-vis closed tenders.

It is also worthwhile to note, in case where interest in low and a very few/less than expected number of vendors have responded, the whole exercise of re-tendering should be carried out in order to maintain transparency, unless it is difficult to do so due to urgency, technical specifications etc.

The tender package prepared outlines what is required, the contractual requirements and how the vendors should respond, ideally.

As and when the vendors respond, the first and foremost activity is to ensure is to obtain all relevant documentation that has been requested in the tender package. Parallel, to this is to check, if there is a requirement by the control framework, for vendors to be pre-qualified. In such cases, they would send in an Expression Of Interest, which would help them get pre-qualified, after which a pre tender briefing sessions would be conducted in order to clarify any uncertainties, plan and prepare a response to any and all queries of the potential vendor(s).

Each tender will be checked for compliance, and if compliant, then evaluated against the criteria specified in the tender package documentation. The tender that offers best value for money will be awarded the contract/business. It is at this stage where the potential buyers are required to submit a tender bond. The value of the bond shall be determined by the Tender Committee and is stated in the tender invitation. The buyer shall call on the tender bond for the following cases:

• A tenderer withdraws their tender prior to the contract award date.

• The successful tenderer refuses to enter into a contract.

• The successful tenderer does not provide the performance guarantee in the specified time when the Contract is awarded

Notification and debriefing: when a contract has been awarded, the successful tenderer will be advised in writing of the award. In ideal circumstances, unsuccessful tenderers are also advised and offered a debriefing interview; however, it is advisable to at least send all unsuccessful tenderers a regret letter.

There are also chances whereby, vendors may choose not to participate in the first place, this is specially the case in closed tenders, these vendor(s) then send (or at least should send) a letter to the buyer stating their inability to participate. This letter may or may not state the reason(s) for not participating in the tender.

Contracts established and managed: generally a formal agreement will be required between the successful tenderer and the buyer.

Some vendors may also request an advance as a mobilization advance. The buyer asks for an Advance Payment Guarantee.

Similar to these different guarantees, the buyer may or may not ask (depending on the value of the contract) for insurance cover. This requirement of providing appropriate insurance cover will be stated in the tender package.

GRC: Enterprise Risk Management PII

noreply@blogger.com (The Consultant) — Tue, 22 Oct 2013 16:41:00 +0000

Although, I recently posted one on this title but I think it needed more work, hence this one.

Convergys, a Cincinnati-based Relationship Management services company with $2.8 billion in 2008 revenues, followed a similar path in erecting its ERM structure. In its case, business leaders across the organization were identified and asked, “What risks keep you up at night and how do they impede your ability to meet strategic and operational objectives?”

Risk Management Defined

The identification, analysis and acceptance or mitigation of uncertainty in decision-making is Risk Management. This decision-making can pertain to operations and/or an investment in stocks, business expansion or closing down a division/product or altogether leaving one market for another. Essentially, risk management occurs every time a business owner or for that matter an individual analyzes and attempts to quantify the potential losses that could flow from a specific decision and then takes the appropriate set of actions given the business or investment objectives and risk tolerance or risk appetite as it is better known and understood.

Risk management is determining what risks exist on one hand and answering the question of how to handle those risks in a way best-suited to the business objectives on the other. Risk management occurs everywhere. It occurs even when a low-risk government bonds are preferred and bought over a more riskier corporate debt or when a fund manager hedges the currency exposure with currency derivatives and more so when a bank performs a credit check on an individual before extending a line of credit.

Inadequate risk management can result in severe consequences for companies as well as the individuals involved. For example, the recession that began in 2008 was largely caused by the relaxed credit risk management of financial institutions.

With the instability from the economic crisis (of 2008-2009 and we are still going through it), the spotlight is on risk management more than ever before and whether or not organizations are assessing strategic and operational risks, the onus, however, is on all organizations to erect a systematic reporting structure for analyses of their risks and develop more comprehensive risk monitoring tools and devise strategies to manage them while taking enough calculated risks and it is these calculated and risk-managed risks that often separate the winners from the losers.

The last couple of years have seen a strong corporate drive towards the development of a methodology to better identify, assess and quantify strategic, financial and operational risks across all functions of the business. It’s called Enterprise Risk Management ‘ERM.’ Most large public companies have implemented ERM, in some cases because of government regulations (as an extension to SOX for those operating in the US. In Europe, upon the passage of the European Union’s 8th Company Law Directive on Statutory Audit (Directive 2006/43/EC), European and non-European companies listed in any country of the European Economic Area have to comply with this directive). Many others have executed the strategy simply because it makes tremendous sense (Australia, France, Germany, Italy, Japan, Turkey and others that have developed regulations as a derivative of SOX).

ERM is a framework for managing every possible risk and practically confronting it so as to enable the enterprise to achieve its business objectives and minimize unexpected operational volatility that could or may adversely affect earnings. Since companies hold capital to absorb the risk of loss — e.g. hedging, absorbing or transferring the risk — there is effectively lesser capital to invest in the profit-producing activities. ERM helps companies determine the right amount they should direct towards risk.

ERM Process

The steps involved in an ERM process are essentially the same, however, having said that, since each organization has its unique way of doing business based on its vision, mission, corporate culture and philosophies, it will certainly have its own flavor to the style of implementation. Nevertheless, a solid ERM framework should have four key components:

Governance Structure, Policies and Process flows
Risk Analytics
Risk Management Strategies
Dashboard Reporting And Monitoring

Organizations that have implemented ERM now pass on their best practices to others, having first adopted ERM and now assisting others to do the same by conveying risk insights and solutions.

The toughest leg in the ERM journey is the first step: a course of action in which risk overseers from across the enterprise come together to share the respective risks within their own spheres of influence. Depending on the operational structure, a company can opt for a top-down process. It begins with an understanding of the company’s strategic priorities coming from the top of the pyramid; the board of directors and C-level suite.

Likewise, contrary to the above, a company may adopt a bottom-up approach wherein, the primary risk managers in each business unit assemble to examine the strategic objectives, the operational solutions to achieve them and the risks these raise. Once this consensus is reached, the risk drivers are aggregated and rolled up for C-level and board review. Senior management now has the ability to determine where best to allocate resources to achieve business objectives, completely aware of where the risks reside, their cost, and the mitigation strategies in place.

Knee Deep

Risk identification is not particularly a very simple task to accomplish. Strategic risk identification process alone can require a very big number of people from different functions of the organization. A review of operational risks, both top-down and bottom-up and also to conduct and subsequently review process and sub-process interviews to identify operational risks. The company’s risk management department may then prioritize these risks in terms of their probability and impact.

Measuring Acceptance

Identifying a risk does not constitute ERM. Companies must understand risks. Once a risk contour is determined, ERM calls for companies to quantify risks in several metrics, such as the potential frequency of an event occurring, the potential severity of financial loss if the event occurs, and whether the risk may start a chain reaction into other areas of the business or also calculating if one risk might actually offset another.

One can argue that the subprime mortgage disaster was undoubtedly a failure of prudent risk measurement. While providers of mortgage-backed securities may have had an understanding of their own commitments, they had failed to act diligently by quantifying the ripple effect of the impact of the credit crisis involving other organizations on these commitments.

Confronting The Risks

After a company has identified and measured strategic and operational exposures, an unfailing strategy for managing and monitoring the risks is required. Bringing technology to use, particularly dashboard-type reporting; a warning system that will help keep track of all operations but then like all technology, the system is only as good as the data within and the processes created to report this data.

Many organizations have given the responsibility for monitoring enterprise risk to a Chief Risk Officer (CRO) or another high-level executive like a CFO or a CGRCO unlike the previous approach to risk management, wherein individual risks were catered to individually, like for example, the insurance risk managers - hazard and liability risks, internal audit - financial and operational reporting risks, business units -project risks, treasury - foreign-exchange risks and so on.

Line Of Attack

Acceptance is the key, accepting the fact that the risks exist makes it easier for the company to plan for it. The better the understanding of the risks the better the plan and effective the strategy. As said earlier, technology is as good as its data, likewise, strategy is as good as its effective implementation. In addition to strategy, management buy-in is equally important. The strategy could be the best in the world but if there is no management buy in, not only is the entire purpose is defeated it can also lead to stricter regulatory interventions.

GRC: Enterprise Risk Management PI

noreply@blogger.com (The Consultant) — Sat, 19 Oct 2013 14:21:00 +0000

Governance: The Enterprise Risk Manager’s Line Manager

Any risk that is imaginable in the business world, strategic, financial, cyber security threats and many more including an ever changing and an equally challenging regulatory environment; not forgetting the domestic, regional and global competition etc. prowl (for the lack of a better term) today’s unpredictable and extremely competitive commerce.

In times like this, it’s important to take a holistic view of business practices, processes and workplace ethics amongst everything else to ensure that adequate control mechanisms are in place to keep the business entity afloat while focusing not only on the risks that can threaten value, but also the risks that an enterprise can take to create value.

What Is Risk Management?

Risk management ensures that an organization identifies and understands the risks to which it is exposed. Risk management also assures that the organization has done enough in creating and implementing an effective risk management plan to prevent losses or at the least reduce the impact(s) if a loss occurs.

A risk management plan includes strategies and techniques for recognizing and confronting these threats. Good risk management doesn’t have to be expensive or time consuming; it may be as uncomplicated as answering these three questions:

What can go wrong?
What will we do to prevent the occurring and in response to the loss?
If something happens, how do we pay for it?

What is ERM

Enterprise risk management (ERM) predominantly is a dynamic proactive approach in business to manage risks and seize opportunities related to the achievement of their objectives, this definitely includes constantly monitoring all business functions, the process and how they are carried out. ERM provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the organization's objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress of that one individual event, circumstance and activity or on an overall operations perspective. By identifying and proactively addressing risks and opportunities, business enterprises protect and create value for their stakeholders, including owners, employees, customers, regulators, and society overall. (ERM)

ERM can also be described as a risk-based approach to managing an enterprise, integrating concepts of internal control, the Sarbanes–Oxley Act, and strategic planning.

Enterprise risk management calls for organizations to identify all the risks they face, to decide which risks managing actively or addressing on a priority basis. By priority it does not just mean giving preference for its ability to reoccur frequently but also its impact even if it was a onetime thing only, and then to make that plan of action available to all.

