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Boston Scientific & Zero-Based Budgeting

April 13th, 2011 Comments off

Boston Scientific announced layoffs today and the news articles mentioned in passing that they had recently adopted zero-based budgeting, a concept we discuss in class.  I dug a little further and found the transcript from their latest quarterly conference call.  While it doesn’t really dive into what ZBB is, it does show that some companies are using this idea to better match their capabilities and resources with the market demand when big changes are needed.

Hot topic number two is our zero-based budgeting program or ZBB. We have instilled a great deal of discipline in headcount expense management, and over the past few years have done an excellent job of controlling our operating expenses while aiming to drive down product cost by above 5% each year. However, with rapidly changing market conditions that will put more pressure on margins, we know that we must do more. We need to examine our expense base from scratch as if we are building the required infrastructure to support our size and our expected growth as we know it today. We also need to examine the various business and sales models we use in each of the markets we serve and ask ourselves difficult questions about how to serve our customers profitably. So we’ve embarked on zero-based budgeting program to deeply examine our large functions and determine what activities we’re performing and what expenses we’re occurring for activities that are no longer necessary to support and grow our business profitably.

via Boston Scientific’s CEO Discusses Q4 2010 Results – Earnings Call Transcript – Seeking Alpha.

Home Depot echoes Lowe’s with focus on costs

November 16th, 2010 Comments off

Photo credit: David Neubert on Flickr

Here’s is a Reuters piece from today that focuses on costs at the two largest home improvement retailers in the headline.  Notice, however, the other things mentioned that relate to what we discuss in class (and that seem to me to be even more important than the cost cuts):

  1. A focus on supply chain improvements
  2. Use of cash and the importance of having strong cash flow
  3. Continued investing in improvements even when cost cuts are emphasized

Read more:

Home Depot echoes Lowe’s with focus on costs | Reuters.

How Tim Hortons will take over the world

September 24th, 2010 Comments off

This is a great article that highlights a lot of the topics we cover in class.  It is quite long, but worth your time if you have 15-20 minutes to read and think about a variety of things including:

  • The strategic decision made by Tim Hortons to take control of coffee roasting by moving that operation in-house.  Like we discussed in the early chapter of the Blocher textbook, sometimes controlling quality (probably the biggest factor for this company), delivery schedules, etc. necessitates a move in-house even when it may cost more.

If you were a Tim Hortons devotee back then, you might have noticed that the coffee in, say, Halifax didn’t taste quite the same as it did in the chain’s spiritual home base of Hamilton. That’s because the chain bought its coffee from third-party roasters. Then-CEO Paul House decided the company needed to take control of the consistency of its brew, and to that end built a lab at the firm’s Oakville HQ.

  • The tweaks necessary when a successful company moves to new markets.  In Canada, Tim Hortons is the king of the market.  The article references, though, difference between Western Canada and Eastern Canada and then spends a lot of time looking at ways that they are trying to crack the American market as they expand into new areas in the East & Midwest.

In 2008, Tim Hortons undertook what David Clanachan, Tim Hortons’ jovial head of U.S. and international operations, calls “a deep dive,” surveying tens of thousands of people about what would get them through the door of a Tim Hortons. The company built a full-sized model store in a warehouse in Oakville, spending months testing and refining the concept before rolling it up, so to speak, to the gates of Troy.

The result is a cross between the likes of Starbucks and the Tim’s Canadians know. “Not that I’m gonna hang around, write poetry and sing songs,” says Clanachan, “but I am gonna feel comfortable.”

  • The focus on quality as a competitive advantage as highlighted by the frequent “cupping” sessions that even involve some senior executives.  The management team realizes that without quality, Tim Hortons has no competitive advantage:

Consistency is key—both Schroeder and West never tire of that axiom. Achieving it is tricky, since coffee from a particular mountainside will not taste the same from season to season. Flavours change depending on the weather: too much rain or too little, more sun or less. The mercurial nature of the bean means that Tim’s coffee team is constantly revising the secret blend to maintain its trademark flavour.

  • The breakeven-point ramifications of the “Always Fresh” program where the cost of individual products (the article mentions donuts) is higher on a per-unit basis, but the hope was that the benefits of not running out of goods and with not having to discard stale product would offset this.  It seems like that hasn’t happened, at least in the eyes of some franchisees.

For 37 years, standard Tim Hortons stores were equipped with in-store kitchens, where staff bakers produced batches of fresh, hot doughnuts twice a day. Shortly after Joyce sold his Tim Hortons stake in 2001, the company brokered a deal with Ireland’s IAWS Group to build the $75-million Maidstone facility. Then-CEO House promised franchisees that the conversion—which cost store owners between $35,000 and $50,000—would boost their bottom line. Instead of letting unsold doughnuts go stale during downtimes, operators would be able to zap new batches as needed, in a glorified microwave oven. Voilà—“fresh-baked” in two minutes. And though the cost of producing one doughnut would change from eight or nine cents to 12 cents, that increase would be offset by a reduction in operating costs—no highly paid bakers on the payroll, less discarded product.

