The threat or opportunity from DBCFT – who’s up and down since the election?

February 27th, 2017

I found the following interesting blog entry referencing stock market abnormal returns since the US presidential election.

http://voxeu.org/article/trumponomics-and-sp-500

The following chart shows which industries have gained or lost either the day after, or since the election.
wagnerfig1

Based on our research, I can rationalize the placement of most industries based on their margins structure, import vs export propensity and hence positive or negative impact of DBCFT, plus their likelihood to benefit from infrastructure spending.

The only particular surprise is retail but I guess that includes Walmart who buys abroad and is howling about DBCFT, and also many other retailer who source domestically and who would benefit from more US employment.

Destination Based Cash Flow Tax — who will it impact?

February 2nd, 2017

TaxHaven

In addition to the headline grabbing suggestion of lowering US corporate tax rates from 35% to ~20% or so, there are various ideas being considered for changing the basis for US ‘C” corporation’s corporate taxes.

There are many reasons to change the US corporate tax basis, since US companies have:
- an incentive to shift their profits overseas to lower their effective tax rate
- little incentive to keep US jobs at home if they can buy the product overseas cheaper

There are several ideas in play to do this.  One of the front runner proposals  for the Republican US Corporate Tax overhaul is an approach called “Destination Based Cash Flow” (DBCFT) touted (but not originated) by Paul Ryan as part of the Republican’s “Better Way” proposals.

The DBCFT approach proposes to only tax US companies on their US cash revenues, against which they can offset only their US costs.  Foreign revenues would not be taxed, nor would there be any recognition for any foreign costs.
This represents a fundamental change from a worldwide tax basis to having only a territorial tax like most other major countries in the world.

To illustrate the effect simplistically, a cell phone manufacturer selling 100% of their product in the US and sourcing 100% of the product from China would pay 20% tax on the entire revenue from the phone.
In contrast today, if the phone had a 50% gross margin, the tax would only be on the 50% profit.

There are other significant impacts in the proposal:
- the ability to deduct 100% of capital investment cash flows from US suppliers
- the loss of ability to carry back Net Operating Losses to claim refunds from prior years
- removal of the ability to deduct interest expense

In all probability the changes will not happen in isolation
- WTO will be upset over the notion that the tax is subsidizing domestic production
- Countries might retaliate with tariffs
- The dollar will strengthen since the US buying fewer imports will need less foreign currency

Jonova has built a model to test the economic impact of DBCFT on companies with various cost structures, domestic vs. foreign sales percentages and other factors.
This model tests the effect of more or less domestic sourcing on after tax cash flows.

The following example tests car industry economics.  It assumes a 30% gross margin product, 10% operating margin, 80% of sales in the US, and a 2:1 US:RoW labor rate.
The analysis shows that under a 20% DBCFT (the red), there is no incentive to produce too much product abroad.
In contrast, the current 35% net income tax encourages more production abroad to take advantage of the labor rates.

TrumpCar

The shape of such curves is very dependent on the cost structure of the business, where its sales are located and the relative factor costs of the US vs. production abroad.

Based on the analytic insights gained from the model, we forecast the impacts will be most felt by companies with:
- greater US cash revenues than their US (cash) cost base (e.g. Walmart and other retailers that import much of what they sell in the US)
- employing foreign labor abroad to make products at similar labor rates to US labor (importers from Europe, Singapore, etc.)
- currently sending royalties abroad to subsidiaries
- high concentrations of sales in the US
- companies with significant debt financing

For those paying US taxes under the new proposals, we anticipate
- a scramble to buy back IP held offshore
- hard discussions on what costs to locate in the US e.g. unfamiliar OpEx vs. CapEx trades on what work to do where
- a need to consider after tax cash flows in sourcing strategy and network design decisions
- a heightened need for accurate cash flow forecasting over the short and medium term
- lumpier corporate cash flows since carry back tax credits cannot be used to smooth cash flows

If you would like to discuss these findings in the context of your specific company’s cost and revenue structure, please contact Oliver Scutt (owscutt AT jonova.com)

