Foreword The purpose of this Handbook is to provide NOV’s DSC Managers with a quick reference guide on what business measures to look at and explain how those measures impact business performance. The Handbook brings together how monitoring and tracking Business Processes, Monetary Assets, Customer Service, Human Capital and the Sales Engine ties into meeting the Financial Plan. The book is divided into six sections on those lines. The style of presentation is intentionally kept easy and light, with an emphasis on explanations in layman’s terms. The target audience is you, if you are an individual who is responsible for a P&L in NOV’s Distribution Services organization. The Handbook has been custom-designed and fool-proofed to ensure that you stay out of trouble with your supervisor! As side benefits, it can also be used to swat the occasional bug, practice juggling in combination with another book (or 2 or 3 – if you’re really good), and even as a (rather light) paperweight. If you have been in your role for many years there will be few things new to you, however it will still be a handy reference. If you are new to this organization the Handbook provides an excellent overview of the key components to pay attention to, in order to ensure superior customer service, and the operational and financial health of NOV’s Distribution Services group.
Instructions – to review the reports A number of measures defined in this book are readily reviewed through SAP transactions or on the Balanced Scorecard: http://mynet.nov.com/BSC Many are already being emailed to you, on a monthly basis from the Corporate Office in Houston. Others may require downloading information from SAP and then performing further analysis (if you do not have access to the specific SAP transactions mentioned here, please contact your Area Process Coordinator to request on your behalf or extract and provide the information to you). Also, it is expected that shortly, all of these measures and reports will be available directly through SAP as a result of the Business Warehouse project being undertaken.
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Where to find what…
Page
01 02 03 04 05 06 07 08
Open Sales Order Review Unbilled Delivery Review Deliveries Created, Not Picked Deliveries Picked, Not Posted Open Stock Transfer Orders Open Purchase Order Review Sales Order Stock Balance Cycle Count Variance
06 08 10 12 14 16 18 20
09 10 11 12 13 14
Inventory Turnover Return on Stock Inventory Quality Ratio DOD Inventory Value MRP Evaluation Accounts Receivable Evaluation
23 25 27 29 31 33
15 16 17 18 19
Product Availability for Planned Items On-Time Delivery – By Customer Request On-Time Delivery – By DSC Commitment On-Time Delivery (Customer Says) Order Accuracy (Customer Says)
36 38 40 42 43
20 21 22
Training & Development Performance Feedback HS&E Requirements
45 46 47
23 24 25 26 27
Sales by Customer Review Sales by Commodity Review Stock, Buyout, ZNIP Proportions Low Margin Sales Market Share Measures
49 50 51 53 54
28 29 30
Comparison to Plan Financial Ratios Cash Flow from Operations
57 59 61
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© The New Yorker Collection 1998 John O’Brien from cartoonbank.com. All rights reserved
Overview DSC Manager’s Handbook
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The
6 core responsibilities
Distribution is conceptually a simple business. At the very basic level it involves a Buy-Hold-Sell strategy. As a result barriers to enter into the business tend to be low and competition severe, leading to tight margins. In such scenarios what separate financially successful ventures from the non-starters is (1) superior customer service and (2) building efficiencies into the supply chain. As a manager of one of NOV’s DSC facilities you are at the frontline in ensuring customers appreciate and experience the value we bring to their business. Keeping the customer delighted (happy would have worked in the last century!) while at the same time turning in exemplary financial performance is best achieved by managing the interrelated functions associated with your processes, assets, service, people and sales.
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It is vital to appreciate the interrelationships between these functions. You will be surprised (pleasantly) how being individually good at one of these functions naturally rolls you into a zone that makes you better at other aspects in your business. For example a higher Inventory Quality Ratio (see definition – page27) will result in more relevant stock, meaning a higher Turn Rate, which implies higher Sales from Stock, which translates into improved Customer Service, providing an opening to demand higher Margins and thus easier to make/beat your Financial Plan. It is this magic “Virtuous Cycle” – where one positive facet leads to another – the measures and reports here attempt to lead you to. The 6 functional areas are color coded in this book as below:
The list of measures covered in the Handbook is extensive. Two areas not covered, Sourcing (Supplier Management) and Logistics (Freight Management) are handled at the corporate/regional level because of strategic reasons and benefits from consolidation.
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Icons you will find in this book
The Bookshelf Here you will find a quick definition, basic explanation, a clarification to clear up a common misunderstanding or background as to why the industry tends to track this measure… ShortManWithPointyStick Like it or not, he will provide brief instructions on how to compile and review reports for the factors you should be keeping tabs on. ButttWhy?? Find explanation here as to why you should review this factor, how it impacts your overall business and consequently why it is important. TheStarOfTheShow Watch out for this icon!! Find out how the measure affects your customer. No question who’s in charge – your customer is next to royalty! Ready…Aim’n’Fire! Researched results (based on internal studies, external benchmarks and SOX requirements) on what acceptable ranges are and what targets should be. Also provides guidance on review frequency.
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Business Process Management Involves the tasks you would typically associate with Operations. Tasks that usually require efforts by your immediate staff – actions involved in efficiently moving material from the “source to sink” and all the events in between.
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01
Open Sales Order Review
Open sales orders are pending customer orders that remain to be fulfilled, in terms of waiting to be sourced from a vendor, physically delivered to the customer and invoiced OR picked from the shelf, posted out of inventory, delivered and invoiced… phew! Rest assured – that’s the longest sentence you’ll find in this book.
Details on all Sales Orders are available through SAP Transaction ZS_SO. To quickly view Open Sales Orders, run SAP transaction SP01. Key in your DSC code and execute the transaction. Open the spooled report with the naming convention YourDSCCode - - Date and download to a spreadsheet. Once in the spreadsheet it is recommended that you perform the following actions to review. 1. Sort Open Sales Orders in ascending order (oldest on top) by the Avail_date. Validate why the antediluvian (look up that word!) orders are still open. Make notes and follow up with the respective sales person to clear them. 2. Review Sales Orders close to the date promised to the customer, and inform the customer of possible delays, if any. The promised date is the date entered as the First Date in the Sales Order. Metric: Calculate the average age of Open Sales Orders. It is to be measured in days from the report run date.
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Reviewing purposes.
open
sales
order
serves
three
First, you are constantly working on correcting problems that hold up a customer from being invoiced. Second, this review over time helps you understand deficiencies in your supply chain and in many cases exposes “root causes� for those weak links. These could be the result of unreliable suppliers, inadequate freight forwarder performance, aggressive promising of delivery dates by your sales folks, customer regularly going on credit hold, or your location frequently running short of stock. And third, on potentially late orders (which should be avoided, but happens, often due to reasons listed above) following up with the customer before the customer calls helps you salvage some amount of goodwill and creates a far better impression. It is recommended, with key customers, a status report on all open items is emailed out on a bi-weekly basis.
The report is spooled daily in SAP. There are no targets defined. It is for review and follow up action only. Make sure the average age of open orders are within a reasonable range. Side Note: Averages can be misleading. A few really old sales orders can make your average seem bad. Use your judgment in excluding such outliers when you calculate the average age.
