The CFO’s Guide to Increasing ROA

Gain Visibility and Control to Synchronize

Operations and Increase Valuation

JANUARY 2013

2 The CFO’s Guide to Increasing Return on Assets

Table of Contents

Introduction ................................................................................................ 3

Need for a Better Approach......................................................................... 4

Flexibility to React and Change for Financial Gain ....................................... 5

Compelling Case for Investment.................................................................. 6

Improve Return on Assets (ROA) ...........................................................................6

Compress Order-to-Cash Cycle Time ....................................................................6

Reduce Idle Inventory and Improve Tracking Accuracy ..........................................7

Risk Management..................................................................................................7

Improve GRC (Governance, Risk & Compliance) Capabilities ................................7

Empowering Finance with Operational Details ............................................. 9

Conclusion ............................................................................................... 11

About Apriso Solutions.............................................................................. 12

About Dassault Systèmes & DELMIA ........................................................ 12

© 2009, 2010, 2011, 2014 Apriso Corporation This white paper, the software described in it, and other program materials are copyrighted works of Apriso Corporation, with all rights reserved. Trademark Information Apriso and FlexNet are registered trademarks of Apriso Corporation.

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3 The CFO’s Guide to Increasing Return on Assets

Introduction

Chief Financial Officers (CFOs) and other financial management executives are tasked with a

myriad of leadership roles. Beyond responsibility to ensure timely, accurate financial reporting,

maintaining financial regulatory compliance and securing access to capital, these professionals

are increasingly participating in the accountability of improving return on shareholder

investment while meeting growth and earnings targets. These tasks require new skills and

supporting systems to provide the visibility needed to better understand operations, while

having the flexibility to change processes for improved productivity and planned future growth.

In order to achieve success, finance executives must understand their business well beyond

financial statements – they must know what drives growth for the business and leverage this

knowledge with the operational intelligence needed to increase profits. Clearly, more time and

effort must now be invested in forging relationships with operations managers and leveraging

systems that provide the visibility, control and synchronization of manufacturing operations.

This timely knowledge of operational performance is imperative for providing advice to senior

management on broad, strategic operational issues while leading change to gain cost savings

and drive positive return on assets.

Of course, this is more easily said than done. Few financial executives are equipped with the

domain knowledge and detail of manufacturing and supply chain operations – this is a skill set

well beyond the traditional core of financial management. Yet, these activities ultimately

determine the productivity and effectiveness of capital investment and asset utilization

including the:

Level of available capacity for sales and marketing commitments

Risk associated with quality and compliance impacting cost of goods sold (COGS)

Credibility during critical times such as natural disasters, financial crisis and major recalls

Use of property, plant and equipment by operations and its impact on ROA and ROIC

Further, these activities directly impact a company’s reputation and brand equity, driving the

need for a balanced scorecard and dashboard performance reporting.

Today’s financial leaders must embrace these expanded responsibilities by investing time,

resources and effort into improving operational visibility so as to gain operational insights and

intelligence. These actions can impact future profitability, positive return on investment and the

generation of above market returns and shareholder value while reducing borrowing costs.

Visionary leaders are actively participating in operational performance improvement efforts by

extracting greater value from corporate assets, driving continuous improvement and attaining

better operational insights for smarter risk management.

4 The CFO’s Guide to Increasing Return on Assets

Need for a Better Approach

Most CFOs and their teams have already invested considerable time and effort in

understanding operational performance by implementing Enterprise Resource Planning (ERP)

systems. This approach has enabled centralized control and reporting – establishing a “single

source” of the truth – which became paramount in addressing Sarbanes-Oxley regulatory

requirements while better understanding performance of the business as a whole.

Implemented as a system to ensure consistent reporting and measurement, the goal for ERP

was spot on – identify opportunities for improvement while ensuring accurate, timely reporting

of financial results.

Unfortunately, for today’s global manufacturer the vision of ERP has fallen a bit short, due in

part to the fact that ERP is a transactional system. It was designed to record data as

transactions occur. This logic works well for purchasing, shipping and receiving orders, but it

doesn’t bode well in capturing the detail necessary for visibility, control, and synchronization of

complex operations.