In putting together ERM initiatives, companies are supposed to focus not only on the downside of risk but the upside as well. The conventional approach was to focus on the downside - the losses that might be caused by a disruption in the normal course of business, e.g. a break in the supply chain or cyber attack that impairs a company's records. Likewise, working on the upside of this is when the companies are supposed to consider viable opportunities and future rewards that might arise out of efficient management of risk. Some of these involve matters of strategy like where to locate a plant or office abroad based on a risk analysis that would look at the political environment in a country.

Benefits of ERM

Enterprise Risk Management, pretty much like a snake wrapping itself around its prey wraps itself around the organizations nutty gritty but in a positive way to ensure all medium to large scale issues are addressed while the smaller ones are tackled to ensure there are no losses due to negligence of the people made responsible for the same.

In a nutshell, they can be bulleted into what appears below:

Increased consistency and communication of risks within the organization

Enhanced reporting and analysis of corporate risks (risk data)
Improved focus, attention and perspective to risk data
More efficient and effective activities related to regulatory, compliance and audit matters
More cost-effective management and monitoring of risks

GRC - Compliance

noreply@blogger.com (The Consultant) — Tue, 05 Feb 2013 19:02:00 +0000

The issue of compliance has been worrying organizations since the beginning of the millennium. Everyone wants to be compliant because the law says they have to be. And, if not the law, then it is industry standards and subsequent customer expectations that mandate the organization to implement changes in the way they work.

Many people don't understand what compliance is all about but it's really quite simple. It's all about conforming to the controls and procedures imposed on your company by appropriate laws or rulings. For this reason it is frequently termed 'regulatory compliance'.

The more satisfactorily these demands are met, the better compliance has been achieved in the organization. There is no such thing as just 'being in compliance' without stating the particular ruling you’re complying with.

As compliance has increasingly become a concern of corporate management, corporations are turning to specialized software, consultancies, and even a new function as well as a job title, the Chief Compliance Officer. Many organizations may still have Compliance working under a more broader Governance, Risk and Compliance platform otherwise known as GRC.

Compliance in a regulatory context is a prevalent business concern, perhaps because of an ever-increasing number of regulations and a fairly widespread lack of understanding about what is required for a company to be in compliance with new legislation. In the financial sector, SOX was enacted in response to the high-profile Enron and WorldCom financial scandals to protect shareholders and the general public from accounting errors and fraudulent practices in the enterprise. In the healthcare sector, HIPAA Title II includes an administrative simplification section which mandates standardization of healthcare-related information systems.

Compliance is either a state of being in accordance with established guidelines, specifications, or legislation or the process of becoming so. Software, for example, may be developed in compliance with specifications created.

In general, compliance means conforming to a rule, such as a specification, policy, standard or law. Regulatory compliance describes the goal that corporations or public agencies aspire to achieve in their efforts to ensure that personnel are aware of and take steps to comply with relevant laws and regulations.

Due to the increasing number of regulations and need for operational transparency, organizations are increasingly adopting the use of consolidated and harmonized sets of compliance controls. This approach is used to ensure that all necessary governance requirements can be met without the unnecessary duplication of effort and activity from resources.

Regulatory compliance and reporting needs to be viewed as a natural extension of the governance duties shouldered by top management and corporate boards. Moreover, only good governance can ensure that compliance is aligned with the company’s business objectives and risk management strategies — and is thereby adding real value (and not just cost) to the organization. Ultimately, the goal is to ensure that the spirit of compliance — as well as the letter of the law — is embraced in every corner of the enterprise.

Regulatory Compliance is the term generally used to describe the policies and processes which organizations have in place to ensure that they follow the very many laws, rules and regulations put in place. It is the set of all data that is relevant to a governance officer for the purposes of validating consistency, completeness, or compliance.

A key component of Regulatory Compliance is the variety of policies and processes firms are required to have in place to meet legislation and regulation designed to prevent fraud.

Regulatory compliance also describes the goal that corporations or public agencies aspire to in their efforts to ensure that personnel are aware of and take steps to comply with relevant laws and regulations. This will include retaining data or records which can be used for the purpose of implementing or validating compliance.

Product Pricing

noreply@blogger.com (The Consultant) — Sat, 26 May 2012 02:55:00 +0000

There are a variety of different types of pricing strategies in business. However, there's no one definite, formula-based approach that suits all types of products, businesses and/or markets. Pricing your product usually involves considering certain key factors, including identifying your target consumer, competition analysis and understanding the relationship between quality and the price.

The Basic Rules

No matter what type of product, the price charged to the consumer will have a direct effect on the success of the business. Though pricing strategies can be complex, the basic rules of pricing are straightforward:

All prices must cover costs (and profits).

The most effective way to lower prices is to control (if not lower) costs.

Review prices frequently to assure that they reflect the dynamics of cost, market demand, competition, and profit objectives.

Prices must be established to assure sales.

Know The Costs

Know the costs of running your business. If the price for your product or service doesn't cover costs, the cash flow will be cumulatively negative, which means, the financial resources will exhaust and the business will in due course not succeed and that is no reason to start a business, no one invests to fail; unless that is your way of spending on charity. Good Luck!

A good idea is to add a %age profit in your calculation of costs. Treat profit as a fixed cost, like a loan payment or payroll, since none of us is in business to break even.

The Right Time

When is the right time to review your prices? When:

Introducing of a new product or product line;

Costs change;

Deciding to enter a new market;

Competition changes prices;

The economy experiences either inflation or recession;

Change in sales strategy.

Pricing - In One Of Four Ways

Cost-Plus Pricing

Many manufacturers use cost-plus pricing. The key to being successful with this method is making sure that the "plus" figure not only covers all overheads but also generates the percentage of profit you require. If the overhead figure is not accurate, you risk profits that are too low. The following sample calculation should help you grasp the concept of cost-plus pricing:

Cost of materials	$ 50.00
+ Cost of labor	30.00
+ Overheads	40.00
Total Cost	120.00
+ Desired Profit (20% on sales)	30.00
= Required Sales Price	150.00

Demand Price

Demand pricing is a method in which consumer response to various price points in a range of prices is analyzed to arrive at the highest acceptable price. Also called value oriented pricing.

Demand pricing is determined by the optimum combination of volume and profit. Products usually sold through different sources at different prices e.g. retailers, discount chains, wholesalers, or direct mail marketers etc. are examples of goods whose price is determined by demand.

A wholesaler might buy greater quantities than a retailer, which results in purchasing at a lower unit price. The wholesaler profits from a greater volume of sales of a product priced lower than that of the retailer.

The retailer typically pays more per unit because he or she are unable to purchase, stock, and sell as great a quantity of product as a wholesaler does. This is why retailers charge higher prices to customers.

Demand pricing is difficult to master because you must correctly calculate beforehand what price will generate the optimum relation of profit to volume.

Competitive Pricing

Competitive pricing is generally used when there's an established market price for a particular product or service. If all competitors are charging $100 for a replacement windshield, for example, that's what you should charge and here the profitability is managed through lower/controlled operating costs.

Competitive pricing is used most often within markets with commodity products, those that are difficult to differentiate from another. If there's a major market player, commonly referred to as the market leader that company will often set the price that the smaller companies within that same market will be compelled to follow.

To use competitive pricing effectively, know the prices each competitor has established. Then figure out your optimum price and decide, based on direct comparison, whether you can defend the prices you've set. Should you wish to charge more than your competitors, be able to make a case for a higher price, such as providing a superior customer service or warranty policy. Before making a final commitment to your prices, make sure you know the level of price awareness within the market.

If you use competitive pricing to set the fees for a service business, be aware that unlike a situation in which several companies are selling essentially the same products, services vary widely from one firm to another. As a result, you can charge a higher fee for a superior service and still be considered competitive within your market.

Markup Pricing

Used by manufacturers, wholesalers and retailers, a markup is calculated by adding a set amount to the cost of a product, which results in the price charged to the customer. For example, if the cost of the product is $100 and your selling price is $140, the markup would be $40. To find the percentage of markup on cost, divide the dollar amount of markup by the dollar amount of product cost:

$40 / $100 = 40%

This pricing method often generates confusion and not to mention lost profits, among many first-time small-business owners because markup (expressed as a percentage of cost) is often confused with gross margin (expressed as a percentage of selling price). The next section discusses the difference in markup and margin in greater depth.

Pricing Basics

To price products, you need to get familiar with pricing structures, especially the difference between margin and markup. As mentioned, every product must be priced to cover its production or wholesale cost, freight charges, a proportionate share of overhead (fixed and variable operating expenses), and a reasonable profit.

Factors such as high overhead (particularly when renting in prime mall or shopping locations), changeable insurance rates, shrinkage (shoplifting, employee or other theft, shippers' mistakes), seasonality, shifts in wholesale or raw material, increases in product costs and freight expenses, and sales or discounts will all affect the final pricing.

Overhead Expenses

Overhead refers to all non-labor expenses required to operate your business. These expenses are either fixed or variable:

Fixed expenses

No matter what the volume of sales is, these costs must be met every month. Fixed expenses include rent, depreciation on fixed assets (such as cars and office equipment), salaries, insurance, utilities, membership dues and subscriptions (which can sometimes be affected by sales volume), and legal and accounting costs. These expenses do not change, regardless of whether a company's revenue goes up or down.

Variable expenses

Most so-called variable expenses are really semi-variable expenses that fluctuate from month to month in relation to sales and other factors, such as promotional efforts, change of season, and variations in the prices of supplies and services. Fitting into this category are expenses for telephone, office supplies (the more business, the greater the use of these items), printing, packaging, mailing, advertising, and promotion. When estimating variable expenses, use an average figure based on an estimate of the annual total.

Cost of Goods Sold

Cost of goods sold, also known as cost of sales, refers to the cost to purchase of products with an intention for resale or to add to the cost to manufacture products. Freight and delivery charges are customarily included in this figure.

Accountants segregate cost of goods on an operating statement because it provides a measure of gross-profit margin when compared with sales, an important yardstick for measuring the business' profitability. Expressed as a percentage of total sales, cost of goods varies from one type of business to another.

Determining Margin

Margin, or gross margin, is the difference between total sales and the cost of those sales. For example: If total sales equal $1,000 and cost of sales equals $300, then the margin equals $700.

Gross-profit margin can be expressed in dollars or as a percentage. As a percentage, the gross-profit margin is always stated as a percentage of net sales. The equation: (Gross-profit / Sales) = Gross-profit margin

Using the preceding example, the margin would be 70 percent.