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02
Unbilled Delivery Review
An unbilled delivery is a sales order against which you have created a delivery ticket – meaning what remains is ensuring that you have completed physical delivery, obtained a POD (Proof of Delivery) and then gone on to invoice the customer. An unbilled delivery could also show up on your Open Sales Order report.
In SAP, execute transaction SP01 as before. Open the report named YourDSCCode – Unbilled Deliveries Report and download to a spreadsheet for further evaluation. Once in the spreadsheet, perform a review near similar to that for Open Sales Orders. 1. Sort all Unbilled Deliveries ascending (oldest on top) by delivery Created on date – and request reasons from your sales folks for aged items that remain unbilled. Keep notes and explanations to follow through for clearing. Metric: Calculate the dollar value of items past 30 days from Delivery Creation Date (for domestic locations) and 60 days (for international locations). Domestic refers to North American locations while International refers to locations outside of North America.
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Reviewing Unbilled Deliveries addresses issues quite different from those addressed by reviewing Open Sales Orders. The most important of which is working towards freeing up cash tied up in the business. Ask yourself – if you owned the goods, would you deliver and withhold billing for an extended period of time?! Also, it is not until we have invoiced the customer, that we can “recognize” Revenue for a sale. Do not leave catching up till the last few days of the month! Actively working on your Unbilled Deliveries right through the month will ensure that you are not short of Plan targets on Revenue and Margin towards the end of the month.
Some customers may require staging for freight consolidation etc, but outside of that for the Metric defined, the target is as below:
Domestic (past 30 days) International (past 60 days)
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Target $0 $0
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03
Delivery Created, Not Picked
In any distribution business the warehouse is the heart of the operation. So Doc, (yes, another cap you’ve got to wear!) you should periodically check on its well being. Most functions in our warehouse are quite manual – and without electronic enablement (say through bar-coding) – they seldom generate measurable aspects. However from a customer service perspective there are two measures you can and should look at. Deliveries Created, but Not Picked is one of them. Side Note: Receiving (which any decent book, including… ehmm… this one!! will tell you) is the most cardinal function in a warehouse. An error in goods receipt has a cascading effect into all subsequent actions. So without question keep your most experienced warehouse staff in the receiving function.
Run SAP Transaction SQ01, select user group DG. Select query Delivery_Pick, select the appropriate variant, enter your DSC Code and execute the transaction. In the resulting report, line items with codes ‘A’ (Delivery Created not Picked) and ‘B’ (Delivery Created partially Picked) in the OPS (Order Picked Status) column are of interest to us for this measure.
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Metric: Determine the average age of items with Deliveries Created, Not Picked. It is to be measured in days from the report run date.
The purpose of the measure is to find out whether your warehouse is in top shape when it comes to fulfilling customer requirements. Many a time sales personnel will promise delivery relying on the warehouse for follow through. Make sure there are no disconnects within your internal systems. It is often said that a supply chain is only as strong as its weakest link – don’t let it be your warehouse. It should be required that all deliveries be picked the same day they are created.
For the Metric defined, suggested target is as below. A quick periodic review, once a week, will suffice to determine whether your warehouse personnel are doing a great job.
Average Age in Days
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Target 1 day
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04
Delivery Picked, Not Posted
Deliveries Picked, but Not Posted is the second critical measure related to your warehouse efficiency that affects customer service. Items that were picked, but for some reason not posted. By carrying out “posting” we move the goods out of inventory in SAP. We commonly refer to posting as the PGI (Post Goods Issue) transaction.
As with previous, run SAP Transaction SQ01, select user group DG. Select query Delivery_Pick, choose the appropriate variant, enter your DSC Code and execute the transaction. Download the report to a spreadsheet for review. In this instance we are looking for line items with the designation ‘C’ (Completely Picked no PGI) in the OPS (Order Picked Status) column. Metric: Determine the average age of items Picked, but not Posted. This is to be measured in days from the report run date.
The simple, straightforward reason why items should be PGI-ed right away is to ensure that SAP reflects true inventory balances.
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A reason not readily appreciated is that it is only after PGI that an item counts towards consumption in SAP – and replenishment of your stock relies on historical consumption for forecasting and planning. Delay in PGI especially towards month end can result in your future forecast requirements being lower than what they should be. All aside, PGI takes you one step closer to physical delivery of goods to the customer… and then invoicing – required to inject cash back into your business. It should be required that all picked deliveries are posted on the same day they are picked.
For the Metric defined, suggested target is as below. A quick periodic review, once a week is sufficient.
Average Age in Days
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Target 1 day
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05
Open Stock Transfer Orders
Stock transfer orders (STOs) are requests to your DSC to move material to another one of NOV’s DSC facilities. Simplistically they can be thought of as internal purchase orders. STOs are created as a result of (1) a supply chain structured in a Hub – Spoke fashion (2) a need to utilize existing stock in the case of urgent requirements or (3) a surplus redeployment initiative (where we first look to “source” internally before buying from an external vendor).
Run SAP transaction ZP25 for your DSC to review Open STOs between particular dates. Open STOs are also available through spooled reports, under SAP transaction SP01. Look for the report Your DSC Code – Open Stock Transfer. Metric: Review Open STOs over 2 days old on a line by line basis. To be measured from the STO creation date. Side Note: Be discreet when running reports that start with transaction code Z (such as here) in SAP. They take considerable system resources to execute as opposed to spooled reports.
By not being aggressive on shipping STOs you are keeping another DSC Manager waiting and having to face a potentially upset customer.
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STOs as such are created with the expectation of a timelier delivery compared to external sources. Therefore your immediate action is expected as the norm. Always treat another NOV Distribution location with the same priority as you would treat your best customer. Reviewing the report lets you communicate back to the STO Creator if for some reason you cannot ship in the timeframe requested or you cannot ship, period. Maybe you have a potential or pending sale on the item, need it as a critical spare or your inventory reflected in SAP was inaccurate (correct A-SAP!). If you cannot ship, cancel the STO through mutual communication so that there is no ambiguity. Where possible assist the requesting location fulfill its requirement from an alternate source. Building a reputation as a timely and dependable facility creates goodwill within the organization.
Reviewing open STOs on a weekly basis is fine for the Metric, but it should be built into your process to fulfill these requirements within the target range below. If you service a central cross-dock facility you should aim for more aggressive targets as additional steps are involved, before goods reach their final destination.
Average Age in Days
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Acceptable 4 days
Target 2 days
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06
Open Purchase Order Review
Open Purchase Orders result from instances where we have “cut” an order to an external supplier but have not received the material as yet. Purchase orders are of two types. (1) Orders for Stock Material (these PO’s all begin with a ‘10’) and (2) Orders issued against and directly to fulfill a Sales Order, (also called Buyout PO’s – these begin with a ‘65’).