  • The value-chain relationships between Tim Hortons and its franchisees.  There are pending lawsuits between the parties and it is interesting that two groups that are so dependent on each other find themselves locked in these kinds of battles.

Still, it’s clear some franchisees have become disillusioned with Always Fresh. Arch Jollymore, a former high-ranking executive at Tim Hortons (and Joyce’s cousin), is seeking certification of a class-action lawsuit against the company. At issue: the impact of the Always Fresh conversion on franchisee margins. Jollymore and his wife, Anne (who owns a store in Burlington in her own right), are alleging breach of contract, negligent misrepresentation, and breach of the duty of good faith and fair dealing. They are seeking damages of $1.95 billion.

  • The decision to centralize or decentralize decision-making.  Most franchise systems rely on strict centralization with standard signage, colors, marketing,etc.  Tim Hortons is selectively decentralizing certain things:

De Nardo leads a tour of Riese’s four other Tim Hortons counters at Penn Station, proudly pointing out the New York-only promotions—the only instance of non-standard advertising allowed in the chain. “It’s the New York mentality. We like to be a little on the edge.” Whenever he can, he steers clear of earnest in favour of funny. “Hell,” he says, “it’s doughnuts and coffee.” Hence Tea and Timbits (T&T—it’s dynamite!) and $5 dozens after 5. “And for New Yorkers, $5 is basically free.”

  • The impact of sourcing raw materials globally and the potential cost changes due to weather in parts of the world where coffee is grown:

“Central and South America are coming off the worst crop in 44 years,” West says as he slaps a sack of beans. And Colombia was deluged with rain for 16 months straight, diminishing crops. That has helped drive standard-grade coffee to a 12-year high of $1.75 (U.S.) per pound. The top-quality beans Tim Hortons buys—West says they compete with Starbucks for the finest Arabica beans on the market—are much pricier.

To read more (and please do!), visit this link: How Tim Hortons will take over the world – The Globe and Mail.

Alcoa Bets on Operating-Cost Cuts

June 25th, 2010 Comments off

Here is an article about Alcoa spending $1.5 billion to create a new low cost mine.  Sounds like an oxymoron, doesn’t it?  Imagine the analysis that goes into a decision like this…all of the information has to be boiled down to some of the basic things we have discussed including breakeven analysis, budgeting (including worst-case and best-case scenarios), pricing predictions, etc.

Alcoa Treks Into Jungle to Cut Costs. Robert Guy Matthews. Wall Street Journal. (Eastern edition). New York, N.Y.: Jun 22, 2010. pg. B.1

Caterpillar Looks Forward to Increased Production

January 29th, 2010 Comments off

I referenced this article in class last week when speaking about how companies have to plan for different scenarios in our discussion of “sensitivity analysis. ” It isn’t enough anymore to arrive at one long-term plan and ride it out to the end.  To be competitive today (or, in fact, to survive sometimes) companies need to engage in several “what if” plans so that they are being proactive when the inevitable surprises arise rather than scrambling to keep up.  Caterpillar is not only planning for their “most likely” scenario, but they are also planning in case other scenarios occur.

Caterpillar says that even if demand for its equipment is flat this year—an unlikely projection it calls its “Great Recession scenario”—it would still need to boost production in its factories by 10% to 15%, just to restock dealer inventories and meet ongoing customer demand.

Meanwhile, output at Caterpillar’s suppliers would have to rise 30% to 40% in this scenario, because Caterpillar would also be refilling its shelves.

Caterpillar is also expanding their planning process to be inclusive of their suppliers and their customers (including dealers) so that everyone is on the same page.  We no longer cover the “value chain” concept in as much depth as we have, but working beyond the legal boundaries of Caterpillar to engage these other participants is growing in importance and moves like should work in the favor of companies that make them.

Going forward, a big question is how well suppliers are positioned to ramp up production. Bottlenecks and other headaches may occur as spot shortages cause unexpected price hikes and hamper companies’ ability to meet demand.

That’s why Caterpillar took the unusual step late last year of visiting with key suppliers to ensure they had the resources to quickly boost output. In extreme cases, the equipment maker is helping suppliers get financing.