When all operating expenses (rent, salaries, utilities, insurance, advertising, and so on) and other expenses are deducted from the gross-profit margin, the remainder is net profit before taxes. If the gross-profit margin is not sufficiently large, there will be little or no net profit from sales.

Some businesses require a higher gross-profit margin than others to be profitable because the costs of operating different kinds of businesses vary greatly. If operating expenses for one type of business are comparatively low, then a lower gross-profit margin can still yield the owners an acceptable profit.

The following comparison illustrates this point. Keep in mind that operating expenses and net profit are shown as the two components of gross-profit margin, that is, their combined percentages (of net sales) equal the gross-profit margin:

	Business A	Business B
Net sales	100%	100%
Cost of sales	40	65
Gross-profit margin	60	35
Operating expenses	43	19
Net profit	17	16

Markup and (gross-profit) margin on a single product, or group of products, are often confused. The reason for this is that when expressed as a percentage, margin is always figured as a percentage of the selling price, while markup is traditionally figured as a percentage of the seller's cost. The equation is:

(Total sales - Cost of sales)/Cost of sales = Markup

Using the numbers from the preceding example, if you purchase goods for $300 and price them for sale at $1,000, your markup is $700. As a percentage, this markup comes to 233 percent:

($1,000 - $300) / $300 = 233%

In other words, if your business requires a 70 percent margin to show a profit, your average markup will have to be 233 percent.

You can now see from the example that although markup and margin may be the same in dollars ($700), they represent two different concepts as percentages (233% versus 70%). More than a few new businesses have failed to make their expected profits because the owner assumed that if his markup is X percent, his or her margin will also be X percent. This is not usually the case.

Effective Communication

noreply@blogger.com (The Consultant) — Sun, 12 Jun 2011 12:12:00 +0000

When the message is understood by the receiver in the same meaning as it was conceived in the brain of the sender that is effective communication.

The ability to do that is, unfortunately, with a few people; it is, however, not a gift with one is born with, it’s an art. To some it does come naturally but it’s not something that cannot be acquired.

Effective communication does require a great degree of being ‘rhetoric’ but that alone does not help. Rhetoric communication always has to be coupled with gestures; enough gestures that help in getting the point across rather than appearing to be speaking with a ‘lah-dee-dah’ accent. Simply, rhetoric communication is what we all refer to as Verbal Communication and the gestures are known as Non-verbal Communication.

A speaker may use verbal communication to transmit his message without any non-verbal tools but then you would notice that apart from the use of words there is a variation in voice, stress on specific words and change in facial expressions. An example of this is the head of state making a televised address to the country.

There are those, who when speak have no facial expressions, no voice variations. An example here is the ex-US President George W Bush.

Communication does not mean just talking nor does it mean the inability to talk fluently in a given language. You would have come across people who cannot speak English very well yet they are able to tell you exactly what they mean and what they want in the first go. That is because they structure their sentences in a way that the message is concise, clear and comprehensive. Language does not remain a barrier anymore. This is what effective communication is all about.

Knowing your target audience, knowing the sensitivity of the message, knowing the distortion and misinterpretation it can go through, you have structure your message in a way that it is well received and understood. This fact is better understood when Nissan had to withdraw its TV commercial last year. Nissan launched their fuel efficient model. It showed Arab sheikhs smashing windows and denting the car’s body just because it was too fuel efficient. Nissan had to apologize and withdraw. Do not try this with your message. People, the receivers of the message may not want to appreciate the creativity if you have hurt their feelings. It will certainly dent if not take away your credibility.

For your message to be well received you need to be credible. Credibility comes over years when your words are backed by your actions and it goes away with one-slip-of-the-tongue. Unless you, like Nissan, want to apologize and withdraw your statement. How well would that do to your credibility?

Speaking purely in terms of business and how communication affects businesses. Communication is the life blood of the business, operationally speaking. Where management does not communicate its goals, its decisions and the logic of its decisions across the organization and also does not make an effort to ask for feedback, especially from people who are on ground doing the job it causes frustration and loss in morale. Where such communication happens, planning is effective and the execution of the plans is efficient. Employees also feel being a part of the organization and the idiom “employees owning the business” actually makes sense.

I read this somewhere and will conclude on with this line, “Communication is the secret of success. Pass it on.”

Corporate Culture

noreply@blogger.com (The Consultant) — Mon, 23 May 2011 13:06:00 +0000

The modus operandi, the response to stimuli, the attitude with which employees work, the manner in which an organization chooses to perform and the flow of information within an organization essentially give it a distinct flavor. It is this distinct flavor that we refer to as Corporate Culture.

Often a phrase is used across the business world that every business is unique and each requires personalized attention and customized solutions; well this is why.

Corporate Culture is like a set of rules of engagement developed in any organization. How will departments or functions communicate with each other? What are the rules of acceptable conduct of employees? and much more.

A culture can be created or reinforced. It is in our control to shape the culture that is the best fit or an organization. Like for example, where you have the top management, the middle management as well as the lower management along with all the factory workers aware of the corporate vision and mission statement known to all, long term and short term strategy shared with all, year-end goals known to all and allowing people from all levels to freely contribute for ways that can help improve the organization in developing it as a revered work-place; such corporate cultures have positive impact on the overall productivity, organization psyche, effectively the work environment therein.

Organizations that boast that “our employees are our most important assets” as a part of their organizational philosophy and on the contrary, employees witness executives (senior and junior) being terminated without any fore-warning or personal contact or someone receiving an email explaining where they will be sitting and who will they be reporting to does not show of a strong culture. Training and development costs are stopped in order to cut costs. Where actions consistently reflect a certain culture, this will effectively emphasize to employees what the top management values are than any publicized statement. Actions have to reflect the culture.

As part of an experiment, they once locked 15 gorillas in a huge cage in a zoo. With all those gorillas in the cage, the zoo-keepers started hanging bananas from the ceiling. The gorillas would try to have them on a first come-first serve basis. On the eighth day when the bananas were lowered and the gorillas tried to have bananas, they were flushed with high pressure water from fire hoses. The water at that pressure hurt the gorillas and slowly after three days they realized that even if the bananas were hung up, the water would be fired at them, hence, they stopped jumping for the bananas anymore. However, when these gorillas stopped responding to hanging bananas, they replaced 14 gorillas (which means only 1 from the first batch remained inside the cage) and lowered the bananas, when the 14 went at the bananas naturally, this one from the original batch attacked all others to stop them from going to the bananas and this happened till the new batch realized they would be attacked. The zoo-keepers brought in the original 14 gorillas back to the cage and now with bananas hanging from the ceiling, no gorilla moves an inch.

Then there are companies with either a strong culture or a weak culture. Ones with a strong culture are those where staff responds to effectively and efficiently to work because of their alignment to the organization’s values. Such organizations operate like ‘well-oiled machines.’ On the other hand, a weak culture depends on an authoritarian (or perhaps bureaucratic) approach on management, resulting in limited alignment to organizational values, employee frustration and dissatisfaction from work.

Studying corporate culture is an essential study in change management; change management requires strong leadership and clear communication of the expectation based on the new road map that was already communicated.

Corporate Governance

noreply@blogger.com (The Consultant) — Sun, 01 May 2011 15:55:00 +0000

Governance is the setting of expectations, the grant of power and monitoring performance against the set expectations. These expectations, either in governments or businesses are goals set by the managers therein. For a government, it comes from the manifesto that they float during their election campaigns and as for the businesses, it comes as a strategic business plan; both are broken down into various categories and almost each category having a distinct goal for itself. In many well defined documents, how the government or the management of the business intends to accomplish these goals is clearly set. How effectively do these managers achieve these goals and while achieving these goals what exactly was the modus operandi - how did they behave as an individual and as an entity - or simply put, Corporate Governance.

The most influential parties involved in corporate governance include governmental bodies, stock exchanges, the management itself (including the board of directors and its chair, the CEO or equivalent, other executives and line managers, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large.

Corporate governance is the set of policies and procedures, rules and regulations even as much as a code of conduct that manages the processes in the organization which effectively control the direction of the company and reflect its management style while highlighting the attention it sets on CSR, the environment, obligation to customers and its commitment to product quality.

Corporate governance spills over all areas of the business and its management. To wrap it all up the UN Intergovernmental Group of Experts on Good Practices in Corporate Governance Disclosure. This document captures good corporate governance in the following 5 broad categories:

Auditing
Board and management structure and process
Corporate responsibility and compliance
Financial transparency and information disclosure
Ownership structure and exercise of control rights

The Organization Structure

Corporate governance is hugely affected by ownership structures and the dominance of individuals within.

A family owned business structure is going to be well weaved and be dominated by the eldest member, usually, sitting at the top as against the public company being run by a bureaucrat. This alone allows the family owned business to react faster than the public company which no matter has realized the urgency would still have to go through a lot of red tape before it can plunge into the opportunity.

Similarly, a top performing individual would have to wait till his year end review/appraisal or a very important task that he pulls off saving the company its image and dollars (both or whichever comes first) to an individual in the family owned business who could attract attention, responsibility, power and rewards fairly easily.

In a recent study by Credit Suisse found that companies in which "founding members retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial peers."

Each business structure has to be managed in a way where the costs, benefits, processes and the time taken to get the job done bring about optimal performance.

Popular principles of corporate governance

Rights and equitable treatment of shareholders
Interests of other/minor shareholders
Roles and responsibilities of the Board
Integrity and ethical behavior
Disclosure and transparency

Corporate Governance Through Built-in Internal Controls

Corporate governance internal controls monitor activities and then take relevant and necessary corrective (or to some extent 'reactive') action to accomplish organizational goals. Examples include:

Monitoring by the Board of Directors

The Board of Directors, with its legal authority to hire, fire and compensate top management
Regular Board meetings allow potential problems to be identified, discussed and avoided
Whilst non-executive Directors are thought to be more independent, they may bring in experience in overall performance of the organization but then they may not always result in more effective corporate governance

Internal control procedures and internal auditors

Internal control policies and procedures are implemented by the Board, the audit committee, management and other personnel to provide reasonable assurance of the entity achieving its objectives related to the financial reporting, operating efficiency and compliance with laws and regulations.

Balance of power

The simplest balance to power is very common; require that the President be a different person from a Treasurer
There should be clear distinction as to who is doing what and what does the job description say in the first place?
In case where there are for any reasons overlaps in the job descriptions, how will things be rearranged to get the most out of employees' efforts?