Run SAP transaction SP01, enter your DSC code and execute. Open the report named YourDSCCode – Open P.O and download to a spreadsheet. Perform the calculations below: 1. Every PO line item has a Delivery Date. Enter the report run date in a separate column and subtract from the delivery date. This will help to cull out the list of Late purchase order line items. 2. Divide the number of late PO line items by the number of open PO line items to obtain a %. Metric: Number of Purchase Order line items past Delivery (promised) Date divided by the Number of Open Purchase Order line items. Side Note: As a further step you may choose to calculate the average days late or % late by supplier for each of your suppliers. Where performance is sub-par use this information to have the necessary discussions with your supplier. And of course, do not forget to congratulate your best performers. DSC Manager’s Handbook
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Reviewing Open POs serve three purposes. First, by calculating the metric defined you are able to gain a good understanding of supplier reliability to meet promised dates. Second, by reviewing items on your Open Purchase Order Report, you are able to prioritize and expedite items with specificity from the supplier. Expediting is a functional reality of our business with clear impact on customer service. Third, as a result of the expediting function we are able to keep the customer most current on estimated delivery dates. The Open PO report is your clearest indication of what you have coming into your location and – dependent on reliable supplier lead times and freight forwarder performance – when. An often peripheral benefit is being able to add and delete items from existing POs to meet emergencies or change in business needs (if the supplier allows). SOX (Sarbanes-Oxley) requires that you receive into the system all items you have physically received without delay. Please do so. You will be audited periodically.
For the Metric defined, suggested tolerances are as below. Review monthly.
Late Purchase Orders DSC Manager’s Handbook
Acceptable 10%
Target 5% 17
07
Sales Order Stock Balance
Sales Order Stock as a term is quite confusing. Simply put, it is Inventory you have received (and hence on your books) that is committed against a Sales Order. The material is in “limbo” and sits in Sales Order Stock until you invoice the customer. Remember Sales Order Stock is a component of the Total Inventory on your Balance Sheet!
Execute SAP transaction SP01, key in your DSC code and download the report named YourDSCCode – Sales Order Stock to a spreadsheet. The report gives you line item detail of material in your Sales Order Stock. Side Note: Spooling is process by which reports are pre-run (and ready for download) in SAP so that less system resources are used when you want to access the information.
Metric: Determine the total Sales Order Stock value of items over 30 days (past 1st Goods Receipt) for Domestic locations and 90 days for International locations.
Items may sit in Sales Order Stock for a variety of reasons – including staging for freight consolidation, waiting for the full sales order to be complete before invoicing, being in-transit and with DSC Manager’s Handbook
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the freight forwarder (especially true in the case of International Operations) and so on. Whatever the reason, it is critical to remember two aspects about material in Sales Order Stock. 1. The longer an item remains in Sales Order Stock, the longer the customer waits! Investigate why its still there and move forwards towards delivery and invoicing! 2. Cash is tied up from 3 viewpoints – (a) in the inventory (b) the fact that we have not invoiced the customer from a genuine sale and (c) the material is blocked from sale to another customer.
Domestic refers to North American locations while International refers to locations outside of North America. For the Metric defined, the target is as below for SOX compliance. However, you are encouraged to maintain your Sales Order Stock as close to current as possible.
Domestic (SOS past 30 days) International (SOS past 90 days)
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Target $0 $0
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08
Cycle Count Variance
Daily Cycle Counting – mundane (?), but in terms of fiscal accountability arguably the most important task your warehouse staff will perform. There are clear definitions and guidelines available through your Area Process Coordinator on how to be most effective in Cycle Counting. By categorizing all items in inventory as A, B, C and D, we aim to count more frequently moving, high value (‘A’ being the highest priority) items more frequently, but all items at least once a year. A periodic Bin Location audit will immensely ease your cycle count efforts.
There are three aspects to review in relation to cycle counting. Count Compliance, Post Compliance and Accuracy. Based on your actual performance, all of these measures are calculated monthly and available through your Area Process Coordinator upon request. In the spreadsheet you receive look out for columns with headings: Cnt Compl. %, Pstg Compl. % and Acc. % Metric: (1) Count Compliance: Items Counted divided by Items To Be Counted. (2) Post Compliance: Items that were Posted divided by Items Counted. (3) Accuracy: Number of Accurate Items Posted divided by All Items Posted.
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Inventory accuracy is of absolute essence in our operation that processes 1000s of SKUs (Stock Keeping Units) every day through locations all over the globe. The information SAP reflects is only as good what we input into it – to borrow a popular techterm it’s a GIGO (Garbage In Garbage Out) world. Integrity is also essential from a financial reporting standpoint. We have an unquestionable responsibility for our Balance Sheet to report the true value of what we keep in inventory. Inventory accuracy gives your sales folks the confidence to promise delivery without the all too familiar physical verification, which is both a waste of time and resources.
Note there are 3 Metrics defined. Suggested ranges are as below. Plan on reviewing once a month at the end of every month. Count and Post Compliance
Excellent Fair Unacceptable
Lower Limit 100% 95% Less than
Upper Limit
Lower Limit 99% 90% Less than
Upper Limit And Above 98.9% 90%
99.9% 95%
Count Accuracy
Excellent Fair Unacceptable DSC Manager’s Handbook
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Monetary Asset Management Monetary Assets are of two types. Fixed Assets do not change on a daily basis and refers to property, shelving, forklifts, office furniture etc. Current Assets (primarily Inventory and Receivables) on the other hand, is where the vast amount of your money is tied up. Liabilities go hand in hand with Assets – the most important of which is your Payables, monies owed to your suppliers. DSC Manager’s Handbook
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09
Inventory Turnover
Inventory Turnover (also referred to as Stock Turns or Turn Rate) is calculated by dividing an Annualized value of Cost of Goods Sold (COGS) by the Average Inventory Value. There are 2 common definitions which can be confusing.
Here’s the difference. COGS in Financial Turns includes sales from stock (TAN), sales through buyouts (TAB), direct ship orders (TAS) and non-part-numbered (ZNIP) sales… essentially all of your sales in the numerator. Stock Turns will include only sales from the stock (TAN) and consignment (KEN) in the numerator – a truer representation of inventory performance. It will also be a lower number. COGS is used instead of Revenue as COGS is more reflective of inventory value.
You don’t have to calculate Stock Turns! It’s available on the Balanced Scorecard (see measure: Stock Turn Rate) For internal reporting purposes we look at a 3 month Turn Rate. Here the number in the numerator will be your Stock (TAN & KEN) Cost of Goods Sold for the previous 3 months, multiplied by 4 (i.e. annualized). The DSC Manager’s Handbook
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number in the denominator will be the average monthend inventory (on-hand plus in-transit) for the previous 3 months. Metric: Stock Turns = Annualized Cost of Goods Sold from Stock, divided by Average Inventory
Turn Rate is the most widely used benchmark across industries to assess the utilization and relevance of stock carried relative to sales. A higher Turn Rate (though a lagging indicator) reflects the fact that you are more efficiently matching your stocking policies with your customer requirements.
