financial services advanced management by bizdox

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financial services advanced management. Business Information and Advice

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									N287E - Advanced Financial
       Management
    Cost Management
       Strategies
         Cost Management
       Public vs. Private Sector
• Public Sector               • Private Sector
  – Custodians of Public        – Primary Fiduciary
    Funds                         Responsibility is to
  – Must Provide Open             Shareholders
    Access to Business          – Cost Management is
    Opportunities                 Focused on Bottom Line
  – Must Establish Cost         – Strategic Alliances and
    Reasonableness for            Supply Chain
    each Decision                 Management
  – Value Propositions can      – Value Propositions
    only be evaluated using       evaluated using Best
    Cost Per Quality Point        Value Analysis
    Analysis
           Cost Consequence
             Accountability
• Public Sector             • Private Sector
  – Delegations of            – Corporate Business
    Authority                   Plan
  – Discretion Limited by     – Risk and Incentives
    Policy                      often Drive Policy
  – Balancing Mandates        – Performance is Driven
    Against Available           by the Bottom Line
    Funding                   – Risk and Profitability
  – Deficit Spending            Drive Spending
Cost Containment Strategies

• Limit Access to Sources
• Pre-Authorization vs. Post-Audit
• Ensure Accurate Contract
  Administration
• Process Re-Engineering
• Mutual Gains Incentives (Partnerships)
• Risk Mgmt vs. Risk Defense/Aversion
      Leveraged Purchasing

• Commit Total Spend in Exchange for Deep
  Long-Term Discounts (Commitments Contract)
• Seek Standardization
• Adjust Requirements to Create a Market
• Integrate Order-Delivery-Payment Systems
• Jointly Attack Other Cost Drivers
          Impacts of Integrated
           Financial Systems
• Upside-
  – Minimize Multiple Databases
  – Apples to Apples
  – Eliminate the “Back Room”
• Downside-
  – Pushes “Central Functions” to Frontline
  – Need to Re-engineer Processes
  – If you can’t ask for it right, you can’t get it.
        E-Commerce Issues

•   Cost
•   Back-Filling the Requisition Function
•   Matching Rules, Tolerances, & Returns
•   The Need for EDI
•   Content Management
•   Keeping Up with Innovation
     Return on Capital Employed
                                              Return on Capital Employed



                                                        =
                Net Income                                                                    Capital Employed



                    =                                                                                =

Revenue              _              Total Expenses



                                         =
                                                                            Working Capital          +           Fixed Assets



             Cost of Goods Sold        +           Other Expenses
                                                                                  =

                    =                                                 Accounts                           _       Accounts
                                                                     Receivable   +      Inventory
                                                                                                                 Payable

  Overhead          +             Materials
       Return on Capital Employed
                                                   Return on Capital Employed
                                                              10%



                                                             =
                                          To Increase                                              Capital Employed
                     Net Income
                                            By $1M                                                       $10M



                         =                                                                                =
 Revenue
  $15M
                          _              Total Expenses
                                              $14M
                                                               Or Decrease
                                                                 By $1M
                                                                                 Working Capital                      Fixed Assets
Either Increase
                                              =                                       $1M                 +               $9M
    By $1M

                  Cost of Goods Sold
                                            +           Other Expenses                 =
                          $9M                                $5M


                         =                                                 Accounts                           _       Accounts
                                                                          Receivable   +      Inventory
                                                                                                 $2M
                                                                                                                      Payable
                                                                             $3M                                        $4M
    Overhead
      $2M
                         +             Materials
                                        $7M
    Return on Capital Employed
                                                   Return on Capital Employed
                                                              10%



                                                             =
                                          To Increase                                              Capital Employed
                     Net Income
                                            By $1M                                                       $10M



                         =                                                                                =
 Revenue
  $15M
                          _              Total Expenses
                                              $14M
                                                               Or Decrease
                                                                 By $1M
                                                                                 Working Capital                      Fixed Assets
Either Increase
                                              =                                       $1M                 +               $9M
    By $1M

                  Cost of Goods Sold
                                            +           Other Expenses                 =
                          $9M                                $5M