Remuneration

Performance based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash and non-cash payments such as shares and shares options, end of service benefits or other benefits

Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior and any intolerable behavior

A continual process

As a process, governance can operate in an organization of any size; from a single human being to a corporation spanning continents whether it does or does not work for profits. A reasonable or rational purpose of governance might aim to assure, that an organization produces worthwhile pattern of good results while avoiding an undesirable pattern of bad.

Business Architecture

noreply@blogger.com (The Consultant) — Wed, 16 Feb 2011 11:51:00 +0000

Business architecture (BA) establishes the company-wide or an organization-wide road map to achieve its corporate mission. This can be made possible through optimized performance of its core business processes within an efficient IT environment. In simpler words, BAs are well thought, chalked out execution documents - blueprints – as the engineer friends call them - for systematically and completely defining an organization's current (baseline) and/or desired (target) environment.

BAs are essential for developing information systems and those newer systems that optimize business performance. This includes a well-thought and detailed plan for transitioning from the baseline environment to the target environment; effectively, change management. If clearly defined, adequately maintained, and implemented properly, these BA blueprints assist in optimizing the work and document flow in an organization's business operations and the underlying IT that support operations. Without complete and enforced BA, organizations run the risk of buying and building systems that are duplicative, incompatible, and unnecessarily expensive to maintain.

Business Architecture is a strategic information–asset base, which defines the mission, the information necessary to perform the mission and the technologies necessary to perform the mission, and the transitional processes for implementing new technologies in response to the changing mission needs. Business architecture includes baseline architecture, target architecture, and a sequencing plan.

Architecture is the structure of components, their interrelationships, and the principles and guidelines governing their design and evolution over time.

Organization is any entity supporting a defined business scope and mission. An organization includes interdependent resources (people, organizations, and technology) who must coordinate their functions and share information in support of a common mission (or set of related missions).

Baseline architecture is the set of products that portray the existing enterprise, the current business practices, and technical infrastructure. Commonly referred to as the As-Is architecture.

Target architecture is the set of products that portray the future or end-state enterprise, generally captured in the organization's strategic thinking and plans. Commonly referred to as the To-Be architecture.

Sequencing Plan is a document that defines the strategy for changing the enterprise from the current baseline to the target architecture. It schedules multiple, concurrent, interdependent activities, and incremental builds that will evolve the enterprise.

Business Architecture Products is the graphics, models, and/or narrative that depicts the business environment and design.

BA terminology carries many variations within each organization and in the vast array of literature. Although the term business is defined in terms of an organization, it must be understood that in many cases, the business may transcend established organizational boundaries (e.g., sales, marketing, finance and accounting logistics, inventory flow, HR).

In general, the essential reasons for developing a BA include:

Alignment – ensuring the reality of the implemented enterprise is aligned with management's intent
Integration - realizing that the business rules are consistent across the organization, that the data and its use are immutable, interfaces and information flow are standardized, and the connectivity and interoperability are managed across the enterprise
Change - facilitating and managing change to any aspect of the enterprise
Time-to-market - reducing systems development, applications generation, modernization timeframes, and resource requirements
Convergence - striving toward a standard IT product portfolio

Tangible benefits

A BA offers tangible benefits to the enterprise and those responsible for evolving the enterprise.

The BA can:

Capture facts about the mission, functions, and business foundation in an understandable manner to promote better planning and decision making

Improve communication among the business organizations and IT organizations within the organization through a standardized vocabulary

Provide architectural views that help communicate the complexity of large systems and facilitate management of extensive, complex environments

Focus on the strategic use of emerging technologies to better manage the enterprise's information and consistently insert those technologies into the enterprise

Improve consistency, accuracy, timeliness, integrity, quality, availability, access, and sharing of IT-managed information across the enterprise

Support the processes by providing a tool for assessment of benefits, impacts, and capital investment measurements and supporting analyses of alternatives, risks, and tradeoffs

Highlight opportunities for building greater quality and flexibility into applications without increasing cost

Achieve economies of scale by providing mechanisms for sharing services across the organization

Expedite integration of legacy, migration, and new systems

Ensure legal and regulatory compliance. The primary purpose of a BA is to inform, guide, and constrain the decisions for the organization, especially those related to IT investments. The true challenge of enterprise engineering is to maintain the architecture as a primary authoritative resource for enterprise IT planning. This goal is not met via enforced policy, but by the value and utility of the information provided by the BA.

Architecture Principles

There are principles that govern the BA process and principles that govern the implementation of the architecture. Principles help devising rules, rules in turn dictate the organization's behavior. Architectural principles for the BA process affect development, maintenance, and use of the BA itself. Architectural principles for BA implementation establish the first doctrine and related decision-making guidance for designing and developing information systems.

The Chief Architect, in conjunction with the CIO and select business managers, defines the architectural principles that map to the organization's IT vision and strategic plans. Architectural principles should represent fundamental requirements and practices believed to be good for the organization. These principles should be refined to meet the organization's business needs. It should earnestly try to map specific actions, such as BA development, systems acquisitions, and implementation, to the architectural principles. Deliberate and explicit standards-oriented policies and guidelines for the BA development and implementation are generated in compliance with the principles. Each and every phase of the Systems Life Cycle is supported by the actions necessitated by the architecture principles.

The Business Life Cycle

The business life cycle is the dynamic, repetitive process of changing the enterprise over time by incorporating new business processes, new technology, and new capabilities, as well as maintenance and disposition of existing elements of the enterprise.

Although the BA process is the primary topic, it cannot be discussed without consideration of other closely related processes. These include the business engineering and program management cycle (more commonly known as the system development / acquisition life cycle) that aids in the implementation of a BA.

Overlying these processes are human capital management and information security management. When these work together, effectively and effectively, the organization can effectively manage IT as a strategic resource and business process enabler. When these processes are properly synchronized, systems migrate efficiently from their baseline legacy technology environments through evolutionary and incremental developments to their target environments, and eventually to prove the point that the investment has been worthwhile.

The Business Architecture Process

As a prerequisite to the development of every business architecture, each organization should establish the need to develop a BA and formulate a strategy that includes the definition of a vision, objectives, and principles. The drawing alongside, shows a representation of the BA process.

Executive buy-in and support should be established and an architectural team created within the organization.

The team defines an approach and process tailored to organization's needs.

The architecture team implements the process to build both the baseline and target BAs.

The architecture team also generates a sequencing plan for the transition of systems, applications, and associated business practices predicated upon a detailed gap analysis.

The architecture is employed in the business engineering and program management processes by way of prioritized, incremental projects and the insertion of emerging technologies.

Lastly, the architectures are maintained through a continuous modification to reflect the organization's current baseline and target business practices, organizational goals, visions, technology, and the required infrastructure.

Theory of Constraints

noreply@blogger.com (The Consultant) — Sun, 09 Jan 2011 10:23:00 +0000

This is how it all started, I was introduced to this theory by an engineer, he talked about how good the theory was and how it affected his factory; he had his product to go through various manufacturing processes before it turned in to something he could sell.

I was overwhelmed by the whole idea, theory of constraints was quite a thing and my engineer friend explained how important it was for the manufacturing processes. How it could be used to optimize production and how to adjust the supply chain so that the constraint was minimized.

I was lost, too much jargon and information overload but then, it’s our engineers that make simple things look complex so that complex things look simple. Didn’t get it, take a look at a bridge better yet look at a suspension bridge and study its design, you’ll know what I mean.

Later did I learn that the theory is more about the management of the organization as a whole rather than the idea suggested by other management theories of having each department aligning itself to the overall corporate goal. Honestly, the theory of constraints is more like macro economics versus micro economics in organization management. That is what I liked about the theory.

The Theory of Constraints (TOC) is something like this, the achievement of the goal is only limited by the constraints in the organization, these constraints need to be addressed and the flow after careful analysis, correction and well thought strategy be implemented for the flow to increase. The more the increase in the throughput the closer the organization gets to achieving its goals.

The idea behind TOC is continual improvement, raising the stakes every time a bench mark is met. Continual improvement means being constant at one state and this is, change.

A constraint is anything that prevents the system from achieving its goal. There are many ways that constraints can show up, but a core principle within TOC is that there is at least one and at most a few in any given system. Constraints can be internal or external.

An internal constraint is when the market demands more from the system than it can deliver. If this is the case, the focus should be on discovering that constraint and following the five focusing steps to open it up (and probably remove it, if possible).

An external constraint exists when the system can produce more than the market will bear. In this case, then the organization focus should be on mechanisms to create more demand for its products or services.

Internal constraints usually are:

Equipment: The way equipment is currently being used limits the ability of the system to produce more salable goods / services.
People: Lack of skilled people limits the system. Mental apprehensions held by people can cause behavior that becomes a constraint.
Policy: A written or unwritten policy prevents the system from making more.

There are three questions that need to be asked now:

What to Change?
To what to Change?
What to do to cause the Change?

And after having solved these three questions you need to manage the change.

What to change?

Identify the core problem causing symptoms and producing corrupted results. Go back from the results all the way to the origin, trace the causes. Build a tree-like structure that validates the identification of the core problems, this helps understand the existing cause-and-effect relationships, it also identifies the illusive formal and informal policies and to an extent the behaviors that support the existence of the corrupted results.

To what to change?

Construct a new tree focused on what the expectations are from the future more specifically defining the complete solution or at least the strategy that:

Resolves the issue of all the corrupted results by making their opposites, the Desired Effects

Ensures alignment with the strategic objectives of the bigger system that the management area under discussion is a part of

Ensures that no new negative effects (Negative Branches) will occur from implementing the solution/strategy

Identifies what changes in the culture (formal and informal policies, policies and procedures) of the system and/or sub-system must be made to ensure the symptoms are resolved

What to do to cause the Change ?

All organizations work to their distinct culture. Therefore, when taking up a change initiative, it has to be not only well thought off in terms of what is wanted; it also needs a lot of thinking in terms of how to get that change in. As you would have read in my earlier post on Change Management, resistance is always there. Some employees raise their voice, some even retaliate physically and then there are those who make sure it’s a failure by not doing anything that was expected out of them and this is just because they found nothing in it for themselves. Therefore, employee buy-in is crucial.

The change management should be a well devised strategy. Knowing who is going to do what and when is really important; this measured by KPIs can get the job done.

Stay tuned: There is more to come.