For the Metric defined, suggested ranges are as below. International locations by default will have lower Turns because of more inventory in-transit (when sourcing from overseas). If you are serviced by a Hub, your Turns should be higher, as a fair share of your inventory is likely held in backstock. Note that a Turn Rate of say “4” does not imply that your entire inventory turns 4 times a year – your fast moving stock is turning quicker, while your slow moving stock pulls the number down. Review monthly.
Excellent Good Fair Unacceptable DSC Manager’s Handbook
Lower Limit 6.00 4.00 2.00 Less than
Upper Limit And above 5.99 3.99 1.99 24
10
Return on Stock
A measure that provides insight into what amount of margin dollars are generated from your inventory! It is calculated on a monthly basis with the following simple formula:
Great news! This measure is already calculated and emailed to you once a month from Corporate. The numerator in this instance is the difference between your Stock Revenue (TAN & KEN transactions) and Stock COGS – i.e. your Margins Dollars from Stock. The denominator is your month end Inventory as shown in SAP transaction ZSTK. This includes both in-transit and on-hand inventory. Metric: Return on Stock = Stock Margin$ in Month divided by Month-end inventory
The measure provides, at a very fundamental level, how much Gross Profit or Base Margin (same thing different terms) or simply additional cash we are able to generate from keeping all that inventory on our shelves. It brings up the question – is DSC Manager’s Handbook
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the level of inventory justified considering the margins (or returns) being generated? Inventory is equivalent to cash. Cash we have borrowed from banks, shareholders or other creditors. It is critical to ask whether that investment in inventory is paying enough to repay the borrowed money (with interest) and then some, to keep the business operational and financially viable.
Though simple (in the case of this measure), one size does not fit all‌ a large proportion of your sales could be bound by contractual pricing obligations or your business model necessitates a significant amount of buyouts. Margin relief, gainshare etc. are also not considered in the calculation. That said, this measure can be and should be improved by demanding higher margins for your Stock Sales and constantly chipping away at and reducing your slow moving inventory. For the Metric defined, suggested ranges are as below. As with Stock Turns, locations serviced by a Hub should show numbers at the higher end of the range, and International locations will trend towards the lower end because of the larger in-transit inventory component.
Excellent Fair Unacceptable DSC Manager’s Handbook
Lower Limit 15.00 5.00 Less than
Upper Limit And above 14.99 4.99 26
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Inventory Quality Ratio
Your inventory is classified into 5 categories. The definitions are very straightforward and given below. Do note here we are interested in ATP (Available to Promise – which is Stock on Hand less Open Sales Orders) Excess: ATP > Last 3 Months Consumption Surplus: ATP > Last 6 Months Consumption Hardcore: ATP > Last 12 Months Consumption Dead: ATP > Last 24 Months Consumption Good: ATP < Last 3 Months Consumption
IQR (Inventory Quality Ratio) is a percentage that measures how much of your Total Inventory falls into the “Good” bucket. A potential downside of the measure is that new items with no prior consumption history will pull your IQR down until a steady usage pattern has been established.
Great news again! This measure is already being calculated and reported once a month from Corporate by the ESHD Team. Metric: Inventory Quality Ratio = Good Inventory divided by Total Inventory
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Any investment must be viewed in a risk-return framework (your financial planner – if you have one!! – will tell you that). While the previous measure, Return on Stock focused on, well… Returns (duh!), this measure looks at the Risk profile of your inventory investment. Having considerable balances in each of your ESH&D buckets (and each bucket is progressively worse) will put you in a hole from which it will be difficult to dig out of. The significance of tied up capital in the wrong inventory is more than just a monetary squeeze on your business. Eventually it will affect your ability to take advantage of business opportunities and even adequately service existing customers. Constantly work to reduce your slow moving stock.
Methods to improve IQR include redeployment within the organization, vendor returns, thorough review before purchasing (particularly items with no proven consumption history), local incentive programs for ESHD stock, etc. Contact the Corporate ESHD Team for assistance in this matter. For the Metric defined, suggested ranges are as below:
Excellent Fair Unacceptable
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Lower Limit 85% 50% Less than
Upper Limit And above 84.9% 49.9%
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DOD Inventory Value
DOD are the tragic letters that stand for our riskiest inventory category – ‘Deadest of the Dead’. As the name suggests it inventory that is not expected to twitch, ever again. This is material that has not had any movement in your entire sales organization in the last 24 months!! The list is prepared at the Corporate level after considering when the material was received, whether it was the result of an acquisition, needed for a production order, required as a critical spare (you will be consulted) and consumption history across all of NOV’s divisions. Note the key differences compared to the definition of Dead earlier: 1. If you had 10 widgets on the shelf and you have a consumption of 1 widget in the last 24 months, all 10 widgets would fall off the DOD list (whereas 9 would still be considered Dead) 2. Dead looks at the consumption at your DSC, while DOD looks at consumption across your entire sales organization and company-wide.
The list of items that are considered DOD at your location will be compiled, validated and emailed to you from Corporate (with updates twice a year). Metric: Total DOD Inventory value at your location. DSC Manager’s Handbook
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DOD is material you have on your shelf (through legacy stocks, acquisitions, bad purchases) that is unlikely to see a sale in the normal course of business any time in the near future. Remember this inventory is also taking up valuable shelf space, has to be cycle counted and quite like the stuff at the back of your garage that you always wanted to clean up (but never got around to). Studies have estimated the carrying cost of inventory in our industry to run at an annual rate of 24% to 36% of product cost!! Now wouldn’t that hurt if it hit your P&L? Importantly our accountants require us to accrue (for a write-off) against the value of DOD inventory. Hence, any DOD you get rid of, has a direct impact on the financial results of the company.
Familiar routes of redeployment, return to vendor and auction/fire-sale should be explored. National Oilwell Varco now has a website for listing surplus material that can be used to gain visibility outside your immediate geographic area. Periodically NOV-Distribution has a Reward Program that allows you to sell DOD inventory below cost (clean out your unwanted stock and pocket some change, now does life get any better!) – so watch out for those email notifications! For the Metric defined, the target is as below:
DOD Inventory Value
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Target $0
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MRP Evaluation
MRP is short for Materials Requirements Planning. With good planning parameters in SAP it should be possible for you to pull out your lawn chair, grab a drink, sit back and enjoy the afternoon sun, expecting material to show up exactly when needed…. but then again it helps to check on once in a while. This evaluation aims to help you determine whether you have adequate stock of your regularly moving items.
The first step is to determine the list of fast moving items. This can be obtained by looking at the last 12 months of consumption at your location (SAP transaction ZMM7) or the last 12 months of your Sales Orders (SAP transaction ZS_SO). Note these will provide slightly varying (but close) results, as items hit consumption only after they are PGI-ed. A simpler alternative is to use the A, B, C indicators (which rank the relative importance of items) in SAP. As a further step review the MRP planning parameters set up for those items. This can be quickly (!) done by running query T5 under user group IS of SAP transaction SQ01 – yes, sometimes the path is long and winding. Items you want regularly auto-restocked must be turned “ON” for replenishment in SAP. “ON” items have a forecast model different from ‘0’ (zero) and have an MRP type different from ND in SAP. The exceptions are items planned on a manual Min-Max DSC Manager’s Handbook
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(V1) model (where you decide the replenishment point and quantity, instead of letting SAP do it). Regular, systematic, unerring replenishment of “ON” items is expected through SAP. To check if it’s true, run the Shortage Report for your “ON” items – SAP Transaction ZSRS (for your DSC) with settings as below.
