1.Identifying the top 2 to 3 biggest issues with NikoTech’s operations.2.For each issue please identify:a) Its causesb) Process improvement tools used to uncover themc) Actions taken (or recommended) to fix the issuesd) Any results obtained (when applicable)e) How the issue manifested itself in the financial statements.The case information will be attached below. One of the issues is Net income grows disproportionately to sales. Please find 2 more and answer the questions above. Just short answersMEASURING RESULTS:
Given the complex nature of international supply chains, the metrics chosen to
measure financial performance must converge on revenue, profitability, produc-
tivity, asset utilization and cash flow. Of equal importance, tools that are ca-
pable of exposing the cause-and-effect relationships between financial outcomes
and areas such as sales, landed costs, lead times and inventory management
must also be employed. Because financial performance has the last word on
supply chain execution, the methodology for identifying causal relationships
should be a diverse exercise that focuses on the elements of time, variance,
utilization and profitability. Applying different techniques to period-specific
figures puts supply chain execution in the crosshairs of management, allowing
managers to make decisions based on a variety of information and angles.
For better or for worse, many stockholders, institutional investors and creditors
base their evaluation of a company on its short-term, period-specific financial
results. In fact, judging by how most senior executives are compensated (quar-
terly or yearly bonuses linked to net income), the same could be said about how
those same organizations gauge their own performance.
Because companies are measured in the short term, the natural inclination
of most management teams is to focus on results found on the income statement.
There is no question that the income statement provides valuable information
on sales, cost of goods sold, general, sales and administrative expense and net
income. Also, many cause-and-effect relationships can be spotted between in-
dividual line items and areas like velocity, productivity and variance. However,
it is the same short-term nature of the income statement that may cause man-
agers to lose sight of longer term considerations. Strict profit-and-loss manage
ment is more reactionary than strategic, with decisions that impact the future
of the organization based on last month’s results. The supply-chain-oriented
manager realizes that outcomes on the income statement are a function of what
is found on the balance sheet. After all, it is investments in plant, equipment
and inventories that make sales possible, right?
Depending on one’s philosophy of business, a fair rebuttal to the preceding
statement would be that market demand and sales are what generate the need
to create manufacturing capabilities. While this is a reasonable statement to
make, what should be observed is that recognition of the validity of both
statements implies a cause-and-effect relationship that cuts both ways. A com-
pany cannot generate sales without assets, but there is no need for assets
without sales. This is an interesting paradox, yet one can be certain that it is
the combination of asset management, profit-and-loss considerations and cash
flow that moves businesspeople from reacting to monthly results to managing
an enterprise
It is for the above reasons that the following case study will begin with an
analysis of asset velocity and utilization, followed by an in-depth look at the
balance sheet itself. Many cause-and-effect relationships will be uncovered,
setting the stage for study of the income statement and the additional causal
relationships found there. Once the reciprocal links between net income and
balance sheet investments are established, a comprehensive breakdown of the
cash flow statement will be presented. The financial epicenter of any organi-
zation, the cash flow statement unites the short-term concerns of profit and loss
with the longer term, strategic issues faced by any company.
Throughout the entire case study, techniques and tools will be introduced
that isolate problems, reduce variation, increase productivity and goose supply
chain velocity. Completing the circle, all supply chain initiatives are intended
to filter up to results on the balance sheet, income statement and most impor-
tantly, the cash flow statement
The best way to validate the points made thus far in the discussion is by means
of a case study. However, if one is to substantiate these ideas while recognizing
the difficulties of operating internationally, care must be taken in choosing the
industry and business model that best portray reality. In seeking an industry
with a scope of operations that spans product concept to final delivery, the
electronics manufacturing services (EMS) industry offers the best illustrative
EMS companies, or contract manufacturers, assume the manufacturing pro-
cesses of their customers, taking on such traditional functions as sourcing,
purchasing, materials requirements planning and production. Because contract
manufacturers operate a production model with sites in multiple countries, they
are constantly working to integrate the importation of raw materials with the
export of finished goods in a timely and profitable manner. Given that the entire
model is founded on the outsourcing philosophy, supplier management also
plays an integral role in the success of a company.
This model creates supply chain matrices that are influenced by variables
such as labor costs, currency fluctuation and multi-lateral trade agreements.
These elements of the business, coupled with the fact that most contract manu-
facturers operate in the highly volatile technology and telecommunications arena,
make EMS the best candidate to use in a supply chain analysis case. To bring
the story to life, analysis will center on a fictitious, U.S.-based contract manu-
facturer, NikoTech, Inc.
NikoTech was founded in 1984 by two high-level executives from the elec-
tronics manufacturing sector. With headquarters in San Diego, California and
a maquiladora operation just over the border in Tijuana, Mexico, the company
started out as an assembly operation catering to the high-tech industry. As
outsourcing became more popular and NikoTech evolved into a full-blown
NikoTech was founded in 1984 by two high-level executives from the elec-
tronics manufacturing sector. With headquarters in San Diego, California and
a maquiladora operation just over the border in Tijuana, Mexico, the company
started out as an assembly operation catering to the high-tech industry. As
outsourcing became more popular and NikoTech evolved into a full-blown
manufacturer, the company expanded operations to Hungary, China and Brazil.
From its origins in Mexico, NikoTech continues to adhere to a build-to-order
production model. The company currently works with 350 raw materials sup-
pliers around the world (65% in Asia) and has six global customers that rep-
resent 70% of total sales.
NikoTech rode the wave of growth in the tech sector through the late 1980s
and early 1990s, setting up production just in time for the onslaught of demand
in telephony and computers. The combination of expanding product families
and insatiable demand brought on explosive growth at NikoTech in its early
years, with sales reaching the $1 billion plateau well before the turn of the
century. To date, NikoTech offers 150 SKUs in four product families: cellular
phones, laptops, desktops and routers. Still a small player by industry standards,
NikoTech has been able to achieve respectable year-to-year sales growth through-
out its history.
When the tide went out on the tech boom, NikoTech saw many of its long-
hidden operational challenges exposed. Explosive growth sometimes causes
companies to bury problems under a mountain of cash, and NikoTech was not
an exception to this phenomenon. By the dawn of the new millennium, man-
agement found itself in a position where revenues continued to grow, but prof-
itability was shrinking every quarter. The sales orders were there, but cost of
goods sold was outpacing sales growth, and inventories were completely out
of control. If current trends continue, the NikoTech founders estimate that the
company will be losing money within 18 months.
Recognizing the serious nature of their predicament, management formed a
multi-functional team to analyze all facets of the business, beginning with the
financial results for the two most recent years (Y1 and Y2). The balance of this
book details what was found.
The income statement, balance sheet and cash flow statement in Tables 11.1,
11.2 and 11.3, respectively, are a reflection of the most recent two-year (Y1 and
Y2) performance of the organization. To aid the analysis, 17 different ratios and
calculations that will assist in evaluating Niko Tech’s financial health are listed
in Table 11.4. Table 11.5 provides the Y1 and Y2 results of those ratios. All
figures from the balance sheet, income statement and cash flow statement have
been consolidated and simplified for ease of calculation. Based on a calendar
year, the most recent year’s balance sheet figures are interpreted as being
indicative of the average figures for the preceding four quarters. To facilitate
the study, it is recommended that the reader make a copy of each report the

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