Resource Allocation during Uncertain Economic Conditions

 

There is a saying most people don’t plan to fail; they just fail to plan.  Unfortunately, this is also true for many companies.  The current economic times has certainly taken it’s toll on business after the go-go 1990’s.  The sad fact is management still run businesses based upon a 1960’s 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 “bunker mentality”, kind of a “do nothing”, 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 conditions.

 

Putting the entire academic issues aside, let’s 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 it’s 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 determining profitability.

 

The 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?

 

Let’s break the process down into it’s 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.

 

Having 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.  Don’t 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.

 

 

Marlin Fought will present the following workshop as part of the Kutztown SBDC’s Business Skills for Success series.

 

Preserving Cash through Efficient Resource Allocation

 

Presented by Marlin Fought

 

Cash 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.

 

 

Marlin Fought gained experience in what works and what doesn’t 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.

 

Marlin Fought

198 Chain Saw Road

Dillsburg, PA  17019

 

717-432-2594

 

mfought@msn.com

 

 

Please visit www.kutztownsbdc.org for complete information on the Business Skills for Success series.