(For International Locations, use Forecast Periods forward = 2)
The report shows your potential shortage quantity and shortage value. Since we live in Utah, Saskatewan, Indonesia and Texas and not in Utopia, of course you will be short some items! Use the information you gather when deciding future replenishment quantities through ZPLAN and/or share with your Materials Planner.
It is difficult to explain to a customer why you are out of stock on an item they buy from you regularly. Monitoring the items you could be potentially short, is an effective way of not running out of your bread’n’butter items! However if you are frequently running short, it is advisable to review the Planning Parameters (Lot Size, MRP Type, Forecast Model, Leadtime etc.) set up for those items and revise in consultation with your Materials Management lead.
There is no metric defined to review.
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Accounts Receivable Evaluation
Receivables is cash owed to you by your customers. In a low margin, high cash flow business like distribution managing your customer credit lines and making sure the customer pays on time, is as vital as watching your expenses and pushing your margins. A standard industry wide measure is Days of Sales Outstanding (DSO for short – don’t we love our acronyms!) Calculated (in days) as:
It is advisable to use the 3 month figures (as in the calculation above) for smoothing effects.
The Revenue figure is best determined from SAP Transaction MCSI. Details on your Receivables are available either through spooled reports (SAP transaction SP01 report named YourDSCCode – SO AR Open Items Report) or through your local Credit Collections department. Metric: (1) Calculate your DSC’s DSO every month as defined above and (2) Use the detailed item level data to age (by Invoiced Date) your receivables by customer account. DSC Manager’s Handbook
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DSO is a measure of how many days of your sales is still with the customer and yet to be collected – meaning although we have made the delivery and invoiced the customer, we haven’t received payment as yet. Customers who hold our receivables for long periods are effectively running us short of essential money to keep the business going (and indirectly affecting our ability to service other customers). Also higher DSOs lead to the real risk of negligent customers being put on credit hold – making sales to them down right impossible! While we do have teams at Corporate and locally to track collections, efforts to remind the customer by the DSC manager goes a long way in helping the efforts of those teams in both collecting and also in reconciling reasons why invoices are not paid. Through B2B (Business to Business), e-commerce and EFT (Electronic Fund Transfer) arrangements, we experience reduced Receivables as “collection” is very close to invoicing. Yes, technology helps!
For the Metric defined, suggested ranges are as below. It is advisable to calculate DSO by customer account for key accounts.
Excellent Fair Unacceptable DSC Manager’s Handbook
Lower Limit Less than 25 days 60 days
Upper Limit 25 days 60 days And Higher 34
Customer Service Management Is ensuring we deliver to the customer what we promise â&#x20AC;&#x201C; i.e. the promised quantity, at the promised location, at the promised price, at the promised time (repeated for best results).
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Product Availability For Planned Items
Product Availability for Planned Items is synonymous with Fill Rate – a more widely used term. Definitions vary somewhat and many companies define Fill Rate in a manner most relevant to their operation. NOV Distribution defines Fill Rate by the following formula:
Before you go, hey that’s Greek… let’s dig into why it makes sense. We are trying to determine, what proportion of transactions come off-the-shelf. The numerator in the above equation is a count of your offthe-shelf – Standard Order (TAN) plus Consignment Stock (KEN) – transactions. The denominator in the above equation is the count of off-the-shelf sales (TAN+ KEN) and Part Numbered Buyout (TAB) transactions. The ratio thus gives you the % you are able to “fill” offthe-shelf sales – for SIC (Serial Item Coded) items.
Good news! Fill Rate is being emailed out from Corporate once a month. In addition there is also a trended report that shows performance over time. The report breaks out performance for Planned Items (meaning “ON” – see definition earlier) and All Items separately. Metric: The ratio of SIC items sold from Stock to SIC items sold from Stock & as Buyouts (for Planned Items).
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Selling off-the-shelf has definite advantages in that, (a) customer gets the material quicker (b) we do not incur additional transaction costs by issuing a new PO and (c) we likely got a better cost for the material â&#x20AC;&#x201C; implying higher margins on the sale. TAB sales on the other hand, usually tend to weigh down on factors (a), (b) and (c) listed above. Side Note: On a related topic, it does a world of good to manage customer expectations on what items are stock-able and which ones are not. Alignment on expectations with your customer is a true indication of your strength in managing your business.
On purpose, direct ship orders (TAS) are excluded from the measure â&#x20AC;&#x201C; the reasoning being that TAS sales are the result of customer requirements. Also excluded from the picture are Non-Part Numbered (ZNIP) sales. ZNIPs by definition are parts we have intentionally decided not to set up part numbers for and consequently decided not to stock. Another element we do not track effectively at this time is lost sales, which has the potential to further reduce reported Fill Rates.
For Metric defined, suggested ranges are below:
Excellent Fair Unacceptable
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Lower Limit 95% 85% Less than
Upper Limit And above 94.9% 84.9%
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On-Time Delivery – Customer Request
Underlining the importance of timeliness of deliveries the next three measures tackle just that issue. The first question in this context is – how frequently do you meet the delivery date requested by the customer in the first instance? The key elements in this arguably strict, but precise measure of On-Time Delivery are: 1. The First Date – the date on which we promise delivery to the customer at the time of Sales Order creation. Integrity of this date field in SAP is key for tracking On-Time-Delivery. It is recommended that you use it for this purpose, even if you have not to date. 2. The PGI (Post Good Issue) Date – is when you issue the material out of your stock for delivery to the customer. It is assumed that the time lapse between PGI and when the customer receives the material is not significant.
This measure is available on the Balanced Scorecard (see measure: Deliveries Meeting Customer Requested Date).
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Metric: Count of SO line items with PGI Date no later than the First Date at time of SO creation, divided by the Count of all Sales Order line items PGI-ed.
Each Sales Order brings with it an opportunity to create a favorable impression. Being able to exactly meet the customer request date goes a long way in helping your customers meet their schedules and targets and count on your reliability over and over. While most of your larger customers are attentively managed at the Corporate level, without question it is the efforts at the frontline, the Distribution Centers, that shape the end user experience. It should not be lost on you that this metric is again a measure of your alignment of expectations with the customer â&#x20AC;&#x201C; a repeated and important concept that you will find in the arena of customer service.
For the Metric defined, suggested tolerances are as below:
For PGI-ed Orders
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Acceptable 90%
Target 95%
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On-Time Delivery – DSC Commitment
Understandably and in certain instances it is not possible to meet the customer request date. In such cases it is recommended that you update and promise a date you can meet and one that is also agreeable to the customer. The measure here looks at your ability to meet the date YOU promise delivery on. SAP allows you to change the First Date as originally entered in the Sales Order. The revised First Date (in instances when you have to) is what we use to measure ‘DSC Commitment’ performance.