Further reading:

A good summary of DBCFT:

https://www.americanprogress.org/wp-content/uploads/issues/2010/12/pdf/auerbachpaper.pdf

A topical discussion of DBCFT in context of a Mexican border wall:

http://www.forbes.com/sites/anthonynitti/2017/01/26/the-border-adjustment-tax-for-dummies-who-will-pay-for-the-wall

An interesting take on DBCFT effect on the oil industry and hence the likely direction of energy costs in the US:

http://blogs.platts.com/2017/01/19/gop-tax-reform-oil-industry/

On-shoring versus Off-shoring for NPI and new iPhones

June 17th, 2016

Apple’s recent announcement that they were going to be assembling iPhones in the USA provides
a good excuse to look at one of the most important decisions in supply chain design, where to manufacture.

“Apple asked both Foxconn and Pegatron, the two iPhone assemblers, in June to look into making iPhones in the U.S.,” the Nikkei Asian Review reported, citing a source.

“Foxconn complied, while Pegatron declined to formulate such a plan due to cost concerns.”

apple-iphone-6-plus-1 Apple iPhone (2016)

The New iPhone: Assembled in the USA

Launching a new product allows a company to take stock of their supply chain, and see if the old network they have is the best choice for the shiny new product. Many trends on both the product and supply chain sides have been changing and may start to favor on-shoring over off-shoring. For brevity and to keep with the original topic of Apple’s recent decision, let’s focus on deciding where to assemble a high-tech product such as Apple’s iPhone.

In choosing whether to off or on-shore a product there are several attributes which will drive the decision. One is the value-density of a product, and for assembly, especially, how much value is being added in the assembly step.

The second attribute is lead time(s) or more specifically the ratio of assembly lead time to total lead time.

Finally, there is uncertainty in the market which can be both supplier uncertainty or demand uncertainty.In another industry, taxes, duties, and tariffs would be other attributes, but for high-tech goods, these do not play a major role.

For the three product attributes that will affect the on-shoring decision, we will briefly examine Apple’s situation for their new Mac Pro and why that product is the most likely in Apple’s portfolio to be assembled in the USA.Higher value density (price of goods divided by weight) and value added during assembly will drive the assembly process to be closer to market. The more value added in assembly the greater the savings you can have by keeping inventory for the product in semi-finished form.

One of the interesting trends in high-tech is that more value is being attached to the software and IP in a design, which is increasing the value density added during assembly. For the iPhone case, I would argue a very large percentage of value is in assembly. Before assembly, there is some molded plastic pieces, some milled aluminum, a few expensive chips, RAM, support components, and basic electronics. After assembly, you have an iPhone for which consumers will pay well over $500 at an Apple Store. The difference in component value versus final assembly value means that every unit worth of inventory that can be kept in components instead of finished goods will save a large amount in working capital.

The ability to shave off days of inventory is directly related to the lead times involved in the supply chain, which is why the lower percentage of lead time spent on assembly, the closer to market you will want an assembly process. In general, as an assembly process becomes more complicated and longer it becomes inflexible and less inventory can be saved by moving the process closer to market. In high-tech, a lot of the cumulative supply chain lead time is devoted to electronic components.

Also, transportation modes used in the supply chain should be taken into account. If sea shipment is used in the supply chain, this can increase your lead times significantly. Removing excess lead time was a primary factor behind Dell being so successful making desktop computers in the USA, so it shouldn’t be too big a surprise to see Apple doing the same.Uncertainty in the market will also drive companies to use on-shoring for new products. Uncertainty directly drives safety stock, and also tests the supply chain’s ability to respond to new developments.

The more demand uncertainty in the market for a new product the more inventory that is needed. The more inventory that is needed, the more inventory that can be saved by having local assembly. Additionally, market uncertainty can force configuration changes in products that will greatly favor nearby assembly processes.Of course, all of this depends on what the difference in cost is for assembling locally versus assembling in a low-cost region.

