Vicenda Summit 201407 lin

Creating Value Through Demand
Strategy
Danie Schoeman

© 2014 Danie Schoeman & Company.
Dude, Where's My Demand?
World Bank

Uncertain Times

Challenges Ahead
The challenges ahead for supply chains, McKinsey Global Survey (2010)

Public Enemy Number One
Gartner Research, August 2011

Pressure’s On
Aberdeen Group August 2012

Creating Value
• Value that a company creates is measured as
Market Value Added (MVA). MVA is the
difference between the current market value of a
firm, the resulting value of management's
actions and investments, and the capital
contributed by investors.
• The basic formula is:
𝑀𝑉𝐴 = 𝑉 − 𝐾0
where:
– V is the market value of the firm, including the value
of the firm's equity and debt
– K0 is the capital invested in the firm

Making An Economic Profit
• The resulting value of management's actions and investments can
be measured by Economic Value Added (EVA) – an estimate of a
firm's economic profit – being the value created in excess of or the
value destroyed below the required return of the company's
investors (being shareholders and debt holders).
• The basic formula is:
𝐸𝑉𝐴 = 𝑟 − 𝑐 × 𝐾 = 𝑁𝑂𝑃𝐴𝑇 − 𝑐 × 𝐾
where:
– 𝑟 =
𝑁𝑂𝑃𝐴𝑇
𝐾
, is the Return on Invested Capital (ROIC);
– c is the weighted average cost of capital (WACC);
– K is the economic capital employed;
– NOPAT is the net operating profit after tax, with adjustments and
translations, generally for the amortization of goodwill, the
capitalization of brand advertising and other non-cash items.

A Series Of Actions & Investments
• MVA can thus be defined as the present value of all
future expected or a series of EVA values. Hence:
𝑀𝑉𝐴 = 𝑉 − 𝐾0 =
𝑡=1
∞
𝐸𝑉𝐴 𝑡
1 + 𝑖 𝑡
where:
– V is the market value of the firm, including the value of
the firm's equity and debt
– K0 is the capital invested in the firm
– t is the time of the cash flow
– i is the discount rate (the rate of return that could be
earned on an investment in the financial markets with
similar risk) also called the opportunity cost of capital

MVA & EVA Relationship
Future EVA values are
discounted to present
Profitable Company
Unprofitable Company
The theory goes:
The value of the company = Book value of equity + the value of expected future EVA
EVAy+1 + EVAy+2 + EVAy+3 + …
(-EVAy+1) + (-EVAy+2) + …
Market
value
of
profitable
company
Capital
invested
in the
company
Market
value
added
Capital
invested
in the
company
Market
value
lost
Market
value
of
unprofitable
company

Value Creation Decision Making
Model
Economic Value Added
Net Operating Profit
After Tax
Weighted Average
Cost of Capital Capital Employed
Profit
Before
Interest
Cost Of
Debt
Fixed
Assets
Adjustment For
Systematic Rate
Interest Tax Cost Of
Equity
Risk Free
Rate
Current
Assets
Cost Of Goods
Sold
Expenses
Without
Interest
Income
Working
Capital
Interest Interest
Rate
Tax
Rate
Current
Liabilities
Selling & Distribution
Expenses
Investment

Appropriate Decisions To Create
Value
• Deploy more and more funds to those activities where the
amount of NOPAT generated by the activities is greater
than the cost of capital.
• Withdraw fund from those activities wherein the amount
of NOPAT is less than the amount of cost of capital unless
there is strategic decision to lose in one activity in order to
gain in another.
• Improve the operating efficiency of the organization to
retain the same amount of NOPAT by possible continuous
reduction of existing capital or / and continuous increase of
the existing NOPAT with existing amount of capital.
• Optimize the capital structure through optimum debt
equity mix in order to have the lowest possible weighted
average cost of capital (WACC).

Budgeting – Becoming Increasingly
Difficult
• Budgeting a formidable challenge even under stable
conditions.
• Managers often spend significant amounts of time on it -
four to six months according to McKinsey.
• Aberdeen reports that the average organization devises a
revenue forecast that is 12% removed from its actual
revenue. Further to this, the average organization devises a
budget for costs that is 11% away from its final costs.
• Under volatile conditions, developing one reliable budget
to coordinate business units and track performance for an
entire fiscal year is very difficult and has shown that the
traditional budget process may even be unproductive.
Aberdeen Group 2013; McKinsey 2009

21%
23%
25%
32%
43%
Inability to trace business success to its key
components
Corporate mandate for growth
Current budgeting and forecasting process is too long
and resource-intensive
Growing operational costs
Market volatility creates the need to dynamically
account for change
% Of Respondents
Pressures In Planning, Budgeting, And Forecasting
Can Be Rendered Useless!
“Really, what all these pressures add up to is a need to plan, budget and
forecast more quickly, while maintaining accuracy. Those organizations that
are pressured with the length of time it takes to complete these processes
may find that by the time those processes are completed; conditions have
changes and ultimately become useless.”
Aberdeen Group March 2012