‘Bullwhip’ Hits Firms As Growth Snaps Back. Timothy Aeppel. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 27, 2010. pg. A.1

Strategic Plans Lose Favor

January 26th, 2010 Comments off

This article focuses on some changes being made to strategic planning efforts given the recent economic downturn.  I think the headline is a bit misleading because I feel that strategic planning is as important as ever, but the rigid, long-term plans of the past are becoming obsolete.  Instead, companies are striving to set more short-term plans while allowing flexibility in the long-term to nimbly change things as information become available (whether that information is about competitors, the economy, new products, etc.).  The lessons learned from the economic challenges of the past couple years will shape strategy for years to come.

Walt Shill, head of the North American management consulting practice for Accenture Ltd., is even more blunt: “Strategy, as we knew it, is dead,” he contends. “Corporate clients decided that increased flexibility and accelerated decision making are much more important than simply predicting the future.”

Companies have long planned for changing circumstances. What’s new—and a switch from the distant calendars and rigid forecasts of the past—is the heavy dose of opportunism. Office Depot stuck with its three-year planning process after the recession hit, largely to make sure employees had a common plan to rally around, Mr. Odland says. But the CEO decided to review the budget every month rather than quarterly so the office-supply chain could react faster to customers’ needs.

Theory & Practice: Strategic Plans Lose Favor — Slump Showed Bosses Value of Flexibility, Quick Decisions. Joann S. Lublin, Dana Mattioli. Wall Street Journal. (Eastern edition). New York, N.Y.: Jan 25, 2010. pg. B.7

How to Save 11% of Your IT Spend – Technology – CFO.com

December 21st, 2009 Comments off

Budgeting has gained more importance in the recent difficult economic times.  When times are great, there is more room for error when preparing budgets and spending money, but most companies have not had the luxury of such a buffer in the past couple budgeting cycles.

An interesting article from CFO.com looks at the importance of budgeting and at ways to make the process more reliable and easier.  It seems that making things too complicated doesn’t add much effectiveness when it comes to budgeting and that simply starting from the prior year’s figures may also be a pitfall. The article focuses on IT budgets in particular, but the lessons are important in other areas as well.

The group estimated that some companies wasted 5% to 9% of their 2009 IT spending in missed cost-cutting opportunities, largely by revising the previous year’s budget rather than starting from scratch with a zero-based budget. Freshly scrutinizing every line item tends to unearth significant savings, says Andrew Horne, senior research director for the CIO Executive Board.

Overall, after doing the survey and interviewing the respondents, the CIO Executive Board concluded that some companies may be trying too hard to improve their budgeting process.

“If you try to make the process stronger — more elaborate and sophisticated — you’re likely to waste more effort,” says Horne. “The best customer-specific examples we found all pointed in the direction of being faster and more flexible, and thus able to respond to change faster, rather than trying to do more and more to predict change.”

How to Save 11% of Your IT Spend. New research suggests that zero-based budgeting and thorough scenario planning are keys to an optimal IT budget. David McCann – CFO.com. December 14, 2009

Wal-Mart works with suppliers to shore up financing

November 15th, 2009 Comments off

walmartSimilar to what Sara Lee did a few months ago, Wal-Mart is working closely with suppliers to make sure that they have ample financing.  Recognizing that if a supplier (or several) were to fail their own costs would rise, Wal-Mart is working closely with their value chain partners to make sure that doesn’t happen, especially in light of the recent bankrupty of CIT Group, a major supplier of financing to small/medium businesses.  You might even look at this as Wal-Mart creating a new value chain connecting its suppliers of merchandise with its suppliers of cash (Wells Fargo and Citibank).

Wal-Mart helps apparel suppliers secure financing. Nicole Maestri and Lisa Baertlein. Reuters. Fri Nov 13, 2009 4:35pm EST

Amazon’s Cash Management

November 14th, 2009 Comments off

amazonFew companies can pay suppliers for goods that they have sold 3+ months after the sale, but it seems that is what Amazon is able to do.  In my opinion, few companies use technology to their advantage to the extent that Amazon does but I’ve only ever considered their use of it to sell things (primarily to me!).  This short article pointed out how Amazon leverages their data to know what to stock and how much will sell and they turn that to their advantage to maximize the time between the date of sale and when they pay their supplier.  It’s no secret how Amazon can charge low prices with little in the way of brick-and-mortar and great use of cash.

Amazon’s Astute Timing. Martin Peers. Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 30, 2009. pg. C.10

Boosting Engagement While Cutting Costs

June 23rd, 2009 Comments off

A great example at a health-care facility of a way to handle cost cuts while maintaining employee morale and getting them to buy-in to the new methods by letting them handle the suggestions/implementations of cost cutting measures.

Boosting Engagement While Cutting Costs. Yes, it’s possible. Here’s how one hospital turned the budget over to its employees and reaped a windfall. By Jeannie Ruhlman and Cheryl Siegman.  Gallup Management Journal.  June 18, 2009.