If I save $100 in assembly cost per unit on a million units, it won’t matter that I could save one million in working capital by moving assembly locations. However, products that have a high-value density, a short assembly lead time, and have high market uncertainty would be good candidates for on-shoring. The new iPhone has probably the highest value density added by assembly, a small percentage of the total lead time is due to assembly, and the demand for the product will be more uncertain than most Apple products.

Price Optimization & Performance Management (2): What’s the Connection?

May 3rd, 2016

Finding the Connection Between Price Optimization & Performance Management Systems: Part 2

By: Jonathan Goldsmith

 

Last week we talked about the importance of connecting price optimization to performance management systems. Pricing has undoubetdly become one of the most important strategic components that drives differentiation and category performance for a business. So, within businesses, how do department heads establish that connection between pricing optimization and performance management systems to create and drive value? How do they achieve a fast ROI for their business?

Department heads can work collaboratively using integrated planning techniques to forecast demand, while quantifying performance trade-offs that result from downstream activities.  While non-integrated pricing systems may improve category performance in financial terms, they are likely to make recommendations that fail to consider the collateral impacts from the operational and supply sides of the business.

 

A Case in Point…

 

If a price increase is planned, Finance can evaluate the product’s price elasticity to determine the new price required to match the product’s existing contribution margin.  Similarly, Sales and Marketing can use Integrated Business Planning to determine how this price increase will impact demand.  Operations use the new demand sensing data to alter its supply chain plan. Through collaborative forward-looking planning, the entire organization can define a portfolio of choices for each possible price scenario.  This example is a simple, single variable example to illustrate how Integrated Business Planning impacts the entire enterprise. However, reality is much more complex and a more real-life example would have multiple variables. This would include hundreds of scenarios for alternative courses of action that pertain to:

  • Product sourcing
  • Mix of product portfolio (product substitution)
  • Product lifecycle (a sunset product may be discontinued earlier than planned, while a new product may require changes to the product’s recipe)
  • Cost-to-Serve to determine profitability by customer
  • Inventory levels

Integrated Business Planning will forever change the manner in which complex organizations operate. Faster cycle times, competitive pressures, emerging channels, globalization, volatile energy prices… the list and combinations are endless. The bottom line is just that: the bottom line. Business complexity, eroding profits, risk mitigation and the accelerated rate in which decisions must be made are driving adoption of Integrated Business Planning.

To learn more, email Jonova at info@jonova.com.






Price Optimization & Performance Management(1): What’s the Connection?

April 24th, 2016

Finding the Connection between Price Optimization and Performance Management Systems

By: Jonathan Goldsmith

 

Pricing has a long history of delivering short-term fixes for sluggish sales volume. Price is undeniably the quickest, most efficient lever for impacting the organization’s bottom line performance. When the economy tanked, retailers of fast moving consumer goods quickly began cutting prices across categories and product groups in order to maintain their supply chains and secure consumer traffic. Even products not traditionally used as lost-leaders were quickly marked down as the battle for share of wallet escalated. As consumer confidence waned, globalized supply chains added complexity to planning activities, while volatility in commodities challenged even the most sophisticated demand planning systems.

Now, the economy is rebounding and analysts see price as a critical element in today’s marketing mix. Price has been transformed from a short-term, merchandising tactic to a strategic component that drives differentiation and category performance. The days of defining price solely based on cost and margin targets have passed. SKU proliferation, the rise of private label, and competition between trade channels is elevating the importance of price as a strategic instrument. Consumers are also in the game as they price compare their favorite brands and stores using online sources and mobile applications.

Astute software vendors are capitalizing on this trend by introducing new price planning and optimization solutions. Advancements in modeling applications, including those featuring rules-based heuristics and statistical modeling, are bringing unprecedented insight into the power of price. These comprehensive systems improve decision-making by simultaneously evaluating cost, competitive activity, and product mix, as well as contribution margins and sales volumes.