TQM: Six Sigma

noreply@blogger.com (The Consultant) — Mon, 03 Jan 2011 06:32:00 +0000

If you are someone in the market with the idea that you are one day going to be the best, you then need to make sure about one thing and that is, being proactive rather than reactive. Otherwise, the guy in the proactive seat is going to just drive past at an alarming speed and leave you wondering what did you do wrong?

If you have started to wonder what do I mean by being proactive and reactive? Read on, in order to answer this, people like Edward Deming, Eliyahu Goldratt, James and Champy, John Welch have spent their lives to come up with the right answer and to their utter disappointment, every time they have come close to answering it, someone somewhere just changed the questions.

It all started with the slogan, Total Quality Management (TQM as most of us know it). With this came man’s flirtations with the idea of having things done right the first time instead of setting it right the second time; yet men have had two world wars and still haven’t managed to get the global political scenario to look any better.

This is where Motorola in the 1980s copy/pasted the 1920s concept of Statistical Process control. They called it Six Sigma (6S). The purpose of 6sigma is to reduce process variation to the point that all goods and services provided meet or exceed customer expectations. Mathematically, 3.4 defects per one million occurrences, or this is what it’s supposed to look like.

The Concept

The concept of 6 sigma is a more “Frankenstein” of my theory on output. Its something like this, in order to have a quality output you need to have quality input and since output is never a hundred percent, therefore, the input has to be a hundred and fifty percent to maybe achieve ninety nine percent in the output.

The term "six sigma process" comes from the thought that if there are six check points or six indicators or six standard deviations (statistically speaking) between the process mean (in statistics, mean means average) and the nearest specification limit and these limits signify the tolerance in error of the output resulting from a process the company has set for itself as shown in the graph below, then practically no items will ever fail to meet specifications. This is based on the calculation method employed in process capability studies.

Graph taken from Wikipedia
USL = Upper Specification Limit
LSL = Lower Specification Limit

Capability studies measure the number of standard deviations between the process mean and the nearest specification limit in sigma units. As process standard deviation goes up, or the mean of the process moves away from the center of the tolerance, fewer standard deviations will fit between the mean and the nearest specification limit, decreasing the sigma number and increasing the likelihood of items outside specification

How does Six Sigma Work?

There are three elements of 6sigma

Process improvement
Process design/re-design
Process management

Let’s look at each of them, briefly

Process improvement

The main idea of process improvement really is to pluck out the root causes of performance deficiencies in processes that exist in the organization. These performance deficiencies may be the real problems or may be preventing it from working as efficiently and effectively as it could. To eliminate these deficiencies a five-step approach is used.

Define – a problem is identified and a team is formed with the responsibility and resources for solving the problem.

Measure – data that describes accurately how the process is working currently is gathered and analysed in order to produce some preliminary ideas about what might be causing the problem.

Analyse – based upon these preliminary ideas, theories are generated as to what might be causing the problem and, by testing these theories, root causes are identified.

Improve – root causes are removed by means of designing and implementing changes to the offending process.

Control – new controls are designed and implemented to prevent the original problem from returning and to hold the gains made by the improvement.

Process design/re-design

Sometimes simply improving existing processes is not enough, and, therefore, new processes will need to be designed, or existing processes will need to be re-designed. There are several reasons why this could be necessary:

An organization may choose to replace, rather than repair, one or more of its core processes.
An organization discovers, during an improvement project, that simply improving an existing process will never deliver the level of quality its customers are demanding.
An organization identifies an opportunity to offer an entirely new product or service.

As with process improvement, a five-step approach is used to design/re-design a process:

Define – identify the goals for the new process, taking into account the customer requirements.

Match – develop a set of performance requirements for the new process that match these goals.

Analyse – carry out an analysis of these performance requirements for the new process, and based upon this produce an outline design for the new process.

Design & Implement – work this outline design up into a detailed design for the new process, and then implement it.

Verify – make sure the new process performs as required and introduce controls to ensure it keeps performing that way.

Process management

Because it requires a fundamental change in the way an organization is structured and managed, process management is often the most challenging and time-consuming part of Six Sigma.

In general, process management consists of:

Defining processes, key customer requirements, and process “owners”.

Measuring performance against customer requirements and key performance indicators.

Analyzing data to enhance measures and refine the process management mechanisms.

Controlling process performance by monitoring process inputs, process operation, and process outputs, and responding quickly to problems and process variations.

This is the first on the series on TQM, in subsequent posts, will be talking of many other concepts that we have heard of but not really sure what they are. Happy Reading.

Preparing Budgets

noreply@blogger.com (The Consultant) — Mon, 13 Dec 2010 01:46:00 +0000

Difference between Budgeting and Forecasting

Budgets and Forecasts, both relate to the estimation of the future; although conceptually a budget happens to be based on planned events and is constructed based on past actual events whereas, forecasts are just an estimation of uncertain future events to help in planning for the business with such uncertainties in mind.

Budgeting; Why?

The first thing to do is to plan; do it on a month-to-month basis for the entire year. Keep in mind that the sales numbers will be critical since they'll be used to compute the overall production required to keep the company afloat till the next budgeting period; the profit margins, the expenses, receivables, payables and all other ancillary expenses necessary to support the business.

Having said that, how much of your product/service has to be sold will purely depend on the accurateness of the market research conducted for the market in which you operate and how well have you understood the competition, after all, entering in to a price war with a giant monopolist is as good as committing suicide.

Budgeting is the most powerful financial planning tool available to any business. Preparing a budget means arriving at thoroughly planned incomes and expenditures.

Ask yourself the following questions to get that brain working:

The borrowing costs?

What will the taxation affect be?

The number of employees needed?

The growth in sales over the years?

What is the credit policy going to be?

What payment terms will the suppliers offer?

What will the operating expenses amount to?

How much will it cost to produce the product/service?

How much inventory will there be and would be needed?

What is the volume of sales that the company as a whole is looking at?

What equipment will be needed to start the business and how much would it cost?

The Master Budget

A master budget is usually classified into two individual budgets: the Operational Budget and the Capital Budget (The process in which a business determines whether projects such as building a new plant or perhaps investing in a long-term venture are worth pursuing). I will be talking of the operating budget in this blog.

The operation budget primarily consists of these individual budgets:

Sales budget: The sales budget shows the expected sales in units at their expected selling prices. The sales budget must be done first so as to identify the expected sales orders before embarking on budgeting plans for any other departments.

The sales budget will set the tone for the entire budgeting process for the period, how much to produce, how many people required to produce, costs of production, the production schedule itself, all depends on the volume of sales that have been planned.

Production Budget: A production budget is a plan for obtaining the needed resources to carry out the manufacturing operations to meet the expected number of sales. The following sub-budgets also need to be prepared (assuming it is a manufacturing/value adding plant/factory)

Direct Material Budget

Direct Labor Budget

Factory Overhead Budget

Selling and administrative expenses budget: The selling and administrative expenses budget gives a comprehensive breakdown of various expenses that would be done in order to boost sales for the budgeted period.

Budgeted income Statement: It estimates the expected operating income from budgeted operations. It also gives the management an idea of the likely operating result for the budgeted period.

Cash Budget: By preparing a cash budget the management will be able to ensure that they have sufficient cash on hand to carry out activities. It will also allow them enough time to plan for any additional financing they might need.

The cash budget should also include; cash available from operating activities, from investing activities and lastly from financing activities.

Budgeted Balance Sheet: The last step in preparing a master budget is the budgeted balance sheet. This is the sheet that will show the expected financial position at the end of the budgeted period.

There are a few other things that need to be brought up as far as budgeting goes and they will be posted on a later date.

Enterprise Resource Planning

noreply@blogger.com (The Consultant) — Sat, 20 Nov 2010 08:01:00 +0000

An ERP system is an integrated solution, with a central database and the luxury of updating it at a click of a button through a single entry. Data, in an ERP system has to be entered once; there are security controls for such entries too, a person can enter but cannot post to the system unless it has been approved by a supervisor, thereby, reducing errors, time and manipulation of accounts. Generating reports is more of “a walk in the park” than those laborious hours trying to import data in to spreadsheets (like Excel) processing them and then printing them for reporting purposes. Analysis, planning and management can be done off-screen through ‘mouse-clicks.’

Ultimately, time and resources are shifted to innovation, problem solving and effective customer service rather than spending hours entering data, processing, verifying them.

I am not going to talk about ERP history, or how it came in to being, you have Wikipedia for that

ERP help reduce operating costs

There are two primary cost reductions a company can benefit from, being:

1) Aligned processes

The ERP attempts to integrate business processes across departments in to a single enterprise-wide information system with the sole aim of having uniform processes across the organization; which in turn helps in having fewer, yet common processes, thereby, making work flow faster through the processes.

An organization that flows on a uniform processes set (or tries to operate as close to bringing them to uniformity as possible) wastes lesser time, effectively manages process quality far better than those that work haphazardly and on a “as-and-when-required” attitude.

Job rotation is then easy, unlike, traditional organizations where companies come to a standstill if the relevant person is not available.

2) Paperless environment

Going ERP is almost as good as going Green. It’s like going paper-less. From your paper purchases to printer cartridges to the millions of trees, you will feel the difference (at least the earth will).

ERP help facilitate day-to-day operations

One point of entry and the data can then be processed in different ways to convey different information to different stakeholders. A sales entry can mean increase in revenue for the sales and accounting manager but will also mean a rise in the accounts receivables for the later as well as it will also mean target achieved during the period for the sales manager. Credit controller also now has to add another name to his list if the collections are not in time. The salesmen can log in to see how much commission they will be earning for the period.

Over and above, sales then can be broken up, in to product, category, location, margins and even on a sales man basis; enabling learned decision-making.

ERP provide Real-time online updated records

When companies work across geographical locations, they need to know exactly what is happening on a real time basis. This is more important for a trading/retail company. If it has a real time availability of its inventory stored in warehouses 100 miles from the sales office, it is still in a position to bid for the order aggressively unlike any other that would have a stores within its vicinity but no updated real time records.

ERP enable strategic planning

Reduce risk

Optimize IT spending

Retain top performers

Improve productivity and insight

Support changing industry requirements

Reduce costs through increased flexibility

Improve alignment of strategies and operations

Provide immediate access to enterprise information

Improve financial management and corporate governance

The ERP Perfection

ERPs come from different vendors with different variations, some may be good for a trading enterprise, where as another may suit a manufacturer better, likewise, one may suit a services provider better than the other two.

Which ERP would suit you better is something that would come up after a thorough analysis of the business and its needs.

Some companies buy the ERP software, whereas, some develop it in-house with the supervision of experienced consultants.