                         =                                                 Accounts                           _       Accounts
                                                                          Receivable   +      Inventory
                                                                                                 $2M
                                                                                                                      Payable
                                                                             $3M                                        $4M
    Overhead
      $2M
                         +             Materials
                                        $7M
      Return on Capital Employed
                                                   Return on Capital Employed
                                                              10%



                                                             =
                                          To Increase                                                Capital Employed
                     Net Income
                                            By $1M                                                         $10M



                         =                                                                                  =
 Revenue
  $15M
                          _              Total Expenses
                                              $14M
                                                               Or Decrease
                                                                 By $1M
                                                                                   Working Capital                      Fixed Assets
Either Increase
                                              =                                         $1M                 +               $9M
    By $1M

                  Cost of Goods Sold
                                            +           Other Expenses                   =
                          $9M                                $5M


                         =                                             Accounts                                 _       Accounts
                                                                      Receivable    +           Inventory
                                                                                                   $2M
                                                                                                                        Payable
                                                                         $3M                                              $4M
    Overhead
      $2M
                         +             Materials
                                        $7M
                                        ROCE Example
                                            Sales
                                          $5,000,000
                            Labor
                           $700,000
                                             Minus
                                                               Net Income
Operating Cost Elements




                                                                $400,000
                                         Cost of Goods
                           Materials                                              Profit
                                              Sold
                          $2,300,000                                              Margin
                                           $3,800,000           Divided By
                                                                                    8%
                                             Plus
                                                                 Sales
                          Overhead                             $5,000,000
                          $800,000        Other Costs
                                           $800,000

                                                                                             Return On
                                                                             Multiply       Investment
                                                                                               10%
                          Inventories
                          $500,000                          Sales
                                                          $5,000,000
                                         Current Assets                           Asset
                                           $1,100,000      Divided By            Turnover
                          Accounts
                          Receivable                                               Rate
Assets




                           $300,000           Plus        Total Assets             1.25
                                                           $4,000,000
                                          Fixed Assets
                             Cash          $2,900,000
                           $300,000
                          Impact from 5% Price Reduction
                                            Sales
                                          $5,000,000
                             Labor
                            $700,000
                                             Minus
                                                               Net Income
Operating Cost Elements




                           Materials     Cost of Goods
                                                               $515,000
                                                                                  Profit
                             -5%              Sold
                                                                                  Margin
                          $2,185,000     $3,685,000             Divided By
                                                                                  10.3%
                                             Plus
                                                                 Sales
                           Overhead                            $5,000,000
                           $800,000       Other Costs
                                           $800,000
                                                                                             Return On
                                                                             Multiply       Investment
                           Inventories
                                                                                              13%
                              – 5%
                                                            Sales
                           $475,000                       $5,000,000
                                         Current Assets
                                                                                  Asset
                           Accounts       $1,075,000       Divided By            Turnover
                           Receivable
Assets




                                                                                   Rate
                            $300,000          Plus        Total Assets
                                                          $3,975,000               1.26
                                          Fixed Assets
                              Cash         $2,900,000
                            $300,000
    What is strategic sourcing?
Strategic Sourcing…

•   A systematic process to reduce the total cost of
    purchased products and services by fully leveraging the
    University’s combined purchasing power, without
    compromising quality or service.
•   Up to 41 Business Units
       10 Campuses
        5 Medical Centers
        3 National Laboratories
       23 California State Universities
                 Total Cost Approach
                 Achieve Best Value
Tip of the Iceberg            Total Cost
Purchase Price                • Transaction / Admin Cost
                              • Delivery, Freight, Handling, Set-Up
                              • Implementation Cost
                              • Communication/Marketing
                              • Training
                              • Cost of Non-Conformance (Quality)
                              • Maintenance, Warranty, Parts
                              • Yield, Useful Life, Consumables
                              • Inventory, Shelf-life, Waste
                              • Disposal, Scrap
                              • Risk, Liability
       Strategic Sourcing Process
Traditional Purchasing                       Strategic Sourcing
 Focus on tasks                        Focus on process performance
 Function isolated                     Alignment with stakeholders
 Reactive                              Proactive
 Insular, static                       Total cost framework
 Unit price based                      Diverse sourcing strategies
 Adversarial supplier                  Create collaboration, trust
  relationship                          Suppliers as a key resource
 Win/lose                              Preventive measures
 Corrective Measures                   Fit for purpose
 Undefined standards                   Value driven (e.g. lowest cost per
 Lowest price - price driven            quality point)