 

Price is Just a Piece of the Puzzle

 

No doubt price optimization is paramount. However, other merchandising tactics including product assortment, space management, inventory, and promotion planning must also be considered. Optimizing prices must satisfy financial targets – that’s a given. But prices must also be evaluated across disparate performance variables. For example, taking a myopic view of a product’s price may cause cannibalization of higher margin products within the same category. Or perhaps the price planning system recommends a price that drives sales of that product beyond the supplier’s safety stock. Now consider the economics of demand and supply side planning activities and it’s easy to see why independent price planning activities will result in suboptimal performance.

 

Price planning and optimization systems must integrate with other planning systems in order to maximize their potential

 

Pricing systems must incorporate decision intelligence that extends beyond the price planners sphere of influence. Specifically, pricing optimization systems must serve as inputs into related planning systems. As stated previously, the pricing planner will use the price optimization system to conduct what-if scenarios that look at KPIs, which are typically defined in financial terms at the category and product levels.

The planner will use the system to determine the optimal price points based on a number of variables and analyses, including:

  • Volume/Margin
  • Competitive analysis
  • Competitor response
  • Category position (in terms of branding, i.e. traffic versus profit generation)
  • Sensitivity analysis – this will include sensitivity curves that define substitution and related elasticity rates. These scenarios will also consider category performance in terms of product cannibalization or the reverse halo effect. 

While the requisite what-if scenarios aid in pricing recommendations, they must integrate with downstream planning systems in order to drive truly optimized decisions. In other words, pricing outputs must be used as inputs into an organization’s forecasting, demand planning, supply planning, and S&OP systems.

 






 

To learn more about how Jonova can help you connect price-planning applications to performance management systems, click the button above, or please email info@jonova.com.

Jonova Launch Planning: We Can Help You Plan for Uncertainty

February 18th, 2016

Let Jonova help you deliver insight and certainty throughout every step of your Launch Planning. 

By: Morgan Smuck

msmuck@jonova.com

 

Is your company considering a dynamic new product launch? Are you unsure how to account for and interpret changing economic factors and risk? Jonova’s Option Explorer provides a platform for clients to assess the complex interactions between consumers, business functions, and suppliers to help your company evaluate alternatives during times of uncertainty.

Jonova’s method is simple: users provide input, and our Integrated Business Planning software provides valuable output data. Users with clearly defined, specified roles can enter their data through Option Explorer spreadsheet tables, run multiple “what-if” scenarios, and see their output results via Browser Dashboards that are easily accessible and easy to navigate. Users can organize their Output Dashboards in any structure they wish.  Outputs are even accessible through Excel spreadsheets and data feeds to other systems for further data editing. Clear, easy, and accessible.

 

Option Explorer can be used as a tool to understand your company’s options and plan for uncertainty to build a solid business plan. By delivering hundreds of real time, “what-if” potential responses to risk events, Jonova software can help your company execute its best rollout plan from start to finish.

 

Watch our Launch Planning Demo to see how our active driver based supply chain models immediately assess changing factors like financial risk, inventory constraints, lead times, and new product launches from competitors to develop your recovery actions. Simply provide your email (which we will keep 100% confidential) to learn more about how Jonova can help your company evaluate financial impact and rapidly changing assumptions.

 

Click here: Launch Video

 

Online Education Series

February 1st, 2016

Jonova Inc Online Education Series






 

Here’s Jonova Inc’s new Online Education Series.  Jonova is a Seattle-based Integrated Business Planning Software Company that specializes in Sales and Operations Planning. Founded in 1997, Jonova has worked with several of the leading names in the pharmaceutical, aerospace, and electronics industries.  Our Education Series features Jonova consultants who bring more than 20 years of experience to discuss the issues they believe are affecting businesses and their customer bases today.  Subscribe to our YouTube Channel, JonovaInc, for expert education tips on Supply Chains, Financial Planning & Analysis, and more.

Our first Education Series introduces Jonova founder Oliver Scutt and the topic of Inventory Targeting; a major consideration in the topic of Supply Chain and academic research.  Oliver brings his 25 years of consulting experience to talk about why Inventory Targeting is important for businesses, how to target it, and how to drive it.

