Introduction to Bridging Your Business concept

Transcription

1 1 Introduction to Bridging Your Business concept 1

2 Chapter 1 Introduction to Bridging Your Business concept When you are comparing year-over-year sales results, very easily the net difference between 2 years is earmarked as a Sales gain or loss. See figure 1. Sales Year-over-Year (1) Year 1 Year 2 figure 1 The quick and easy conclusion here is that the sales value in year 1 of 100 grew to 110 in year 2 so a Sales Growth of 10% was realized. But is does not tell you how this growth was achieved and what factors contributed to it. We all know that every year things change. A company may lose business due to pricing issues, quality issues, delivery issues, end-of-life (EOL) products of your customers etc. When you take these factors into account, the necessary growth required to achieve the same result as in figure 1 now changes dramatically. See figure 2. 2

3 Sales Year-over-Year (2) Year 1 Lost/EOL New sales Year 2 figure 2 This shows to increase sales from 100 to 110, 30 of New Sales is required (37,5%) to offset the 20 lost business. The Detailed Sales Bridge will help to analyze and quantify the main impacting factors and to define corresponding strategies and tactical action to achieve your business targets. By the end of 2007 and into early 2008 it was clear that the worldwide economy was entering a downturn. All around the world many companies started to feel the stagnation of business and sales and profit figures started to decline. At that time, it was not evident how long this economic depression would last but in the years following people realized that this depression would last longer than initially anticipated. Stocks and real estate prices dropped drastically; bankruptcies were the daily hot topics in newspapers. During the last years of this economic downturn we have worked for a variety of small to mid- sized international companies as a business consultant. As we discussed and reviewed business activity with our clients, they often blamed the economic situation for the downward trend or stagnating business. One of our standard questions was: How are you so sure that it is only the economic climate that is causing your business decrease? 3

4 In many cases this question resulted into long discussions followed with many standard, off-the-shelf answers and we noticed that in many cases a meaningful analysis over time was not created and used. This is when we started to advise and work with our clients to create a Detailed Bridge Analysis. Bridging the gap is an often-used expression and that is exactly what the Bridging your Business tool is supposed to do for you. If you want to simplify it you can state that it is nothing more or less than identifying and quantifying the critical effects (positive and negative) that impacts your business. Most of these effects can be influenced by implementing tactical actions. Each industry has its own typical characteristics that seriously influences the business results. Our experience, both as an employee of a large multinational as well as in our Consultancy activities in creating a Detailed Bridge Analysis is in the technology driven Business to Business (B2B) market segments. Typical characteristics of these businesses include: local manufacturing/assembly, sales of products in the region (country, Europe, Americas or Asia) and export, Design-here and Built-there, multiple customers with standard products or customer specials and numerous inkind competitors. An example of such a business is a company that develops, manufactures and sells passive electronic components. These products are sold to Original Equipment Manufacturers (OEM s), which use these products to manufacture their end products. These components are usually hidden in the end product. Take for example a company servicing the Aeronautical market. The company designs and manufactures components with stringent specifications on water/dust tightness, vibration/shock and operating temperature range. They are not the only company playing in this harsh environment market segment. At least 5-10 competitors offer the same or comparable parts. In this specific case, products were designed, made and sold in Europe. 4

5 As the focus of that company was to grow their topline sales a Detailed Sales Bridge was created based on the specific business characteristics with the objective to determine the root causes or critical contributors for the business growth or decline. In this case there were 6 critical factors identified to create the Bridge from one year to another year. The end result provided a good view on the root causes for the sales decline: i.e. too much business was reported Lost or End-of-Life (EOL) and there was not enough focus on introducing new products to the market and growing the sales outside Europe. Next to that, many quotations never turned into firm orders because leadtimes were not competitive. These negative factors blocked growth. Strategic action plans were made involving Sales, Product Marketing, Operations, Finance, Human Resources and Product Engineering. A Detailed Sales Bridge was created from one year to the next year and the logical next step was the initiation of using the Bridge tool for the creation of the following year budget process. Later on, the Budget Bridge was also used as the measurement tool that could show and explain how the business performed over the year compared to budget. Every year, traditionally after the summer period, many companies start to work on the creation of their Sales, Marketing and Operations budget for the upcoming calendar or business year. Some companies have a lot of expertise in dealing with this process where others struggle with this exercise. Most of the time the budget process starts with the expected high level topline sales input from the sales team and senior management. Followed by input from Product management, Product development and Operations. The Finance team is the last one to develop the budget proposal by analyzing and determining the financial impact. Then the budget process really starts with questions back and forth, requests for more details and proof by producing facts and figures. 5