Note the formula is the same as with the earlier measure. But SAP stores the date you originally promise and each time you make a revision it is recorded. This measure looks at your PGI Date Vs. your most recent promised date. The measure is available on the Balanced Scorecard (check measure: Deliveries Meeting the Commitment Date). Metric: Count of SO line items with PGI Date no later than the First Date (implying these were not late per DSC commitment), divided by the Count of all Sales Order line items PGI-ed.
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The revised promised date is your second promised date to the customer. Ideally you are expected to stick to the date requested by the customer and what you agree to at the time of Sales Order creation. In circumstances beyond your control, commit a second date only after careful evaluation of all existing information. Further and multiple revisions thereafter is in extremely poor taste. Make it a point to keep customers updated of delivery status, so that they have adequate time to make alternate arrangements or factor in any delays into their plans. Playing extremely safe on delivery dates (under promising and over delivering) is not recommended however appealing that plan may seem. Over time it is a strategy that leads to customers being uncertain about your reliability and your understanding of your operation.
For the Metric defined, suggested tolerances are as below:
PGI-ed Orders
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Acceptable 95%
Target 99%
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On-Time Delivery (Customer Says)
The drivers here and for the next measure is a component of NOV Distribution’s Vision Statement – to deliver “Superior Customer Service”. Surveys of our customers have indicated that On-Time Delivery is of paramount importance to them. We have thus chosen to ask the customer at the time of actual physical delivery of goods whether our service met their expectations on timeliness (and record and analyze the results).
Available on the Balanced Scorecard (see measure: On-Time Delivery, Customer Says). Metric: % of Deliveries On-Time per customer at physical transfer of goods (obtaining POD).
A bona fide indication of customer satisfaction. Low scores here should challenge you to ask: Are you over-promising? Are you managing customer expectations well enough? Were regular updates and revised delivery dates not communicated?
For the Metric defined, target is below:
On-Time Delivery (Customer Says)
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Target 100%
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Order Accuracy (Customer Says)
Order Accuracy was indicated as the second most important measure through the same customer surveys. This translates not only to the right quantity, but quality and price as well.
Available on the Balanced Scorecard (see measure: Order Accuracy, Customer Says). Metric: % of Deliveries Accurate per customer at physical transfer of goods (obtaining POD).
An inaccurate order reflects badly on our expertise in managing the movement of goods (and information) through the supply chain. It creates additional transaction costs in processing returns.
A simple second check before delivery is all that is required to avoid errors here. A more empirical and meaningful measure can be got by analyzing the Return Reason Codes on customer returns. For the Metric defined, target is as below:
Order Accuracy (Customer Says) DSC Managerâ&#x20AC;&#x2122;s Handbook
Target 100% 43
Human Capital Management People make an organization, its culture, its ability – present and future. Often difficult to measure, human capital is arguably the most valuable asset held by an organization today. A company’s Human Capital is the collective sum of the attributes, life experiences, knowledge, inventiveness, energy, and enthusiasm that it’s people choose to invest in their work.
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Training & Development
Training The following training programs are available through Distribution Services: Accounts Payable Training, Accounts Receivable Training, DSC Manager Training, SAP FICO Training, SAP MM Training, SAP SD Training. These trainings are graded. Non-graded training offered include: CPR Training, Credit Card Usage and Reconciliation, Defensive Driving, Distribution Process Team Training, First Aid Training, Forklift Operation, Product Training, Sales Training, Safety Training. Please contact your supervisor for further information on these programs and whether, and at what frequency they are offered in your region. …And Development Consistently work towards training, inspiring, motivating, cultivating, grooming, challenging, rewarding and retaining your employees. Turnover is expensive! Cost of hiring a replacement is calculated at 500 times the employee’s hourly rate of pay. Most employees abide by rules without strict enforcement (common sense). However discipline those who need it and thus work to mitigate your business risk. Effective discipline must be with warning, immediate, consistent and impersonal. Always consult with Human Resources before you terminate anyone! DSC Manager’s Handbook
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Performance Feedback
Every individual in NOV is graded along ten dimensions in relation to (1) Company Objectives, (2) Business Growth, (3) Productivity, (4) Job Knowledge/Technical Skills, (5) Team Effectiveness, (6) Quality/Desire for Excellence, (7) Customer Focus, (8) Process Improvement, (9) Attitude and (10) Advancement – in the context of their responsibility.
Complete performance feedback in a timely manner. Results on the Balanced Scorecard. Metric: % of Required Assessments Completed
The Annual Performance Review helps you understand your employee’s apprehensions and aspirations. Past performance is a clear indication of future potential – use the review results from previous years when you select employees for key responsibilities. During the review take the time to make sure your staff understands their goals and your expectations of them.
For the Metric defined, the target is as below:
% of Assessments Completed DSC Manager’s Handbook
Target 100% 46
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HS&E Requirements
A thorough explanation of Health Safety & Environment requirements is beyond the scope of this Handbook. The broad purpose of our HS&E programs is (1) to promote a healthy and safe environment for all NOV employees and to provide an accident free workplace, (2) to monitor and track trends and perform safety analysis and (3) comply with contractual obligations.
For a comprehensive list of directives, policies, forms and an accident logging system (which mandates reporting work related occurrences with 24hrs) visit the following intranet link: http://inside.nov.com/C1/HealthSafetyEnvironmental For questions and clarifications a key list of HS&E administrators is provided for all facilities, on the website. A handbook on HS&E training programs and applicable to US Operations is available at: http://inside.nov.com Distribution Services HSE HSE 2005-2006 Safety Manual.pdf
As an organization we have a commitment and responsibility internally and to our customers to strive for continuous improvement in our health, safety & environmental performance. Regular and scheduled safety meetings are mandatory. Please contact your facilityâ&#x20AC;&#x2122;s HS&E representative for assistance. DSC Managerâ&#x20AC;&#x2122;s Handbook
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Sales Engine Management Goes hand in hand with understanding your customers, their relative importance to your business, what you sell to them, how you sell to them, margins through each of these channels, monitoring new business development and tracking business growth relative to market activity.
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Sales by Customer Review
A simple review of Sales by Customer is recommended once a month at the end of every month. It is recommended that you look at Revenues, Margin dollars, and Margin percentage (which is Margin$ divided by Revenue$) for each of your customer accounts and trend over a 12 month period.
In SAP, enter transaction code MCSI. Next select report S512 – NOI Sales Summary – std curr. Further key in the month just ended, and your Sales Office code – execute. Switch drill down to view by CustomerName and CustomerCode and download to a spreadsheet for further review. Add this information to your prior month’s data for trending.
(1). Keep tabs on customers where Revenue or Margin is falling and investigate reasons why (2). Follow up with customers showing promising growth for potential increased business (3). Identify first time customers – studies have shown that acquiring new customers is many times more expensive than keeping existing ones. In any follow up action work with your Sales lead so that one front is presented to the customer.