Part 2: What types of Inventory are there?

In Part two, Oliver shares his perspective on the types of inventory that Jonova recognizes to be most vital to your supply chain operations. What factors affect your inventory? How do lead times affect inventory production? How much inventory do you need to cover demand over a certain period of time? Oliver answers these questions and explains Demand Safety Stock, Cycle Stock, In-Transit Inventory, and Leveling Inventory.

Part 3: What drives Inventory?

In part three, learn how inbound and outbound lead times are a major driver of a company’s inventory. Oliver explains how he calculates the variability of lead times over any time period.

Part 4: How do you target Inventory?

Inventory is a system of decisions. Which ones do you have to make to target your inventory? Oliver gives his opinion on how to master your timing and service levels to optimize your inventory. Learn the difference between single-tier and multi-tier inventory targeting, and which targeting methods major industries employ.  

Inventory is a necessary evil.  It delivers a service, and without it, elements in your supply chain will stall.  Oliver reminds us that the important concept is how to target each individual component of your supply chain to figure out where you need inventory.

 

Integrated Business Planning in Less than 3 Minutes

January 17th, 2016

Integrated Business Planning 
in Less than 3 Minutes

John Lennon once said, “Life is what happens while you’re busy making plans.” Well this sentiment also applies to today’s complex corporate landscape. Planning is an integral part of every executive’s organizational contribution. Strategic planning, financial planning, sales and operations planning are just a few of the planning initiatives developed to improve financial performance and mitigate risks.

But these planning activities and related systems, which are developed at the functional level, fail to consider departmental interdependencies and therefore cannot optimize decision making from the enterprise perspective. Rapid changes in the marketplace further complicate understanding and relegate decisions to assumptions and heuristics. In other words, “Business is what happens while you’re busy making plans.”

Integrated Business Planning moves all corporate planning into a holistic system where functional planning and strategic planning become directly connected to financial performance.

Integrated Business Planning enables executives and department heads to conduct what-if analyses and run multivariate scenarios in their respective areas – all based on forward looking analytics. But the real power of Integrated Business Planning is unleashed when each independent plan is linked to enterprise level drivers and KPIs.  This is where Integrated Business Planning identifies unknown interdependencies and helps decision makers to understand which choices will deliver the optimal result according to financial objectives.

Integrated Business Planning connects every step of the planning process directly to financial performance. While Business Intelligence systems are great for extracting historically-based insights from transactional data, Integrated Business Planning uses simulation and predictive modeling so decision makers can anticipate potential disruptions and quantify each scenario in advance. As business hiccups arise, and they most certainly will, executives are already armed with the optimal, alternative course of action.

A case in point

If the price of a key raw material triples, Finance can evaluate the product’s price elasticity to determine the new price required to match the product’s existing contribution margin. Similarly, Sales and Marketing use Integrated Business Planning to determine how this price increase impacts demand, while Operations uses the new demand sensing data to alter its supply plan. Through collaborative, forward-looking planning, the entire organization can define a portfolio of choices for each possible scenario. This example is a simple, single variable example to illustrate how Integrated Business Planning impacts the enterprise. However, reality is much more complex and a more real-life example would have multiple variables. The example above would include hundreds of scenarios for alternative courses of action that pertain to:

  • Product sourcing
  • Mix of product portfolio (product substitution)
  • Product lifecycle (a sunset product may be discontinued earlier than planned, while a new product may require changes to the product’s recipe)
  • Cost to Serve to determine profitability by customer
  • Capital expenditures
  • Inventory levels
  • Tax minimization
  • M&A

Integrated Business Planning will forever change the manner in which complex organizations operate. Faster cycle times, competitive pressures, emerging channels, globalization, volatile energy prices… the list and combinations are endless. The bottom line is just that: the bottom line. Business complexity, eroding profits, risk mitigation and the accelerated rate in which decisions must be made are driving rapid adoption of Integrated Business Planning.