6 Depending on the complexity of products, customers, (Global) markets served and trends as well as transparency, reliability and availability of data and in-depth knowledge, the creation of a budget can consume a lot of internal focused time and work. Budgeting or forecasting is not a science but there are many aspects that can be quantified if solid definitions are agreed upon and consistently implemented. Over the past 30 years we have worked for different companies and gained solid Business-to-Business (B2B) experience in the creation of budgets. This experience provided the input for the Bridging Your Business concept. As most of today s state-of-art ERP-systems have the capabilities to crunch the data required to create a Detailed Sales Bridge, so no incremental, complex and expensive software is required. However, a consistent and traceable dataset that combines products (part numbers or Stock-Keeping-Units), Customer base (account numbers or ID s), sales volumes, pricing and cost information is essential data for creating The Detailed Sales Bridge. If an insufficient or inadequate ERP-system is available the data can be analyzed off-line using spreadsheets. Seeing the results achieved using the Bridging Your Business concept it is evident that it has the potential to provide new insights and will greatly contribute to the creation of your next Sales & Marketing budget. This is greatly achieved by consistently measuring and monitoring the sales performance to budget and Year-over-Year analysis. It also becomes a powerful tool for the finance group for analyzing and creating a Standard Margin Bridge and an EBITDA Bridge. This book will guide you through the process on how to create the: 1) Year-over-Year Detailed Sales Bridge, 2) Sales Bridge as a Budget tool, 3) Sales Bridge as a measuring tool, 4) Standard Margin Bridge, 5) EBITDA Bridge. 6

7 Figure 3 shows a generic and basic example of the Detailed Sales Bridge Generic Sales Bridge Year 1 actual sales negative sales impact positive sales impact Year 2 actual sales figure 3 The corresponding data table to create the Detailed Sales Bridge graph looks as follows: Year 1 actual sales 1500 Negative sales impact -300 Positive sales impact 400 Year 2 actual sales 1600 table 1 Each business has its own characteristics and therefor will have different or additional key factors that seriously positively or negatively can influence the business performance. Pricing, Volumes, exchange rates, just to name a few, can positively or negatively impact your sales performance. 7

8 Some typical negative impact factors are for instance business lost to competition, End-of-Life (EOL) of products or transfer-out of certain business to other regions or countries. Customers may decide to stop producing an item that contains your product in a particular country or region because the market demand switched to another country or region. Part of your customer s strategy may be to manufacture close to their customer base. Shipping products from one region to another can be costly and time consuming. Another reason for transferring manufacturing products to another region is cost related. During the period many companies decided to stop manufacturing in Europe and the Americas and shifted their manufacturing to the PRC, Mexico, Eastern Europe and India. If an international operating company, supplying parts to a customer that decides to transfer manufacturing, the transfer of the business may not impact your consolidated business. However, one region would see a decrease of sales while the receiving region will see an increase of sales since the customer decides to change manufacturing location. The sales result of the overall/consolidated business would not change but the financial performance of the individual legal or financial entities would. There are many more of those types of examples and the number of steps to create a Sales Bridge depends on the typical business characteristics of each company business model. The first step in the process of creating a Detailed Sales Bridge to is to identify and agree on which factors have an important impact on the company s performance. Key participants in this discussion are representatives of Sales, Product Management, Finance, Product & Process Development, Operations and Segment or Industry Marketing. This process requires trust and teamwork; sharing of data, information, a clear and analytical focus and agreement on each individual factor. 8

9 A key advantage of the Detailed Sales Bridge is that it clearly identifies the major contributors to the growth or decline of the overall business. Furthermore, you can start measuring your periodic actual sales/product performance and immediately act when changes to plan/budget become visible. The Bridge turns DATA into INFORMATION and INFORMATION into KNOWLEDGE. 9