To start, the volume of data that is collected, processed and distributed throughout

manufacturing is significant. This can create a challenge for ERP systems to manage, due in

part to their centralized architecture as well as the sheer quantity of records that can cause

latency. What this means is that ERP can’t function with the timeliness needed for CFO’s and

their teams to take corrective actions before an operational issue explodes into significant

financial loss. And, for manufacturing activities, which are often treated by ERP as a black box

with no visibility to work-in-process, machine efficiency, root cause of quality issues or operator

performance centralized ERP systems are at a significant disadvantage.

A new approach is needed that can provide oversight of the volume of activities that make up

manufacturing operations. This new approach must deliver a deeper level of understanding

into operations so performance observation and improvement can be more realistically

achieved.

5 The CFO’s Guide to Increasing Return on Assets

Flexibility to React and Change for

Financial Gain

Next generation manufacturing operation management solutions function as a “layer” between

ERP and the automation control systems, which is made up of machines and equipment

running on the shop floor. This solution is an ideal complement to ERP by providing the

capability to effectively collect and aggregate the data and intelligence necessary to model

plant operations and identify opportunities for performance improvement.

Leading manufacturing operations solutions embrace embedded Business Process

Management (BPM) architectures to provide the benefit of greater flexibility and ease frequent

process improvements. Such flexibility is critical to gain the process flexibility needed by

operations to react to business changes while collecting critical operational data to support

financial decisions in near real-time. This strategy is quite different from the typical “change-

the-process-to-fit-the-system” approach.

Couple these capabilities with processes that can be standardized on a multi-site basis, as is

the case with today’s operations management systems, and it becomes clear that these

solutions become quite powerful and valuable for both operations managers and financial

executives viewing operational performance on a global scale. In effect, a closed loop can be

established for continuous improvement where feedback from both financial and operations

management can be shared and improved upon resulting in a highly collaborative, social

approach to performance improvement. This type of environment can be quite conducive to a

“whole that is greater than the sum of its parts.”

A closed loop can

be established for

continuous

improvement where

feedback from both

financial and

operations

management can

be shared and

improved upon

resulting in a highly

collaborative, social

approach to

performance

improvement.

6 The CFO’s Guide to Increasing Return on Assets

Compelling Case for Investment

Let’s look in further detail at the financial benefits possible from an operations management

layer in complement to your existing ERP. Beyond adding visibility and flexibility to implement

greater process improvement, this approach can improve efficiency and performance across

the entire business, paying significant dividends for many years to come.

Improve Return on Assets (ROA)

Regular process improvements conducted across operations have a direct impact of

increasing the efficiency and effectiveness of how plant assets are utilized. A common

measure of plant asset utilization is Overall Equipment Effectiveness (OEE), which is a

composite KPI that incorporates quality, availability and performance of critical machines.

Case Study: Global cosmetic giant, L’Oréal, leveraged their next generation

manufacturing operations management system to achieve a 10 percent improvement in

their OEE across 20 plants in just two and a half years. This accomplishment was

recognized by their winning an award for operational excellence at the 2010 European

Manufacturing Strategies Summit.1

Case Study: Global Advisors, a strategy and management consulting firm that draws

upon a network of experts from around the world, completed a market study to measure

how ROA can be improved with greater equipment efficiency. According to their

research, a 10 percent reduction of downtime plus a 10 percent improvement in OEE

(exactly what L’Oréal achieved) and a 5 percent reduction in scrap will have the effect of

almost tripling ROA.2

Compress Order-to-Cash Cycle Time

As is the case in nearly any industry, the faster a production, sales or renewal process

can be completed, the faster cash can be collected. The faster continuous process

improvement initiatives can be implemented, the faster improvements are made and

cash can be generated. Other examples include performance improvements to

accelerate production processes, reduce waste or compress end-to-end cycle time and

lead-time, each major parts of the order-to-cash cycle. Shorter cycle times can result in

reduced work-in-process inventory, not only a reduction in cash requirements, but also

impact to customer satisfaction and future sales. A manufacturing operations solution

also contains the details and intelligence behind “value-add” versus “non-value-add”

time, enabling lead-time reductions through Lean and Six Sigma initiatives.

1 “Apriso Customer L’Oréal Wins Awards for Operational Excellence at European Manufacturing

Strategies Summit,” November 30, 2010;

http://www.apriso.com/company/news/press_releases/2010/Nov_30_2010_LOreal_awards.php?mgs1=d07a2MHge1

2 “Improving ROA in manufacturing with utilization,” by Blake Cuningham, December 9, 2011;

http://www.globaladvisors.biz/fast-facts/20111209/181838/.