Like in my first blog (right at the bottom of this page) you would notice I have talked of an ERP in supply chain management. Aligning your SCM to almost perfection is just one example of having a well implemented ERP.

Below is a list of few modules of an ERP to help ascertain the strengths and benefits of an ERP to the business.

Treasury

Human Resource

Plant Maintenance

Production Planning

Quality Management

Financial Accounting

Sales and Distribution

Materials Management

CRM (Customer Service)

Logistics Information System

(Project Management Systems)

Supplier Relationship Management

SCM (SAP Supply Chain Management)

Would you have any queries please feel free to write to me and/or my friend, Mr. John McGrann, CEO of Drive ERP, we would appreciate the opportunity to help you.

Change Management

noreply@blogger.com (The Consultant) — Mon, 15 Nov 2010 10:35:00 +0000

Change management is an ability in which managers need to be proficient. It is more or less like Exodus where you are playing Moses and the people following you through the water walls in to the Promised Land. People Management is the key.

We will talk of this walk and how to manage people and their reactions to changes they want and what they are actually getting.

Always keep in mind that:

Different people will certainly react differently to change

Everyone has perceived needs that have to be met

Change often involves a loss

Expectations have to be managed

Fears have to be dealt with

Different people react differently to change

Change can be presented on a continuum like:

Different people have different preferences for where they like to be on this continuum. Some people like to be at the stability end of the continuum - they like things to be the way they have always been.

Then there are those who like to be at the change end - they are always looking for something different, new and challenging.

Problems arise when the individual's preferences differ from the situation they are put in. Meaning to say that, where :

a stability-oriented person finds that circumstances are changing quite rapidly, or
a change-oriented person finds that everything is the same and there is nothing new

In these situations, the individuals involved usually experience:

strong dissatisfaction even to the point that it evolves in to frustration

stress

negative attitudes towards individuals, work and the management in general

resistance to change

de-motivation

People tend to resist.

Everyone has fundamental needs that have to be met

Psychologist, Will Schutz identified three basic needs that people have in interpersonal relations. These basic needs are also of fundamental importance in people's reaction to change:

The need for control
The need for inclusion
The need for openness

Every human being processes his needs and wants through his frame of references; these references pour from the individual’s likes and dislikes to which his brain has been tuned over years. On the other hand, a person’s attitude towards change is also a very important factor. Therefore, when you have look at a person’s attitude towards change you would have almost solved the change management issue, as I said earlier, attitudes are behavioral patterns that are exhaustively dominated by an individual’s frame of reference. In any change process there is always some degree of need for control over one's environment, even participation in the events leading to the change, expectation of clear and precise information of the change and its processes otherwise, it is likely to run into an array of negative reactions, ranging from anxiety, stress, frustration through resistance to partial resentment.

Change often involves a loss

The relevance of the "loss curve" to a change mature and extent of the change. If someone is promoted to a senior position, the change is rarely an issue because it has been replaced by something better. But if someone is made redundant with little prospect of getting a new job, there are many losses (income, security, working relationships) that can have a devastating effect.

Expectations need to be managed

The relationship between expectations and reality is very important. You can see this in customer relations - if a supplier fails to meet expectations then the customer is unhappy; if the supplier exceeds expectations then the customer is happy the same applies to change. If their expectations are not met, they are unhappy. If their expectations are exceeded, they are happy.

What managers have to do, however, is make sure they don't over-promise. Expectations have to be set at a realistic level, and then exceeded. The wiser thing to do.

This also reminds me of one of my clients, I was reviewing their cost budgets and their actual performance all round was just excellent, they had been phenomenal. I tried to learn the secret of their success and I did, their budgets set goals too low, therefore, under normal production they were able to beat their budgets and a little effort helped their cause. I brought this point to light in the board meeting and tore off the budget sheets, since then the CFO and COO never spoke to me, although the CIA and CEO have become very good buddies of mine.

Fears have to be dealt with

Where significant change rational thought is not clearly understood nor absorbed people often fear the worst - in fact, they fear far more than really required, their subconscious minds suddenly become illogical and see irrational consequences which just goes on to add on the anxiety and stress:

Our company is reducing staff, which means...
They will make people redundant, and...
I'll be the first to be kicked out, and...
I'll have no hope of getting another job, and...
I won't be able to pay the mortgage, so...
I'll lose the house, so...
My family won't have anywhere to live, and...
My wife won't be able to cope, etc.

Such fears (primarily negative thoughts) should be addressed, eg by helping people to know what is happening and that one individual is being made redundant will find a better job with better pay and have a huge lump sum in their pocket.

Always:

Give people information - be open and honest about the facts, do not promise that cannot be delivered.

For large groups, produce a communication strategy that ensures information is disseminated efficiently and comprehensively to everyone. This, however, should be followed up with individual interviews to produce a personal strategy for dealing with the change. This helps to deal appropriately with individual reaction to change.

Give people choices to make, and be honest about the possible consequences of those choices.

Give people time to express their views and support their decisions, providing coaching, counseling or information as appropriate.

Where the change involves a loss, identify what will or might replace that loss - loss is easier to cope with if there is something to replace it. This will help alleviate potential fears. Also give individuals opportunity to express their concerns and provide reassurances - also to help assuage potential FEARS.

Where you are embarking on a large change programs, you should treat it as a project and bring about all the functions of project management.

How Interest Rates Affect Our Purchasing Power

noreply@blogger.com (The Consultant) — Thu, 04 Nov 2010 09:26:00 +0000

Before we see how interest rates affect our purchasing decisions, we need to talk about the Messengers of Death and understand how they affect us. Yes I am referring to interest rates and inflation.

What is interest?

An interest rate is the percentage of the debt that is charged as interest. Every loan, mortgage, credit card etc. that you ever will receive will have an interest rate associated with it. These can vary wildly between financial products, and also between consumers based on their credit histories.

What is Inflation?

Inflation is a constant increase in the prices of all goods and services produced in an economy. Money loses purchasing power during inflation periods since each unit of currency buys progressively fewer goods.

Suppose the overall price index increased by 3% during the past 12 months. If a typical household spent AED 4,000.00 during the first month for all household expenses, then they must budget AED 4,120.00 during the last month for exactly the same quantity of goods and services.

In simpler terms, it can be said like

3 Liters of milk cost AED 10 earlier now costs AED 15 or you can now buy 1 Liter only for AED 10 This is often described as "too much money chasing too few goods.”

The interest rate is a monetary policy tool used to achieve price stability and sustainable growth. Changing the interest rate influences the money supply, beginning with banks and eventually trickling down to consumers.

Governments and Central Banks in particular lower interest rates in order to stimulate economic growth. Lower financing costs can encourage borrowing and investing. However, when rates are too low they can spur excessive growth and eventually inflation as has happened during the 1990s to 2006. Inflation eats away at purchasing power and could undermine the sustainability of the desired economic expansion plans set forth by countries. Meaning to say many countries draw 20 year economic targets and in order to achieve them they design and develop fiscal and monetary policies; if forecasting and subsequently economic planning had been poor, anything can go wrong: inflation, deflation, stagnation all of this in a nation.

On the other hand, when there is too much growth Central Banks raise interest rates. Rate increases are used to slow inflation and return growth to more sustainable levels.

Lower interest rates allow more people to buy and more people to purchase more expensive commodities like homes, cars etc. The negative about low interest rates is that it has a tendency to push prices of commodities higher because there are simply more buyers. It is a "supply and demand" thing.

A consumer's purchase power is seen here in the graph between QQ/SS/YY/XX the shaded area. As long as the interest rates are with the consumers'/firms' reach there is tendency to spend as it appears on QQXX but the moment RR goes above the purchase budgets B, at SSYY, the spending comes to a halt, here then, the Indifference curves and the Budget Lines re-align themselves for the consumer to adjust his optimal utility derieved from various combinations of available commodities from his newer and scarce resources.When interest rates are changed, demand can be affected in various ways.

Income = Expenses + Saving

Quantity of money

Exchange rates

Income = Expenses + Saving

Against a certain level of income, for firm or a consumer an increase in interest rates will attract saving and should theoretically reduce borrowing.

This will tend to reduce current spending, by both consumers and firms; this includes spending by consumers in the shops and spending by firms on new equipment, ie investment in newer assets or expansion in to newer markets. Conversely, a reduction in interest rates will tend to increase spending by consumers and firms.

Quantity of money

A change in interest rates will affect consumers' and firms' cash flow, ie the amount of cash they have available. For savers, a rise in interest rates will increase the money received from banks and co-operative society deposits. But it will also mean higher interest payments for people and firms with loans - debtors - who are being charged variable interest rates. These include many consumers with mortgages on their homes.

Exchange rates

In practice, the exchange rate will be influenced both by expectations about future interest rates and any unexpected changes in interest rates. That is because if investors expect interest rates to rise, they may increase the amount they invest in a currency before interest rates actually rise.

"If something will cost far more than it is worth because you do not have the money to buy it, then you should wait until you can afford it and stay out of debt."

Write Probate Wills: Don't die Intestate

noreply@blogger.com (The Consultant) — Wed, 06 Oct 2010 12:23:00 +0000

A Will is a legal document that sets forth a person’s wishes regarding the distribution of his/her property and the care of any minor children (a guardian). A Will provides the manner in which a person’s property will be distributed after death. A Will contains instructions and wishes as to how the property and assets are to be distributed.

Any person, of any age (after 18: in some countries after 21), should seriously consider writing a Will at the earliest. People die at all ages and a Will is needed especially if you have assets and property to be allocated to those you wish to benefit.

Why Write a Will?

A Will is the expression of the person's wishes concerning how their property is to be distributed.

It is a:

written statement
signed in compliance with the various formalities covered by legislation
It is a legal document containing the names of the people you want to benefit
details of your possessions at the date of your death: the people you want to benefit are called beneficiaries

Property or possessions include everything you own, such as your home, land, vehicle(s), bank account(s), benefits of insurance policies, furniture, boat(s), investments such as shares, personal jewellery, all forms of royalties received on intellectual property and so on.

A Will also clearly states the manner in which the person wishes to be put to rest after his death. He/she may choose to be buried or cremated is also clearly stated in the Will.

If you are charitably inclined, a Will lets you direct your assets to the charity of your choice. Likewise, if you wish to leave your assets to an institution or an organization, a Will can see that your wishes are carried out.

If you do not have a Will?