No Metric defined – for review only.
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Sales By Commodity Review
Just as important as understanding who you are selling to, it is important to understand what you are selling. Product Hierarchies (or Product Lines) is your best bet for grouping sales. A list of common Product Hierarchies is available in Appendix A at the end of this book.
In SAP run transaction MCSI (same steps as in the previous report). Now, switch drill down by Product Hierarchy, then download and append to the previous month’s data for trending.
The primary objective is for you to review sales volume by of your key commodities, understand their sources and margins therein. Now, here’s the twist. Is your customer aware of all the other product lines NOV Distribution brings to the market place? The ability to grow business (develop a best practices approach with your Sales lead) outside of your “comfortzone”, ensuring the customer appreciates the lower Total Cost of Ownership when doing business with NOVDistribution, is where oft elusive business growth lies.
There is no Metric defined as the product mix is often dictated by the customer base.
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Stock, Buyout, ZNIP Proportions
Broadly and rather simply, all sales can be classified as (1) Sales from Stock (meaning off the shelf), (2) Sales through Buyouts (where we issue a PO against a sales order) and (3) Sales through ZNIPs (which are one-off-purchases). Side Note: It is sometimes common NOV internal parlance to call both TABs and ZNIPs as “buyouts”. But it makes clear sense to distinguish between Part-numbered buyouts and Non-partnumbered buyouts for the reasons explained further in this section.
1. Sales from Stock include Revenue through Standard Order (TAN) and Consignment Sale (KEN) transactions in SAP. 2. Sales through Buyouts include Revenue through Individual Purchase Order (TAB) and Direct Ship Order (TAS) transactions in SAP. 3. Sales through ZNIPs include Revenue through ZNIP and ZTAS transactions in SAP. It is important to track what proportions of your Revenue go through each of these channels, understand the Margins associated and then re-evaluate whether it is optimal. A listing of common Item Categories is presented in Appendix B, at the end of this book.
This report is being done for you and emailed from Corporate, once a month.
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Metric: Proportion of sales from Stock, through Buyouts and through ZNIPs, trended for 12 months.
The report, in addition to showing Revenue proportions through each of the three channels also shows margins for each channel. In general you will find margins for Sales from Stock to be 5 to 10 points higher than margins for Buyouts, which is higher by 3 to 8 points, when compared to ZNIPs. While the above statistics in themselves should be reason enough to aim for higher Sales from Stock, the following additional factors should not be forgotten. 1. A buyout sale typically implies a longer wait period for the customer and additional costs to NOV (of a whole new transaction) to process the order. Buyouts are potentially stock-able because we have an existing SAP part number for them. 2. With ZNIPs we have limited history on the item being purchased. This compromises our ability to (a) track repeat purchases, (b) plan to stock those items in the future and (c) leverage on spend with suppliers.
Your attention to entering clear descriptions for ZNIPs can alleviate the issues in (2) above to some extent, as it facilitates later analysis. Though it is recognized that there is a place for Buyouts and ZNIPs in our business, as a flexible dictum we always attempt to increase Sales from Stock. For the Metric defined, there are no suggested targets or ranges. DSC Managerâ&#x20AC;&#x2122;s Handbook
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Low Margin Sales
Base Margin at the line item level is the difference between your Revenue and your Cost of Goods. Margin Percentage is Base Margin divided by Revenue.
In SAP, run the invoiced sales report ZS_CI, for the previous month with your sales office selected. At a line item level calculate, and further review sales with Margin % < 10%
Maintaining strong margins is essential for a healthy business. In this regard it is necessary to take a second look at transactions at a line item level where margins are low. Except in the cases where you get additional margin relief, sale is to an alliance account or sale is the result of a contractual obligation, low margin transactions are not acceptable.
For review only. Follow up with your sales personnel. Understand reasons. There is no metric defined.
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Market Share Measures
Market share is a measure every organization attempts to keep a pulse on. However, due to the large number of small players, the lack of availability of and difficulty in analyzing published data, estimating market share in the oil field supply business is easier said than done.
The discussion here revolves around the different ways in which market share can be measured â&#x20AC;&#x201C; from the subjective to a more objective (and widely accepted) measure, like Revenue per Rig. The following 3 methods are suggested: 1. Identify your competition in town (similar businesses serving similar customers). Keep tabs on head-count of personnel directly involved in the sales function. Assuming like efficiencies, the percentage of people you employ is a good indicator of what your share of the market is. 2. Poll the sales folks who handle your key customer accounts every month and gather their input on sales leakage by customer. Add to it any untapped business opportunities you know of in your area. The total is your lost business opportunity. What remains (in % terms) is your share of the market. DSC Managerâ&#x20AC;&#x2122;s Handbook
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3. Divide your monthly Revenue by the number of operating Rigs in your area to come up with a dollar figure. Monthly Revenue for your DSC is best sourced from SAP transaction MCSI. The standard we follow for the number of operating Rigs is found on the Baker Hughes website (and it’s broken out by geographical areas): www.bakerhughes.com/investor/rig/index.htm An increasing trend in Revenue per Rig clearly indicates that you are channeling more business to your operation and growing your market share.
It is fundamental to understand that market share involves measurements that are independent of how the overall market is performing (which tends to closely track underlying commodity prices). It challenges you to ask the question – are you performing above and beyond the market or just riding the wave. Many a times we are lost in the nitty-gritty’s of the business. A look at your operation from a holistic and outsider perspective is the immediate benefit as you start to track what the competition is doing, why we not able to capture more sales from existing customers or why has it been difficult to follow through on new leads. Over time such an analysis will serve as a powerful force that surges into development and growth of your business.
There are no targets suggested.
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Performance To Plan Is striving to deliver on the financial targets promised and also promising all you can deliver. A good plan ensures that we are able to add resources in a rapidly expanding market but also make provisions to cut infrastructure as business goes south. It also has wider implications as our share price reflects our future cash flows, and we have a responsibility to the shareholders of the company to be as close to projections in the delivery of actual results.
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Comparison to Plan
Financial performance is most commonly summarized through two standard statements that are prepared at the end of every business period. We plan our business on a monthly basis with quarterly (un-audited) results and annual audited results are released to the public, creditors and investors. The Income Statement (also called Profit & Loss Statement – the P&L for short) is used to evaluate financial performance over any period. The Balance Sheet on the other hand provides a snapshot of the business at any point in time. The focus in the rest of this discussion is on the Income Statement and two components on the Balance Sheet.
A first step to facilitate a thorough review is to make sure you build your R-Plans in a detailed and systematic manner. (An R1 is a plan for 12 months, at the start of the year, R2 for 9 months – 3 months into the year, R3 for 6 months – 6 months into the year, and R4 for the remaining 3 months – 9 months into the year). While this task is tedious, there is nothing more important than to have a map of exactly where your money is coming from and where it is going.
