2.2 Redesign customer interactions and supporting processes to serve high-value customers

2.3 Train, motivate, and organize human resources to support the customer-driven mission

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Canadian Manufacturing Profits Are Under Attack – Productivity Seen as Key to Resurgence

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Furniture Manufacturer (Estimated 15% lift in profitability)

15% to 25%Profitabilty Gains

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15% to 25%Profitabilty Gains

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CoreCoreProcessesProcesses

SupportSupportProcessesProcesses

Process TeamsProcess TeamsFocused OnFocused On

ValueValueCreation CriteriaCreation Criteria

Lenses Used to IdentifyLenses Used to IdentifyProcess ImprovementProcess Improvement

OpportunitiesOpportunities

PurchasingMarketing InboundLogistics

Manufacturing Sales Out boundLogistics

CustomerService

MaintenanceRepair

Human Resource Management

Financial Management

Information Technology Management

Facilities Management

ProductQuality

ServiceQuality

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Cycle TimeReduction

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Automate

Design ForManufacturing

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Design ForLogistics

Solution Benefit

Reduced the number of stock keeping units(SKUs) by 20%, and standardized the basic product platforms within given product categories

• Reduced inventory by 22%

Eliminated the top three product related warrantyissues

• Reduced warranty expenses by 40%

Automated labor intensive production activity thatwas experiencing production variability problems (product coating)

• Reduced cost of goods sold by 15%

Redesigned the product to better accommodatestorage, pick, pack, and ship activities

• Reduced material handling costs by 20%• Reduced product damage expenses by 15%

Developed a problem recognition/resolutionsystem for the Call Centre service representatives

• Increased customer satisfaction ratings, contributed to significant increase in repeat purchasing

Consumer Products Distributor (Estimated 25% lift in profitability)Solution Benefit

Increased the quality and relevance of new product development through the integration of suppliers and customers into the process

• Experienced significant increases in revenue from new products• Significantly reduced the number of new products with poor sell through

Developed an on-line store front for customer purchasing and product information

• Increased sales by 15%

Reduced overall inventory levels by 25% and reduced the inventory replenishment lead timeby 35%

• Reduced inventory by approximately 20%

Reduced pick, pack, and ship costs and time through bar coding and product positioning within the warehouse

• Reduced material handling costs by 35%

Used third party warehousing to serve secondary markets

• Reduced warehousing costs by 20%• Increased revenue by 10% through sale of land and buildings

Direct Marketing Advertising Agency (Estimated 20% lift in profitability)Solution Benefit

Restructured the organization from a functional based design to an account based structure,which served to better understand client needs,reduce delivery cycle times and labor and material waste

• Increased the average account recovery rate from 66% to 85%• Reduced the number of lost accounts from 4 to none• Significantly reduced material waste, benefits unknown

Introduced a performance management systemthat significantly increased productivity and employee satisfaction/retention

• Increased the utilization rates on average by 15%, from 65% to almost 80%.• Reduced employee turnover by 20%

Rationalized external production suppliers andestablished service level agreements

• Reduced the cost of third party production suppliers by 15%• Reduced production turnaround cycle times by 20%

Exited the bottom 10% least profitable accounts • Reduced costs-to-serve by approximately 20%

When one stops to consider the potential profitability impact of the “BIG 3” factors for manufacturers:

• A 10% profit reduction off the bottom line on all sales into the U.S. as a direct result of the increased value of the Canadian currency against the American dollar.

• A 10% to 25% reduction in sales margin for all direct sales into Wal-Mart coupled with an increased cost-to-serve because of rigorous service level agreements and category

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management competencies.

• A 10% to 50% reduction in sales margin on all sales that directly compete with Chinese manufactured products.

In the face of such profit pressures, it should not come as a surprise that many Canadianmanufacturers are facing profitability reductions of more than 10% or 20% depending onthe degree to which each of the “BIG 3” factors negatively affects their business. In response,Canadian manufacturers must capture productivity improvement gains in an effort to regaintheir historic levels of profitability.

Using Transfer Pricing to Increase Your Competitive AdvantageIn the winter 2004 issue we presented a framework of the transfer pricing rules in Canada.While transfer pricing is generally seen as something a business has to worry about, it can actually provide opportunities for Canadian companies that are spreading their wings intoforeign markets. As is discussed elsewhere in this newsletter, this includes supplying U.S. retail giants such as Wal-Mart, and both importing from and exporting to China.

Reading the title to this article you may be wondering “how can transfer pricing increase my competitive advantage?” The answer lies in the general principal that transfer pricing rules theworld over try to accomplish which is to compensate each related party for its contribution.

Now how can this be used to your benefit? Consider a Canadian company we’ll call “CanCo”who sets up a sales subsidiary in the U.S., called “SalesCo”. Transfer payments might be made to SalesCo to compensate it for selling CanCo’s products. Generally, Canadian corporate tax rates are higher than those in the U.S. By retaining a profit on the ultimate sale, say toWal-Mart, in a U.S. corporation, it may be possible to reduce the effective global tax rateexperienced by the shareholders. It may also result in a reduction in import duties paid to theU.S. on importation of product since the value for duty may be reduced to the inter-company sale price from the sale price to the end customer.

Or, it could be more complex – CanCo sets up a subsidiary in a tax haven such as Barbados toprocure products manufactured in China, for sale in the U.S. by SalesCo, so that the products never touch Canadian soil. The subsidiary is compensated for the procurement services and the related profit escapes tax in both Canada and the U.S. Still, tax authorities in Canada andthe U.S. will want to ensure that the fees charged meet the arm’s length standard.

It is best to do your homework in advance to establish what the market rate for the products or services being transferred, where should the non-Canadian entity be established, and whatrestrictions could foil your plan.

Establishing market rates is the most difficult task. A starting point may be checking priceson the open market, through the relevant trade associations who may publish accepted prices, and by determining the costs involved in producing the product or service. Documentationis a big part of being able to demonstrate due diligence (see the documentation requirements described in the winter issue article).

Selecting the jurisdiction to incorporate the foreign affiliate requires a careful analysis of the current activities of the organization and crystal ball gazing. Given the cost of implementing the strategy you do not want it to be obsolete shortly after as new markets are entered or possibly discontinued. One also has to consider how the introduction of the new entity will impact on the business of the organization. This can be a significant factor in deciding where to set up shop. For example, establishing your Asian procurement corporation in Ireland, while possible tax effective, may not make sense for selling into the U.S.

One might think why concern myself with establishing the foreign entity for sales to my

Assurance/Tax Planningand Compliance

Canadian Manufacturing Profits Are Under Attack – Productivity Seen as Key to Resurgence was authoredby Brian Joffe. Brian is a Partner in Fuller Landau’s Assurance Services Group. To contact Brian directly, pleasecall (416) 645-6516 or email bjoffe@fullerlandau.com.