     Strategic Sourcing is a process rather than a series of activities
Strategic Sourcing Methodology
  This must be a joint effort between purchasing departments
  across the UC system and our internal stakeholders
  • Project Plan and Scope       • Stakeholder Requirement        • Sourcing strategy
    determined                     sessions conducted               developed and                   • Negotiation strategy
  • Resource Commitment          • Existing contracts summary       communicated                      document developed
    Obtained (people,              produced                       • User adoption strategy          • Meetings/Negotiations
    dollars, etc..)              • Requirements weighting           and implementation plan           with finalists
  • Kick-Off Meeting               sessions conducted               developed                       • Agreements signed
    Conducted                    • UC requirements published      • Initial cost/benefit
  • Team members                                                    analysis developed
    identified




       Launch           Develop           Determine        Conduct         Develop          Evaluate &                        Implement
                                             UC                                                               Negotiate
      Sourcing           Spend                              Market         Category           Select                          Solution and
                                                                                                             Agreements
        Team            Analysis         Requirements      Analysis        Strategy         Suppliers                         begin SRM




             • Analyze total spend by          • Complete pre-bid              • RFP developed /                 • Implementation team
               Category and Location             industry analysis               distributed                       assigned
               and determine percent           • RFI developed /               • RFP responses                   • Implementation plan
               that is “sourceable”              distributed (if needed)         evaluated and scored              finalized
             • Document historical             • Supplier responses to         • “Short list” of finalists       • Implementation
               purchases                         RFI evaluated                   selected                          completed
             • Develop current TCO             • Final market analysis                                           • Ongoing SRM plan
               for each Location                 published                                                         created and
             • “Quick Hits” identified                                                                             implemented
Strategic Sourcing Opportunity
  • University of California
    – $7.0 Billion paid invoices
    – $2.5 Billion construction
    – $4.5 Billion of opportunities


  • $100 Million Commodities
    – Office Equipment and Supplies
    – Laboratory Supplies
    – IT Hardware / Software
     Strategic Sourcing Goals
• Maintain or increase product and service quality
• Leverage UC buying power through strategic
  alliances
• Create more efficient procurement processes
• Educate the UC community
• Determine the appropriate product distribution
  system
• Demonstrate significant on-going cost savings
• Meet our service and community standards
  (Sustainability, Small/Disadvantaged businesses, etc.)
                 Channeling
• VWR Implementation YTD January to July 2005

    Campus      YTD 2005     YTD 2004      ∆%
  Berkeley      $ 581,295    $ 418,962    38.7%
  Los Angeles   $1,628,382   $1,088,067   49.7%
  San Diego     $ 993,908    $ 723,884    37.3%

   Average Growth: 41.9%

  San Francisco $ 891,566    $ 783,345    13.8%
      Automate Payment

• UCSF processes ~ ½ million vouchers
  – Federal Express: 27,815
  – Arrowhead: 6,256
  – Verizon: 8,983
                                        ROCE Example
                                            Sales
                                          $5,000,000
                            Labor
                           $700,000
                                             Minus
                                                               Net Income
Operating Cost Elements




                                                                $400,000
                                         Cost of Goods
                           Materials                                              Profit
                                              Sold
                          $2,300,000                                              Margin
                                           $3,800,000           Divided By
                                                                                    8%
                                             Plus
                                                                 Sales
                          Overhead                             $5,000,000
                          $800,000        Other Costs
                                           $800,000

                                                                                             Return On
                                                                             Multiply       Investment
                                                                                               10%
                          Inventories
                          $500,000                          Sales
                                                          $5,000,000
                                         Current Assets                           Asset
                                           $1,100,000      Divided By            Turnover
                          Accounts
                          Receivable                                               Rate
Assets




                           $300,000           Plus        Total Assets             1.25
                                                           $4,000,000
                                          Fixed Assets
                             Cash          $2,900,000
                           $300,000

								
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