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At the end of every month you are ready to make a comparison of how close your projections of Revenue, Margins, Expenses and Operating Profit were to predictions. On the Balance Sheet watch out for Inventory and Accounts Receivables. For review purposes run SAP Transaction KE5A. Follow the root path of Profitability Reports Profit Center P&L Profit Center P&L in USD (or Local currency where applicable). Enter your profit center number and execute. Download the resulting statement to a spreadsheet and spend at least an afternoon making a comparison between your prediction and actual results for the month â&#x20AC;&#x201C; by GL (General Ledger) account.
Now why on earth would you waste a lovely afternoon reviewing whether predictions were correct? Heck, they were just predictions in the first place! There are two critical reasons. 1. Reviewing the expenses (usually all clubbed under SG&A) by ledger code will help you identify and question large variances. 2. Over time you will be able to improve your Rforecasts by analyzing which factors are most unpredictable in your business and making suitable provisions for those
There is no metric to review.
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Financial Ratios
The ratios below are industry standards calculated using your P&L and Balance Sheet. You should compare whether your actual performance met your R-Plan projections. Also check whether your performance was in a healthy range.
Since you did not (very likely) do graduate level accounting further below is what the ratios mean. The good news you can easily calculate all of these measures by reviewing your KE5A report and R-Plan inputs. There is no bad news. 1. BM% - Base Margin %, calculated as above 2. OP% - Operating Profit %, calculated as above 3. FROCE % - is a derivative of a standard measure, ROCE or Return on Capital Employed. ROCE is a measure of how much money we make as a % of the money invested in the DSC Managerâ&#x20AC;&#x2122;s Handbook
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business. Money invested or locked up in the business is in Inventory plus Receivables less Payables. However since a DSC has little control over Payables (in our business model), we look at only Inventory and Receivables when calculating an adjusted ROCE and call it FROCE or FieldROCE. 4. FT % - Flow Through %, aims to determine what proportion of Revenue increase (or decrease) is reflected in an Operating Profit increase (or decrease). For example if we increase Revenue by $100, by how much does OP increase – giving an indication of whether we are able to control expenses and maintain margins in a growing business.
All four are measures closely tracked at a Corporate level, you should too – also compare your Actuals to Plan.
Suggested targets are as below:
BM%* OP% FROCE% FT%
Target 25% 11% 40% 10%
*Guideline only DSC Manager’s Handbook
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Cash Flow from (Field) Operations
Cash Flow from Operations is a standard measure used to determine the financial health of an operation from a Cash Generation standpoint. The concept is straightforward. Think of your business as a “stash of cash” (aren’t we rhyming here) given to you by NOV’s shareholders to take care of. The major component of the money given to you is tied up in your Inventory and Receivables. Incremental cash is generated when you sell Inventory at a margin and collect on outstanding Receivables. Cash is used up in DSC expenses, additional inventory purchases and when extending further credit to customers. You can answer the question of whether you added to the stash or reduced your stash, in any period, by performing the simple computation below:
In the formula above note that if you decrease your Inventory, your increase in Inventory will be a negetive number (read that one more
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time!) so you are in effect adding to your cash stash. Ditto with Receivables. When you reduce your Receivables, the ‘Increase in Receivables’ will be a negetive number, which results in a net addition to the cash stash. You can easily calculate the number above by either reviewing your KE5A report or R-Plan data. To assist, a Cash Flow Calculator is available on the intranet site under Distribution Manager’s Corner.
You receive a remuneration to take care of the investment entrusted to you. At the end of every period (month, quarter, year) the management / shareholders are interested to know whether you added to the organization’s wealth, or whether you used up more cash than you generated. While meeting your OP% targets is great, it is OP$ (yes, the green stuff) that feeds your business. The single biggest reason why companies go out of business is because they run out of cash!!! This measure should remind you that in addition to generating Operating Profit dollars, it is important to monitor your balances in Inventory and Receivables.
There is no metric defined, but if you have a cash flow negative business you are definitely borrowing more money to run your business than you are generating. Over the medium term (let alone long term) it’s an unsustainable proposition, but then again perfectly understandable in the short term, if you are going through a high growth phase.
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Conclusion Hope you made it here without looking at the trash-can a dozen times. Yes, as forewarned the list of measures and reports are extensive. While where possible, targets and acceptable ranges are suggested, it should be noted that without question business needs and requirements at your location may need different targets. For example, international locations will have a higher Inventory value because of the larger in-transit component, Receivables might be higher where customers tend to demand longer credit terms or Expense as a % of Revenue could be higher for location that serves as a cross-dock facility because of additional personnel requirements. However it should be noted that when we are deviating from the norm, intentionally or otherwise, we are adding risk to the business. The hope is that the increased risk is mitigated through higher margins or other means. It is only then that the operation becomes financially self sustaining. Managing by numbers is not what is being recommended through this Handbook. It is hoped that you will use these reports in making decisions, defining processes and tracking whether you reach your goals â&#x20AC;&#x201C; and in the process help this organization achieve its goals.
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Relative Importance Matrix*
*Shows impact of each Report/Measure on the 6 functional areas (filled-in box implies a positive impact).
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Appendix A Product Hierarchies
Drilling Product Lines
Mission Product Lines
Others
ZPL02 ZPL03 ZPL04 ZPL06 ZPL09 ZPL10 ZPL11 ZPL15 ZPL26 ZPL12 ZPL14 ZPL16 ZPL18 ZPL20 ZPL21 ZPL22 ZPL24 ZPL29 ZPL30 ZPL34 ZPL36 ZPL38 ZPL40 ZPL41 ZPL42 ZPL43 ZPL99
DRILLING EQUIPMENT DRILLING SPARES MARINE EQUIPMENT MISC DRILLING EQUIP. HANDLING TOOLS & PARTS MISSION MFK OTHER MKF KING C PUMPS MODULES & JEWELRY MISSION MULTIPLEX FLUID CONTROL SYSTEMS PUMP UNIT/PROD EQUIP ENGINES & COMPRESSOR SUCKER RODS ROD PUMPS PROG. CAVITY PUMPS OPTIMATION & AUTO HYDRAULIC/UNIDRAULIC INDUSTRIAL PUMPS HDQ. TUBULAR GOODS WILSON SNYDER SYSTEM FIELD TUBULAR GOODS NON-METALLIC PIPE MRO COMMODITIES GAS TRANS/MEASUREMENT FIELD UNITS-NON-MRO WHS SURFACE SYSTEMS NOT CLASSIFIED
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Appendix B Item Categories
TAN TAB TAS KEN REN KRN L2N ZNIP ZREZ ZTAS
SALE FROM STOCK BUYOUT OF PART NUMBERED ITEM DIRECT SHIP - PART NUMBERED ITEM SALE FROM CONSIGNMENT STOCK RETURN TO STOCK CONSIGNMENT RETURNS GAINSHARE, MGMT, SERVICE FEE NON PART NUMBERED PURCHASES ZNIP/ZTAS RETURN DIRECT SHIP - NON PART NUMBERED ITEM
Note: This is a partial (but most common) list of Item Categories
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Appendix C Movement Types
Note: The 600 & 700 series movements are automatically generated by SAP
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…
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