Legally, you die intestate. In such a case, the State will oversee the distribution of your assets according to the laws prevalent therein. Contrary to popular opinion, the State does not inherit your assets, but rather distributes them according to a set formula. Such a scenario can result in the sale of the family home or other assets, negatively impacting the surviving spouse. Further complications can arise if your children are minors, as the Court will appoint a representative to look after their interests.

In the United Arab Emirates, the bank accounts (operated singly and jointly) area all frozen by the banks till the Court instructs the banks to release the amounts, this court order arrives only after the Will has been carried out which may take any number of days.

Power of Attorney

It is also possible that you may have an accident, are in a coma and no one but you had the access to the bank, now what happens to your wife and the children, in this case it is wise to write a Power of Attorney, authorizing her to use the banks in case you are incapacitated.

A lawyer friend of mine also said and I quote, “If you don’t trust your wife, just don’t give her a Power of Attorney.” So just be careful to whom you give them out to.

Modus Operandi

Step 1: Planning and an Introductory Meeting

I begin each Will with a Planning phase, which requires the involvement of the person who’s Will is being prepared. Detailed discussions are held with the person to exactly understand his/her wishes and desires and by enabling the client to better understand the implications of dying intestate along with the advantages of having a probate Will.

Step 2: The Documentation

These meetings typically last no longer than couple of hours and take place at your office, if possible. At this time you have the opportunity to ask questions about the upcoming work and its process.

I encourage you to discuss any concerns that you may have and any areas or businesses that you would like me to address effectively.

At this time, you may also provide e with the information I request before work begins -

Step 3: Fieldwork

In this step, the actual work of the Will is performed from the already gathered information about your desires and wishes regarding the execution of the Will.

I also prepare a Power of Attorney in favor of your wife, so that if the need be she can exercise her right to secure herself legally and take care of the funeral/repatriation of the body; relevant procedures and all incidental expenses.

Step 4: Probate your Will

After the fieldwork is completed and the Will and the Power of Attorney have been reviewed with you, at your option, either you or I will have the Legalization done from all the Government offices so that the Will is effectively carried out by the Courts after your death.

Inventory Management: Tips

noreply@blogger.com (The Consultant) — Wed, 22 Sep 2010 10:16:00 +0000

Keeping track of their supplies

It really does not matter what line of business you are in; from a steel mill to a ghetto workshop, a law firm to libraries or schools for that matter everyone needs to have a good track of things that they need on a “as and when required basis.” As I just said, law firms, libraries and schools do not print text materials nor do they print note books and other relevant stationery, but they need to ensure that an adequate amount of the items that really matter, things that are prime to their operations are on hand at all times. This goes without saying that it does not mean that they have to be overly prepared by holding excess amounts of inventory all the time. They need to develop a system for keeping track of their supplies; check on the history and observe the consumption trends and perhaps there on build from there on.

Here are a few tips on how you can better manage your inventory

1. Consolidate

If you don’t already have one, create a centralized storeroom, when you have your inventory scattered all over your facility creates confusion; consolidating into one location creates clarity and reduces cost and downtime.

2. Catalog

Once they are all together in one place, create a list of all items identify them your Unique Product Identifiers (UPI). Your UPI may also be something on the lines of your SKUs.

3. Count

You should have a full count of all the items physically lying in the central location. If a specific product comes in different dimensions it should be counted separately and be allocated a UPI. Aggregating them to quote or sell is another thing but when they are in your warehouse they are different “people” within themselves and have to be treated accordingly, with care and respect.

4. Calculate

Go through your records and see what materials do you require frequently and how much of it do you really ever require, if they are fast moving items perhaps you would have some inventory lying in the warehouse all the time but then this also comes from certain calculations so as to ascertain how much do you really need in the first place and it is also possible that some items although fast moving may be too big to have in the warehouse all the time, those are then to be procured on a “as and when basis".

Inventory management is about intelligently reducing costs without any serious compromises on product quality and in all of this striking a balance between reducing costs and arriving at the optimum level of inventory levels required.

5. Computerize

Have a good application in place where in it gives you the facility to create bar codes and keep a track of what item occupies which shelf in which warehouse, the more specific the better.

6. Continuity

Having bought a machine and the computer wizards come in, install the application, print bar codes, sticking them on the inventory and after a few weeks its all back to square one, does not really do the trick. Continued use, updating at every transaction is ideal but then the sooner the records are updated the effective the control the business has on its inventory. There is no management if there is no control to begin with.

This closes the series on Inventory Management. If ever there is something relevant I would be writing about it again so but for now, its too much (of inventory).

Inventory Management: Inventory Replenishment

noreply@blogger.com (The Consultant) — Mon, 13 Sep 2010 12:22:00 +0000

Companies may choose to have a periodic or a perpetual system for their inventory replenishment. A periodic system is where a company purchases all inventories required for the year and feeds its production department or retail out lets from there in. A perpetual system is where in raw materials are bought as and when the company feels the need to do so and in my experience so far, I have not come across any company that operates on a periodic inventory system, perpetual is the preferred system so much so that a relatively newer technique, the JIT (just in time) is being practiced by many companies, big and small.

Inventory Replenishment is predominantly based on historical to determine inventory requirements; this in turn is equally applicable to one stand alone site or multiple sites across the locality, country and even the globe.

Impact of under-stocking

Inventories are essentially the lifeblood of a business therefore, it is imperative that inventory is available when required unless circumstances adversely affect the availability or that the materials have to be ordered to specific specifications; otherwise, customers often will not tolerate product unavailability and/or delays in delivery beyond a stipulated time. In some cases, a shortage may be only a small inconvenience (such as wanting a particular flavor of ice cream), while sometimes it may cause a severe problem (such as interrupting production-line activity at a factory that manufactures customized luxury yachts). On top of that periodic shortages can be expected, but then these recurrent shortages may in due course eat into a company’s reputation and condense their market share.

Impact of over-stocking

Likewise, overabundant, slow-moving inventories can place a serious strain on a company’s resources and negatively affect the company’s ability to take advantage of other business opportunities.

Frequent shortages or excessive inventories are telltale signs of a company headed in the wrong direction moreover, many businesses have the misconception that high levels of customer service can be provided by keeping an abundant supply of products on hand to meet expected demand. However, keeping excess product on hand is very expensive, resulting in eventually write-offs.

When ordering, holding, and stock-out costs are all known, Replenishment Planning can be used to calculate optimal inventory replenishment. However, estimating stock-out costs can be difficult.

Forecast demand

Track usage and vendor performance statistics to forecast demand.

Coordinate stock availability

Calculate optimal order points, safety stock, and order quantities automatically so the right amount of the desired materials are available at the right time.

Optimize calculations

Eliminate reorder guesswork by calculating past inventory turnovers and allowing for sales hikes/movements based on seasonal/cyclic trends or unusual demands. Maintain optimal stock levels, reduce inventory carrying costs, and help eliminate special or urgent reorder charges.

Automate the replenishment cycle

Save time and money by reducing the expense of last minute reorders and lost sales opportunities when stock is unavailable. With Microsoft Dynamics SL Inventory Replenishment you can automatically generate purchase orders.

Meet product needs

Satisfy your customers by maintaining sufficient quantities of products to meet expected demand. Balance inventory carrying costs with customer service levels, and cut expenses, including write-offs and mark-downs, associated with keeping excess stock on hand.

ERP/MIS support

In one of my earlier posts I mentioned an example, where in an outlet from a chain of retail stores in the US sells a product off its shelf and the half way across the globe, its Chinese suppliers are already packing it; that’s an ERP for you.

It ERP combines all your accounting, purchases, distribution and inventory management aspects of business in to one efficient database driven by a powerful software. Many ERP providers have even developed its character from an ERP into a supply chain management tool, which means that once a product is marked sold at a POS point, it automatically updates the sales figure, the inventory is affected by the same units, suppliers notified at the warehouse and even a purchase order is generated to be sent to the suppliers at source.

If you have a product, a mobile phone, a Nokia E5 and another product, another Nokia E90. The ERP should be able to tell you at what rack, in which warehouse is it lying and at what time (not just the date) did it arrive in the specific warehouse and of all the outlets which outlet has it been assigned to. Your ERP should also be able to tell you that if there are requests from other outlets for the same product and in case those have exhausted their inventory can this be sent to them if there is no demand for the products at the outlet they were originally marked for.

Inventory Analysis

The proper tool to analyze the inventory is the Inventory Turnover Ratio. The inventory turnover ratio is one of the most important financial ratios. The inventory turnover ratio measures the efficiency of the business in managing and selling its inventory. This ratio gauges the liquidity of the firm's inventory. It also helps the business owner determine how they can increase their sales through inventory control.

In order to calculate the ratio, you take net sales off the company's income statement and inventory off the balance sheet and dividing the net sales for the period over its average inventory:

Net Sales/Inventory = number of times the inventory moves

What does it mean?

A high inventory ratio means that the company is efficiently selling its inventory. The higher the resultant number off the ratio above faster the company is in selling its inventory and fewer funds the company has tied up.

Companies have to be careful thought that if they have a high inventory turnover as a high turnover and a high lead time can subject them to a stock-out.

Where companies have a low inventory turnover ratio, then there is a likelihood that they are holding obsolete inventory which is difficult to sell. This may eat in to a company's profit. However, the company may be holding a lot of inventory for legitimate reasons. They may be preparing for a holiday season in the case of the retail industry or preparing for a seasonal cycle, among other reasons.

It is important for a business owner to understand why the inventory turnover ratio is high or low. In order to do that, the owner needs to look at the company's inventory and determine what inventory is being most productive.

It is also important to use comparative data such as time series (trend) or industry data with which to compare a company's inventory ratio in order to analyze whether it is too high or too low.

Inventory Management: Inventory Valuation

noreply@blogger.com (The Consultant) — Wed, 01 Sep 2010 06:03:00 +0000

This needs radical updation and has been removed for the time being. An updated vrsion will be posted soon.

Part III of the series on Inventory Management
Next Blog: Inventory Replenishment

Inventory Management: Warehousing Methods

noreply@blogger.com (The Consultant) — Wed, 18 Aug 2010 06:05:00 +0000

In my previous blog, Inventory Management: Managing the Flow, I pointed out the fact that many business owners do not really see the impact inventory carries on the bottom line of the company. Therefore, there are many overheads get buried in the inventory costs without getting noticed. When you sit to review such growing costs coming out of your inventory it is already too late to recoup what you have lost but then it is never too late to correct what was done wrong in the past. Start by looking at your processes and kick in those cost savings initiatives.