20%
22%
27%
44%
56%
Inability to identify high risk areas of
the business
Organisation is increasingly distributed
across geographies
Lack of organisational accountability
Lack of contingency plans for
unforeseen events
Elevated risk, potentially impacting
profitability
% Of Respondents
Pressures To Factor Risk Into Financial Planning,
Budgeting, and Forecasting
83%
60%
Economic
conditions
Unpredictable
customer demand
Top Two External Challenges
Facing Companies With Respect
To Product Or Service Delivery
(% of Respondents)
Risky Business Inside
Aberdeen Group August 2012

Leading Methodologies
• In historical budgeting, organizations create budgets and forecasts based
on the variances between prior budgets and actuals,
• Zero-based budgeting assumes that there has been no history, and no
presumptions on future performance, This approach is used, typicallYt in
conjunction with external services to establish a baseline commonly
associated with industry norms and performance expectations.
• Performance-based budgets are driven by expected changes to the
business for which performance metrics have been established. These can
include new initiatives that will produce additional results, or can be
related to expected growth in resources - for example, the addition of
significant new sales resources or product lines.
• Using a driver-based budgeting process will involve the selection of one or
more basic drivers of the business upon which the budget is based, For
example, for a hospital, the budget may be largely driven by the insurance
reimbursement rates that the government mandates. As the rates
fluctuate, the budget for staff, supplies, and facility costs must be adjusted
accordingly. These budgets can also be influenced by controlled changes in
internal factors.
Aberdeen Group January 2013

Leading Methodologies
Best-in-Class organizations are less likely than All Others to
utilize the historical method and more likely to utilize
performance based budgeting and driver-based budgeting.
This indicates that Best-in-Class organizations are more likely
to understand factors that impact their business and
integrate this knowledge into plans, budgets, and forecasts.
51%
7%
22% 20%
59%
7%
20%
13%
0%
10%
20%
30%
40%
50%
60%
70%
Budgets prepared based
on historical data
Zero-based budgeting Performance based
budgeting
Driver-based budgets
%OfRespondents
The Best-In-Class Focus On Utilizing Data
Best-In-Class All Others

Just In-Time Budgeting
• McKinsey – “A volatile economy makes
traditional budgets obsolete before they’re
even completed”.
• Suggested new approaches:
– Scenario planning with trigger events
– Zero-based budgeting
– Rolling forecasts
– Quarterly budgeting
McKinsey 2009
“A volatile economy makes traditional budgets
obsolete before they’re even completed” -
McKinsey

Getting It
24%
27%
27%
30%
Elevated risk, potentially impacting profitability
Need to better integrate information from
unstructured data into corporate objectives
Need to better assess risk / reward dynamics before
undertaking initiatives
Too many decisions are based on incomplete or
inaccurate data
% Of Respondents
Key Factors Influencing Data Utilization
• The main theme that emerges is that organizations have difficulty using data, whether
it is available to them or not. They do not necessarily even know what factors impact
them, or where to find them.
• Thirty percent indicated that too many decisions were based on incomplete or
inaccurate data. These organizations do not have access to information on all of the
important things that impact their business.
• Twenty seven percent cited a need to better integrate information from unstructured
data into corporate objectives. There is much happening outside of the organization
that will impact performance. Much of this can be found on the internet in an
unstructured format. It is just as important as the internal structured data.

Flying Blind
• Best-in-Class organizations are 2.2 times as likely as All
Others to have the ability to incorporate business drivers
into the on-going forecasting process.
• Conversely, 65% of the Industry Average are flying blind
when it comes to planning, budgeting, and forecasting and
simply guessing when it comes to projections.
76%
35% 32%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Best-In-Class Industry Average Laggard
%OfRespondents
The Best-In-Class Understand Their Drivers

Being Capable
• Since driver-conscious organizations understand the factors that impact their
business, as well as the incremental increase that changes to these drivers has,
they can then figure out how these factors will impact the business in the future.
• Driver-conscious organizations are 76% more likely than non-driver-conscious
organizations to have the ability to perform a profitability analysis which is an
essential tool for ensuring that the business is a success.
• Driver-conscious organizations are able to provide data in the time needed to
make decisions 84% of the time. The results impact decision-making and,
ultimately, accuracy. Driver-conscious organizations have seen greater decreases in
time-to-decision and more accurate budgets and forecasts.
60%
74%
37%
50%
23%
42%
17% 18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Ability to perform "what if"
scenarios and change
analysis
Ability to perform
profitability analysis
Share analytical data with
the extended enterprise
Real-time updates to
financial metrics
%OfRespondents
Capabilities And Requirements
Drivers No Drivers

1960-01
1963-06
1966-11
1970-04
1973-09
1977-02
1980-07
1983-12
1987-05
1990-10
1994-03
1997-08
2001-01
2004-06
2007-11
2011-04
BusinessOutput
• The term business cycle refers to
fluctuations in aggregate
production, trade and activity
over time in a free market
economy and is measured by
fluctuations in real GDP and
other macroeconomic variables.
Business Cycle
• A business cycle is identified as a sequence of four phases:
– Contraction: A slowdown in the pace of economic activity
– Trough: The lower turning point of a business cycle, where a
contraction turns into an expansion
– Expansion: A speedup in the pace of economic activity
– Peak: The upper turning of a business cycle

Economic Indicators
• An economic indicator is an economic statistic
which indicate how well the economy is doing
and how well the economy is going to do in
the future.
• Economic indicators are typically used by
investors to make investment strategy
decisions.
• An economic indicators has a timing and
directional relationship with the business
cycle.

