Resource Allocation during Uncertain Economic Conditions
is a saying most people donít plan to fail; they just fail to plan.
Unfortunately, this is also true for many companies.
The current economic times has certainly taken itís toll on business
after the go-go 1990ís. The sad
fact is management still run businesses based upon a 1960ís model or
mentality. This is a risky situation given the cost of capital,
increasing competition, declining consumer demand and the effects of
geo-political events in the world. All
of this has lead business to develop a ďbunker mentalityĒ, kind of a ďdo
nothingĒ, status quo approach to dealing with day to day operations. This reactive style of management can be hidden during good
economic times, but can become dangerous when confronted with uncertain economic
the entire academic issues aside, letís focus on what management really does.
Managers manage, resources that is.
These resources include raw materials, manpower, plant and equipment,
overhead, distribution systems/channels, etc..
The reason companies are in business are to produce a product or service
that satisfies a market demand. How
effectively and efficiently a company meets this demand will determine itís
profitability. A business can be
viewed in turns of an input/output model. The
inputs are materials and manpower; the outputs are products and service.
The effectiveness at which these products and services meet market demand
and the efficiency at which these inputs are converted weigh heavily in
input/output model is not static. It
changes almost daily due to the cost of materials, availability of labor,
condition of plant and equipment, competition and general business conditions.
The objective function of the model is to maximize profits, while
minimizing costs and risks. Once these conditions have been met, the model has been
perfected. This may be achieved in
theory, but not in reality. Business
does not operate in a vacuum. Inefficiencies
and bottlenecks in production will occur. Cost
go up, while market demand goes down, putting pressure on profit margins.
This constant stage of flux requires the resources and the conversion
process to be managed. At this
time, the benefits of realizing efficient resource allocation kick in.
But how does one start?
break the process down into itís components.
Materials and the conversion process represent inputs, while sales less
promotion/distribution costs equal outputs.
How effective you are in meeting market demand through pricing,
promotion, distribution, etc. will determine your volume and revenue stream.
This revenue stream will be reduced by the cost of production and
overhead. It is important the allocation process is efficient due to
the fixed quantities of input. Managers
should evaluate the needed level of output (sales) versus the required
expenditure of inputs (materials, manpower) to get there.
If the information is available, standard cost accounting can provide a
lot of information on efficiency, such as material usage, overtime, spending
variances, etc.. If standard cost data is not available, using a modified
version of zero-based budgeting could provide useful planning data.
Managers have a tendency to focus on costs to determine profitability and
efficiency. Costs are symptoms and
represent the expenditure of resources consumed by the execution of some action
or activity. By controlling
activities, you control costs. A Process Value Analysis would identify value-added
activities that increase customer satisfaction or meet customer demands.
Good decision platforms boost the performance of resource allocation. Many decisions are made during the production process, from material purchases, manpower planning, assignment of plant and equipment, etc.. Decision-makers should explore least cost alternatives when available, develop selection criteria, test/simulate strategies, measure performance against benchmarks and hold participants accountable for their actions. An audit of the decision process would spot deficiencies in policies and procedures that support the process.
a business plan and communicating it to the rank and file will help coordinate
individual efforts. Company results
can be measured against competitors and their respective industry sector by
conducting peer analysis and comparing select financial ratios.
Networking is vital in keeping up with industry trends and modern
technology. Donít short cut the
hiring process. Hiring employees
who are process-oriented with good team building skills will become valuable
assets in fine-tuning any resource allocation system.
Fought will present the following workshop as part of the Kutztown SBDCís
Business Skills for Success series.
Cash through Efficient Resource Allocation
by Marlin Fought
how to be more proactive in addressing the issues that effect the cash
position of your small business.
techniques and tools to evaluate internal processes, policies and procedures
that effect the timing and adequacy of cash flow.
maximum use of cash and other resources by utilizing effective decision
making and insuring the business achieves maximum efficiency.
is the lifeblood of business. Business
owners must be aware of the external and internal events that affect the cash
flow characteristics of their company. Participants
will discuss the meaning of free cash flow, measuring the adequacy of cash,
components that effect cash flow and the use of time-proven techniques for
improving cash flow.
Fought gained experience in what works and what doesnít while employed in
different industries and as a business consultant.
Through his work, he tries to make businesses aware of the need to
re-evaluate their current basis of operations and be more proactive in
addressing the issues that confront them in a changing economic environment.
Chain Saw Road
visit www.kutztownsbdc.org for
complete information on the Business Skills for Success series.