Effective management of the warehouse operations through best practices will certainly have a positive impact on the company’s bottom line than probably any other area.

It must be understood that there is no global definition of a ‘good warehouse.’ Each warehouse has some features that are akin to the business and its needs and this sense of uniqueness must be taken into account.

The Pests of the Warehouse

After having gone through hundreds of warehouse operations over the years, I have come to the this simple understanding and this holds good true no matter what industry and what stage of growth the company is in. Most organizations hold unknown incremental costs within their warehouse in one of five following areas:

Too much inventory

Incorrect inventory mix

Inventory placed in non-optimal locations in the warehouse

Inefficient pick or put away processes

High reliance on paper within the warehouse

Optimizing a warehouse and implementing best practice techniques can have a huge impact if a company focuses on these five areas of waste.

Too much inventory

Maintaining a ‘more than required’ inventory is a classic problem. This is generally a result of either one or is a combination of two or even all:

incorrect forecast of demand

a desire to have at all times enough inventory to service customers almost instantly

a (perceived) inability to procure product fast enough to meet business needs

Incorrect inventory mix

Inability to optimally position inventory leads to excessive “just in case” over-production, the wrong mix of inventory, and overspending in transportation on inbound and outbound expediting.

Incorrect inventory mix is usually caused by errors in forecasting. This starts a chain reaction which disturbs the inventory levels, which affects the purchases and their lead times, poor delivery schedules to the customer and eventually poor customer satisfaction ratings.

Inventory placed in non-optimal locations in the warehouse

This is an area where the biggest of companies and the most experienced of people charged with warehouse management make mistakes. They either do not store them ‘close enough’ based on the frequency of consumption and where they actually do; they do not store them in a very retriever friendly fashion.

FIFO is my favorite as far as inventory costing is concerned but when it comes to warehousing and inventory movement it has to follow the same rule, LIFO is not an option. Another area where most companies and warehouse managers make a mistake is they tend to stack every identical product together, where as they could have different manufacturing specifications, different packaging specifications, to illustrate, in one of my assignments where I was reviewing a company warehousing, I noticed that they had one specific chemical, an active ingredient in one of their premium products, lets call it Chemical X.

Understandably Chemical X was supplied by two companies, one in Europe and the other in South America. Both shipped Chemical X in steel barrels, both competitors used different packaging; Supplier One used a 220 liters barrel and Supplier Two used a 200 liters barrel. Stored together.

I asked them to continue using the same corner they used for Chemical X but then they had to be segregated based on Supplier and Packaging; storing based on any one of the two would offer better control on inventory and would enhance warehousing.

Inefficient pick or put away processes

Many warehouses do not really use floor space efficiently either. Some being adventurous do not really mind allocating floor space to different products at all and dump all inventory anywhere and everywhere and end up wasting hours looking for the products when required.

High reliance on paper within the warehouse

This is something that sent chills down my spine when I visited a warehouse of a company that dealt with building accessories and construction material. A complete inventory list, bin cards, physical count perfect, the inventory listed tallying with the system records with that with the accountants yet the warehouse was a disgrace.

Inventory placed in non-optimal locations in the warehouse, Inefficient pick or put away practice. A company that had over 300 products in inventory and all haphazardly stored the warehouse personnel prided themselves for being able to remember which corner had 12 boxes of 1” screws and the rest 12 boxes lied where exactly (which was almost 500 meters away stacked behind 250 other products).

With such warehousing practices, there are a lot of overheads; excess expenses in terms of electricity, security, sunlight and moisture protection. Not to mention the possibility of pilferage when products are small enough to be slipped in to pockets and actually have domestic use. Warehousing isn’t just a shed, it’s a complete management discipline.

Part II of the series on Inventory Management

Next Blog: Inventory Costing

Inventory Management: Managing the Flow

noreply@blogger.com (The Consultant) — Mon, 09 Aug 2010 07:52:00 +0000

Inventory is a term used by American writers to mean the goods bought to resell during the course of business. The same is known as ‘stocks’ in the books from the UK. However, ‘stocks’ in the US mean shares of a company. Likewise, Americanally speaking a person may have an inventory of stocks which would Britishally mean, an investment in shares of a company by that individual. Therefore, in here and most of my blogs I would use the term Inventory to mean (British) stocks, not that it’s a brilliant term; it just saves us a lot of confusion.

Inventory is the most important asset of the business; it is from this where the bigger and the bulkier fixed assets come in to show off. Many business owners fail to understand its significance and treat it no more than a product bought, stored and sold; there is more to it than meets the eye.

Inventory relates to the goods purchased for resale by the business to be sold off within the 3 – 12 months of purchase. Like any other asset, it too has to be managed diligently; for the ease of avoiding fancy terms, we call it Inventory Management.

Inventory management deals with many important issues of which a few are listed here under:

Managing the inventory flow

Warehousing methodologies

Stock keeping units

Inventory costing – for financial reporting purposes

Inventory replenishment

ERP/MIS support

Inventory analyses

Understanding the implications of – over and under storage

Understanding the implications of – slow moving and obsolete stock

These issues will be discussed in detail in separate blogs, however, at the end of this series on inventory management I will also be offering some tips on inventory management.

We start by talking about managing the inventory flow. Inventory flow is more or less the same as a supply chain within the company; ensuring the materials are available for the production as and when they are required and once out of one phase being moved in to the next phase for further value addition till the final or the finished good/product is ready to be shelved in the warehouse. There on, how the finished products would be dealt with once they are being dispatched for delivery to the customer.

This is a fairly simple illustration of the inventory flow; it is however, worthwhile to notice that the trigger here is the production plan. Where companies have powerful ERPs that can handle complex situations and manage big databases and their integration to customers and suppliers’ ERP is possible then the triggers move out from the production plans in to the customers demand for the product. A common example is, a chain of departmental stores has given restricted access to its suppliers in China; now where one item sold off a shelf in any one of the outlets within the chain in the US the suppliers in China know of it and pack the piece accordingly.

Documentation is the Key

In a company I used to work they had absolutely no documentation at all so much so being a manufacturing company and that too almost all its products were prepared on specifications from the customer. Being a small family business is never an excuse and I didn’t want to take that for an excuse either.

Many such small companies (sole proprietors / small family businesses / small partnerships) have this notion that they and the business are the same, in saying so, what ever the business owns is theirs no real need to complicate things but recording and noting where lies what; my point is, if I were to agree with them that what ever the business owns is theirs then what ever they own belongs to their business too and this can prove to be true if the company were to go insolvent due to poor/inefficient management. Lack of documentation is the first sign of a poor managed company.

A store room was in place, racks full of screws of all sizes, nuts and bolts and drill-bits all over the place, chemicals (hazardous: inflammable) lying around. I have recurring nightmares to date when the brain recollects those images of the ‘first day at work.’

The entire process was defined, all sub-process identified, all activities with counted. All inventories listed, counted and marked. Bin cards prepared, inventory database created in the system, Standard Operating Procedures (SoPs) written to structure all requests from the production floor directed towards the stores and likewise all company purchases were formalized; various forms printed with a strict requirement to approve material requisition by the supervisors. Initial days were very difficult; they were slow and the new systems were being taunted and frowned up on. Stores had a hard time explaining to people that no issues unless the documentation was in place and approved by the supervisor; a couple of weeks down the line and every nut and bolt issued was recorded and the best thing of it all was everyone understood the positive change a different approach brought to their work style bought, they felt the impact.

Here under are generally required documents, they may be and should be lots more to suit the nature of your business and would effectively reflect the efficiency of the internal controls

Materials requisition note to request stores for materials for production

Stores issue note record materials issued to production

Stores requisition note to request for materials for stores

Purchase order sent to suppliers for materials

Goods received note GRN prepared once materials are received from suppliers

Delivery note DN prepared once goods are delivered to the customers

Invoice – supplier supplier’s invoice to be paid

Invoice – customer invoice to be sent to customer

The relationship of these documents should be ‘domino effect.’ Unless there is a requirement (cause) to add/move inventory there should be no issues (effect) from the stores and the surprise physical counts should ideally match with the system records.

Part I of the series on Inventory Management

Next Blog on: Warehousing Methodologies

Supply Chain Management

noreply@blogger.com (The Consultant) — Wed, 04 Aug 2010 07:46:00 +0000

Rising operating costs primarily due to the upward trend in the global economy companies try to operate efficiently so that the costs are reduced and controlled effectively. The main goal of today’s corporations is to reduce uncertainty, operating costs and providing customers with a quicker response as compared to a slow response. In doing so, companies try to manage their working capital and operating cycle time diligently. Similarly managing and reducing risks in the supply chain, managing inventory and warehousing, improving production through-put to ensure better response to customers’ demand.

The benefits of a supply chain management have long been felt and seen by many in today’s ever-changing and competitive business environments. So much that efficient and effective supply chains are critical to the survival of most moreover; these supply chains rely heavily on support from dynamic information systems and ERP tools.

The function of the Supply Chain Management is to plan, organize and coordinate the supply chain activities. Today, supply chain management is a total systems approach to managing the entire supply chain

The Three Flows of a Supply Chain

Supply chain is the precision in arranging goods and services from their source, adding value and delivery to the customer. The Supply Chain encompasses the flow of materials, services, information and payments from raw materials to factories through warehouses to the end user of the product or service.

Materials, Information & Finances

1. Materials mean the flow of materials from the suppliers to the factories, the internal movement within factories based on the production planning and into warehouses as finished goods and ultimately from the logistics to their distribution and delivery to the end user

2. Information of all the activities generated within the company should be available in time and accurately so that the company can better plan its production and make efficient use of its resources

3. Finances include information regarding all payments, bank-transfers, E-payments

Components of a Supply Chain

The supply chain also includes companies and processes that add-value by processing, enhancing product life/quality and also by delivering products to the end user. It is a close-knitted network of activities that delivers the product or service to the end user.

It includes, purchasing, payment flow, materials handling, production planning and control, logistics and warehousing, inventory control, distribution and delivery

Supply chain is more or less a vertical movement of unless there is a need to undergo processing to add value to the deliverable product. Upstream is when sourcing or purchases from external suppliers takes place; internal, when the company itself or any of its partners in the supply chain add value to the product or service by virtue of processing, assembly, and packaging; similarly, downstream, where distribution to customers takes place, frequently by external distributors, or a disposal takes place.