VOLATILITY: Managing In Volatile Times

It has been said many times before but it’s worth repeating – the supply chain is the business.
The supply chain brings your customers, your suppliers and your resources together in an endless cash-to-cash cycle that uniquely reflects your business. Decisions you make in your supply chain affect everyone connected with your business, so they have to be right.
In booming economy, companies tend to focus more on growing revenue and market share than on managing costs and operating efficiencies. But when the economy slows, they must find ways to do more with less – particularly within their supply chains.
You could start by cutting costs…
• Reduce costs and working capital across the board by reducing inventory. This might sound simple, but it’s not necessarily easy. Many supply chains don’t have the tools, processes, or visibility to reduce inventory levels without incurring collateral damage.
• Cut costs, not customers. Customers are precious asset that must be protected. Like it or not, cutting costs can negatively impact customers. If you don’t consciously decide which customers to keep – or drop – you could lose those that matter most.
• Cut costs, not revenue. It is myth that when times are tough, you need all the revenue you can get. There’s good revenue, and there’s bad revenue. Bad revenue generates negative returns and costs you money – which you can’t afford in downturn.
• The downturn might not be as deep or sustained as many anticipate. In the end, you might only need to trim little fat from your supply chain, rather than amputate limbs. But remember supply chains tend to get flabby in good times. In crisis, people are more receptive to improvement and change, so this is an opportune time to whip things back into shape. Don’t waste the opportunity by merely tinkering with small improvements at the fringes.
• Downturns present an opportunity to reassess cost structures. Structural cost reduction is never an easy process. Downturns increase uncertainty, and any executive actions are closely followed by the organisation. But the opportunity to methodically review your cost structures and make them less fixed and more variable cannot be missed.
• Beware cutting R&D investment in non-core products. Reduced R&D investment can result in bland portfolio of products for which customers won’t be willing to pay premium. Downturns can push careless businesses towards lowest common denominator approaches where they end up in the clone wars – and looking just like the competition.
… Or you could start by cutting revenue and products:
• In downturn most companies immediately focus on cost reduction. That could be mistake. To make smart cuts to your supply chain, you should first understand which elements represent the core of your business. Which customers are the most profitable, and which are expendable? Which products do customers truly care about, and which are just window dressing? What level of service quality do key customers need and expect?
• You can’t make smart supply chain cuts if you don’t know which customers and products to protect. Deciding which customers to serve and which products to offer isn’t something supply chain managers can do on their own. Such decisions need to come from the top, and the resulting changes need to be driven into every corner of your business.
• Ironically, the best way to start cutting costs may be to start cutting revenue – specifically the “bad” revenue that undermines your profitability. Decide which revenue streams are not worth preserving, and then target cost reductions accordingly. The idea of cutting revenue in downturn might seem little crazy. But some customers aren’t worth serving – and some products aren’t worth selling. The shrinking margins that accompany an economic slowdown often only serve to exacerbate the problem.
• Businesses derive most of their profits from relatively small number of customers and product offerings: the 80/20 rule. Protecting your profitable core is the key to surviving and thriving in downturn. Once you know which customers and products are most critical to your business, you can start ruthlessly cutting fat out of your supply chain without fear of hitting muscle or bone.
• Some products aren’t worth selling. In boom times, every idea seems like winner. But the additional volume and complexity increases supply chain cost and risk. Be more selective. After pouring money and sweat into developing new products and services, it can be difficult to walk away – even if the associated revenue is marginal at best.
For many business leaders, their first instinct is to zero in on cutting costs. But you may find it hard to control the collateral damage, and it may not be the best way to achieve your ultimate aim of delivering more from less resources.
Before you opt for cost-cutting, take moment to answer these two questions: Is this the best way for us to start? And where will it lead our business?

Matthew Hitch leads the consulting practice for Deloitte in New Zealand.

Tax is still one of the biggest expenses for business, and even where businesses are not profitable it has material regulatory and cashflow obligations in terms of indirect taxes such as GST. So, in terms of taxpayer obligations, it’s important businesses keep their guard up.
While Inland Revenue will as general rule be fair to taxpayers, take care your relationship with them does not progress to an intimate level involving their investigators. It is hugely distracting to businesses when they are subjected to an audit by Inland Revenue, exacerbated because of the significant amount of time spent looking at past decisions, as opposed to thinking about what your next move should be.
Also, before you embark on any transaction that has tax implications, talk to your tax adviser. The relationship between Inland Revenue and taxpayers is under slight stress lately, largely because Inland Revenue is struggling to determine exactly what constitutes tax avoidance. You need to be sure that any transaction you undertake is legitimate and not unduly driven from tax perspective to steer clear of this uncertainty.

What’s likely to be different down the track?
In relatively recent times, the New Zealand economy was full steam ahead. In short space of time it has deteriorated, and cash has quickly become king. direct casualty of the crisis has been the Government’s books, now firmly in the red and forecast to stay there for some time. This could likely cause the Government and officials from Inland Revenue and Treasury to fundamentally rethink the status quo, that is, whether the tax system requires shake-up.
The age-old adage of “broad base and low rate” as design feature of the tax system cries out to officials that New Zealand needs capital gains tax. Unfortunately, officials could realistically get traction on this with the Government in the current environment. Officials are also concerned about the mobility of capital and labour – something that has never been addressed even though being small open economy, New Zealand is over-exposed to those risks. The debate over the adequacy of the tax mix is also likely to be raised shortly.
Some of these issues may be addressed (for better or for worse) sooner rather than later.
But right now, there are some simple measures you can take to ensure you are operating tax efficiently.
• Ensure bad debts are written off before the end of your financial year. These amounts will reduce your gross profit figure. Writing off bad debts also allows you to get an immediate GST saving if you’re operating on an invoice basis.
• Undertake review of your depreciation expense. Using the highest available depreciation rate allows you to accelerate depreciation and reduce your overall tax liability.
• Carefully analyse all expenses and ensure you maximise allowable deductions. If figure appears to be non-deductible, consider whether any componen

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