Directional Relationship
• Procyclical indicators move in the same direction
as the general economy: they increase when the
economy is doing well; decrease when it is doing
badly.
• Countercyclical indicators move in the opposite
direction to the general economy. The
unemployment rate is countercyclic: it rises when
the economy is deteriorating.
• Acyclical indicators are those with little or no
correlation to the business cycle: they may rise or
fall when the general economy is doing well, and
may rise or fall when it is not doing well.

Timing Relationship
• Leading indicators are indicators that usually
change before the economy as a whole changes.
They are therefore useful as short-term
predictors of the economy.
• Lagging indicators are indicators that usually
change after the economy as a whole does.
Typically the lag is a few quarters of a year.
• Coincident indicators change at approximately
the same time as the whole economy, thereby
providing information about the current state of
the economy.

Leading Indicator
65
75
85
95
105
115
125
2000-01
2000-05
2000-09
2001-01
2001-05
2001-09
2002-01
2002-05
2002-09
2003-01
2003-05
2003-09
2004-01
2004-05
2004-09
2005-01
2005-05
2005-09
2006-01
2006-05
2006-09
2007-01
2007-05
2007-09
2008-01
2008-05
2008-09
2009-01
2009-05
2009-09
2010-01
2010-05
2010-09
2011-01
2011-05
2011-09
2012-01
2012-05
2012-09
2013-01
2013-05
2013-09
2014-01
Index:2010=100
Business Cycle Leading indicator
Based on data from SA Reserve Bank (SARB), 2014

Leading Indicators & Stats
• Leading economic indicators have been successfully
used to predict the direction of the commercial share
price index on JSE through multivariate logit modelling
• Multiple linear regression is found to be a good enabler
to project demand as a process within the business
cycle using leading indicator as a proxy for aggregated
demand
J. Jordaan, E. Moolman, “Can Leading Business Cycle Indicators Predict the Direction of the
South African Commercial Share Price Index?”, 9th Annual Conference on Econometric Modelling For Africa, 2004
R. Burger, “Creating wealth through demand strategy”, Supply Chain Strategy Services, 2012
0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
3 000 000
3 500 000
Time Period
Actual
Forecast

Our Leading Indicator
Our Indicator: 21 components vs RBM 11 components
0
10
20
30
40
50
60
70
80
0
20
40
60
80
100
120
1970-03
1971-05
1972-07
1973-09
1974-11
1976-01
1977-03
1978-05
1979-07
1980-09
1981-11
1983-01
1984-03
1985-05
1986-07
1987-09
1988-11
1990-01
1991-03
1992-05
1993-07
1994-09
1995-11
1997-01
1998-03
1999-05
2000-07
2001-09
2002-11
2004-01
2005-03
2006-05
2007-07
2008-09
2009-11
2011-01
2012-03
2013-05
RBM-SR0603090 Indicator

Modelling Black Swans

Performance Defined
Definition of Maturity Class Mean Class Performance
Best-In-Class:
Top 20%
of aggregate performance scorers
• 94% of financial reports are delivered
in the time for decision-making
• Actual costs are with 3% of budget
• Actual revenue is within 2% of
forecast
Industry Average:
Middle 50%
forecast
Laggard:
Bottom 30%
forecast

Benefits
• The ability to quickly and accurately reforecast in
today’s volatile market place.
• The ability to do “what-if scenarios” and change
analysis allows a company to consider the potential of
certain events, even black swans, and what the
resulting effect will be on the business.
• Ability to receive periodic alerts on changes in the
business cycle.
• Reduce the overall supply chain’s bull whip by sharing
alerts and information across the extended enterprise
• Following Best-In-Class practice gives a margin
advantage of 5% over the Industry Average to 13%
advantage over the Laggards.

Disclaimer
This document has been prepared by Danie Schoeman and Company
to provide background information on the subjects mentioned herein,
the forecasts, opinions and expectations are entirely those of Danie
Schoeman and Company. This presentation was prepared with the
utmost due care and consideration for accuracy and factual
information; the forecasts, opinions and expectations are deemed to
be fair and reasonable. However there can be no assurance that
future results or events will be consistent with any such forecasts,
opinions and expectations. Therefore the authors will not incur any
liability for any loss arising from any use of this presentation or its
contents or otherwise arising in connection herewith. Neither will the
sources of information or any other related parties be held responsible
for any form of action that is taken as a result of the proliferation of
this document.

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