A 10 percent

reduction of

downtime plus a 10

percent improve-

ment in OEE (exactly

what L’Oréal

achieved) and a 5

percent reduction in

scrap will have the

effect of almost

tripling ROA.

7 The CFO’s Guide to Increasing Return on Assets

Reduce Idle Inventory and Improve Tracking Accuracy

A comprehensive manufacturing operations solution can track and manage inventory at a

highly granular level, allowing you to identify and monitor status by container and bin location if

needed. This level of detail is key to improving inventory accuracy and reducing waste,

essential components of Lean and Six Sigma programs. By automating inventory throughput,

material can be better synchronized with production and market demand, resulting in reduced

idle inventory by as much as 30 to 70 percent, significantly improving working capital.

Case Study: Medical device manufacturer, Becton Dickinson, reduced inventory by 60

percent, which freed up 96,000 square foot of floor space, where another production line was

deployed after successfully implementing a next generation manufacturing operations

management solution.

Risk Management

While risk can never be completely avoided, significant risk reductions can reduce cash

outflows over time. A manufacturing operations solution reduces quality and reliability

risk by improving product traceability and containment. Less scrap and rework offers a

significant opportunity to improve COGS. Defective parts that skipped through quality

assurance and testing processes can lead to not only significant recall and warranty

costs, but also to reputation damage and negative brand equity. Any one of these

disruptions can hurt future revenue opportunities or even jeopardize the business as an

ongoing concern.

Case Study: Engine and powertrain manufacturers GM and Cummins both implemented

solutions for manufacturing operations to improve traceability and containment on a

global scale. Both of these companies now offer some of the best warranty terms for their

powertrains, which provides them a strategic differentiator in their respective markets.

Case Study: Hi-tech manufacturer Ricoh and spark-plug manufacturer NGK have each

implemented next generation manufacturing operations solutions to help better monitor

supplier and outsourced production processes. With improved visibility and control over

these operations, these manufacturers have found a way to reduce the risk associated

with external production, on time delivery and performance.

Improve GRC (Governance, Risk & Compliance) Capabilities

A key to cost effectively maintaining regulatory compliance is process automation and

manufacturing execution consistency. Audits are more readily completed and approved

in direct proportion to the level of process automation a manufacturer has. Next

generation manufacturing operations management solutions are capable of delivering

electronic batch records, provide tighter traceability within and across plants, support

Medical Device

Manufacturer,

Becton Dickinson,

reduced inventory by

60 percent, which

freed up 96,000

square foot of floor

space, where

another production

line was deployed

after successfully

implementing a next

generation

manufacturing

operations

management

solution.

8 The CFO’s Guide to Increasing Return on Assets

reusable business processes across operations allowing for faster, more automated

response to customer escalations and recalls.

Case Study: Medical device manufacturer, Becton Dickinson, implemented their

manufacturing operations solution to help meet FDA requirements. Phillip Morris International

(PMI) and British American Tobacco (BAT) each implemented solutions in order to tighten the

tracking and traceability of their production processes and product delivery. By assuring proper

principality tax commitments are met per product shipped, these manufacturers are avoiding

paying excess tax. In addition, tight product tracking and traceability is helping them combat

product counterfeiting and black market distribution, a major risk concern throughout the

tobacco manufacturing industry.

9 The CFO’s Guide to Increasing Return on Assets

Empowering Finance with

Operational Details

In addition to the above direct operational benefits, operations management solutions are

being used by many manufacturing companies to provide almost real-time monetary value

feedback to operations. This feedback can not only improve the awareness of underlying dollar

impact on decisions made by managers, but also serves to change behavior patterns of

workers leading to significant cost reductions. Here are some examples of accounting

frameworks that can be enabled by an operations management solution.

Piecework system – One of the most famous Harvard Business Case studies is on Lincoln

Electric’s piecework system, where workers’ wages are paid according to fixed rate times for

the number of pieces manufactured. At Lincoln, all production activities are measured against

a set of standard activity cost. For example, the standard times in a production routing are all

measured by a unit called the “Lincoln Dollar” instead of the more common minutes and

second measurement. Through this piecework system, Lincoln Electric has been able to

develop a work culture of self-motivated continuous improvement. Operators tend to work

outside of their regular paid hours on improving their own efficiency. Lincoln has been quoted

as one of the most successful American manufacturing companies and its system has been

widely studied as a model. Lincoln Electric is using a manufacturing operations management

solution at its core to track detail production activities and labor hours that enable the

piecework system.

Pseudo Micro-Profit Center Accounting –Pseudo Micro-Profit centers is a popular

accounting method used by German companies. In this case revenue streams are being

assigned to micro-profit centers which can be a production line or a machine. The challenge in

using ERP to realize this type of accounting is in gathering detailed activity information from

machines and worker activities. This is especially difficult in a Lean manufacturing environment

where workers of multiple skills or flexible machines and equipment can be assigned to

different work cells and hence different profit centers during different hours of the day. Here

operations management solutions can track variable cost in a precise manner.

Lean Accounting – As a counter movement to activity-based costing, Lean accounting has

been receiving increasing attention in recent years. Lean accounting reflects what is

happening in operation and hence drives improvement goals better than traditional accounting,

which tends to hide the real story behind complex cost allocation. A typical Lean accounting

report compiles KPIs such as delivery performance, capacity, first-time through quality, lead-

time, utilization and typical profit and loss items and aggregates by value-stream. Such detail

operational information at the value-stream level is not supported well by most ERPs.

10 The CFO’s Guide to Increasing Return on Assets

Manufacturing operations management systems can not only support Lean accounting reports

but also can allow drill down to the next level of value-added and non-valued activities to drive

Lean and six sigma improvement initiatives. When a manufacturing operations solution is

standardized across the enterprise, the detailed value stream analysis provides insight for

operational improvement through bench-marking comparison of multiple facilities. Such global

operational detail would also enable holistic scenario analysis, such as figuring out the

financial and operational implications when deploying the same value stream in another

country, and/or in support of make or buy decisions.

11 The CFO’s Guide to Increasing Return on Assets

Conclusion

In today’s interconnected world, stockholders, investors and the capital markets are making

frequent, rapid decisions about the position and valuation of companies in the marketplace. No

one understands these dynamics more than the CFO and her/his departmental team. Given

the incredible competition for scarce resources and capital for investment, financial executives

that can step out of their traditional oversight role to partner with operations managers have

found themselves in a strategic position to lead.

While traditional ERP systems have helped to increase reporting standardization and

accuracy, their role is limited in providing the timely, detailed intelligence of complex operations

needed to gain visibility, control and synchronization of operations across the enterprise.

In the same way that ERP set a new standard in the CFO’s office, manufacturing operations

management systems are now making the same impact by removing the reliance on disparate

systems, multiple spreadsheets, paper reports and hear-say from operations to make smart

financial decisions. Complementing ERP with an operations management solution can provide

the insight needed to bridge the gap between operations and finance providing critical and

timely inputs to the process of managing external expectations, ultimately determining the

market valuation of the business.

12 The CFO’s Guide to Increasing Return on Assets

About Apriso Solutions

Since 1993, some of the world’s largest and most successful manufacturers have leveraged

Apriso software and services solutions to ease the challenges of global manufacturing

operations management. With Apriso, manufacturers can improve organizational agility so as

to adapt more quickly and effectively to change. This agility enables firms to take advantage of

new market opportunities by delivering the right product at the right time for the lowest total

cost. Manufacturers choose Apriso to help manage today’s manufacturing transformation of

thinking global while acting local.

Apriso software solutions have won numerous awards and accolades for their ability to tightly

synchronize global manufacturing operations and supply chain networks to deliver real-time

visibility, control and synchronization of business processes performed across plants and the

product supply network. Leverage an Apriso solution to establish a common set of operational

standards that can be managed holistically on a global scale while still being continuously

improved to meet your local market and customer needs.

Apriso Corporation was acquired by Dassault Systèmes in July 2013, and is now a product

portfolio within its DELMIA brand. Apriso products and solutions provide a connection between

the virtual world of digital manufacturing and the real world of manufacturing production.

About Dassault Systèmes & DELMIA

Dassault Systèmes, the 3DEXPERIENCE Company, serves 170,000 customers across 140

countries, providing virtual universes for sustainable innovation. Dassault Systèmes’ DELMIA

brand offers products that connect the virtual and real worlds. As part of DELMIA, the Apriso

product portfolio – including its suite of manufacturing operations management applications –

helps manufacturers transform their global operations to achieve and sustain operational

excellence. Learn more at apriso.com, visit our blog at apriso.com/blog, or follow us on Twitter

at @Apriso..

www.apriso.com