Incentives for Good Asset Management

Aug. 1, 2003
By Tom Andel, chief editor, MHM You have a great opportunity to help your company outshine its competitors by improving asset visibility--both corporate

By Tom Andel, chief editor, MHM

You have a great opportunity to help your company outshine its competitors by improving asset visibility--both corporate assets and those in the warehouse. If you're a publicly held company, this will make you look good in the eyes of stock holders as well as customers.

On what do I base this sorry assessment of asset management? A couple of sources.

First, according to a study by WhereNet, more than 70 percent of companies they surveyed still rely on manual techniques to locate and track physical assets. This has a direct impact on supply chain efficiency and cost. Every respondent stated their current asset management data are inaccurate, and that by the time an asset or inventory item is located, scanned, and downloaded into their inventory system, its status has changed.

Michael J. Liard, senior AIDC/RFID analyst for Venture Development Corporation, says these survey results demonstrate the need for total asset visibility within end-user environments.

"Enterprises of all sizes are challenged with the 'black hole' syndrome... if they had real-time data about the location and status of all their assets, their overall operation would be, by orders of magnitude, much more efficient."

Ron Giuntini, executive director of the OEM Product-Services Institute, had an even bleaker picture of the art of asset management to share with me.

"Very few companies have their act together," he told me. "I always tell my clients it's not how good you are, it's how screwed up your competitors are. You may only have 98% accuracy but your competitors probably have 95%, so you're looking great."

In this era of corporate accounting scandals, where cooking the books has burned several star-CEOs, you can do your company a favor by showing how good material handling practices can fix, help or uphold its corporate image.

Believe me, there are a pack of watchdogs out there hunting asset mis-managers. I got a call the other day from an organization called TeleTruth. It's on the case of Verizon, the telecommunications giant, for its alleged long history of faulty asset management. According to TeleTruth, the Federal Communications Commission (FCC) conducted audits in the 90s to get the Bell companies to clean up their accounting records. Turns out, the FCC was unable to verify 20 percent of Verizon's and some of the other Bell companies' accounting records. In those days, the Bells' rates were based in part on their assets. Those assets were wildly inflated, according to TeleTruth. Whether those bad numbers were the result of cheating or just poor management, the result was unjustifiably high rates.

According to an article in Forbes magazine, the FCC abandoned an equipment audit of the Bells after they agreed to a compromise known as CALLS, the Coalition for Affordable Local and Long Distance Service. The result was flat "all-you-can-eat" calling plans.

MHM sat in on a teleconference held by TeleTruth recently. Here's their side of the story, stated by Daniel Berninger, of their advisory board:

"The Federal Communications Commission conducted audits in the 90s to get the Bell companies to clean up their accounting records. The Bell Companies and Verizon at the time denied problems with their records, so the FCC declined to press the issue further. Teltruth made a complaint to the Securities Exchange Commission using information we received from a whistle blower who was a former Nynex employee familiar with property records. We made some of that data available to the SEC.

"Verizon called the property records process a paper shuffling exercise. Any public company has to maintain property records, of which Verizon does not have an alternative property record that covers value. They have records regarding provisioning of phone service, but that doesn't track the value of equipment. They're calling the duty to have a property record superfluous. They point out in the years before the audit, phone company capital investment was irrelevant to the prices charged.

"Only two things affect prices. One is market forces, where your competitor charges a price less than you and you want to lower your price to be competitive. The other, if you're a regulated entity, is cost. They can argue all they want about the direct or indirect connection between cost and prices, but they don't have market forces defining price, so the only other possibility is some assessment, however indirect, of cost. If there's no association with cost, then that in itself is a fraud, because they're charging prices that don't have anything to do with reality.

"The property that Verizon has on hand is very dynamic. Things go in and out of service, get lost, get broken, so it takes a great deal of effort to do the asset management. If you don't work hard on that, put bar codes on everything and do your annual property audits, you get the craziness we observed. The SEC estimated it probably took upwards of 16 years to get as bad as they are because there are only 40,000 line items that get entered each year and there are far more than those that are screwed up. The bottom line is none of them are caught because there is no reconciliation."

After the teleconference, MHM contacted Verizon for their comments. Here's what Larry Plumb, director of communications, had to say:

"There used to be a form of regulation of phone rates called rate base rate of return. You added up your rate base and it worked out to cost plus profit equal price. Your costs were your capital equipment investment, plus your expenses, then you'd have cost of capital, and that would be your profit, and the regulators would figure out a way for you set a rate and meet all your total costs. That form of regulation began to change in the 80s with price caps. Instead of worrying about your investments, the regulators said whatever your rate is right now, your rate is frozen, and we no longer care what your investment is or your cost structure. It was a way to have the market set your price. If you can be efficient and realize a 70% margin, you can make a lot of profit, and no one can fault you. If you're inefficient and get only 10% margin, that's your own fault. So there was no longer this need to track investments, and this was a good 9 years before these FCC audits took place, so assets were irrelevant to rate making for a long time.

"How do we keep track of equipment now? We're using bar codes."

Even though the value of assets is no longer relevant to telecom rates, TeleTruth believes if the actual value of all those telecom assets in inventory years ago was known, the Bells would have to be paying refunds and lowering prices today. You know what they say about paybacks.

All managers of public companies are under more scrutiny today. The latest regulatory snare to avoid is the Sarbanes-Oxley Act (SOA), which requires officers of public companies to certify various representations regarding the fairness of financial statements and the effectiveness of disclosure controls and procedures. Supply chain managers, take note: Section 404 of the Act requires management to file a report articulating how you establish and maintain control over financial reporting at year end. Poor inventory management lends itself to financial misstatement, as we saw with the Bells.

APICS, The Educational Society for Resource Management, and Protiviti Inc., a risk consulting and internal audit firm, released a white paper for logistics professionals: "Capitalizing on Sarbanes-Oxley Compliance to Build Supply Chain Advantage: A Back-to-Basics Approach to Internal Control and Supply Chain Integrity."

"Businesses [have] lost their competitive advantage due to management's inability to retain control and the inefficient, unpredictable and chaotic nature of the supply chain process," the report's authors note. "Ineffective supply chain operations not only drive inefficiencies but also increase the likelihood of financial misstatement."

Although Section 404 focuses on internal controls over financial reporting, the fundamental approach to achieving compliance has a complementary impact on supply chain infrastructure design, transaction integrity and reporting measures, both in a financial and operational nature. For supply-chain-related processes, the suggested approach begins by defining and linking six supply chain components: business strategies and policies; business processes; organization and people; management reports; models and methodologies; and systems and data. Users are also advised to document and assess critical supply chain processes, design and implement controls, and report on the final state.

Electronic copies of "Capitalizing on Sarbanes-Oxley Compliance to Build Supply Chain Advantage" are available at Proviti will present the paper at the upcoming 2003 APICS International Conference and Exhibition, October 6-9, in Las Vegas.

If you're a publicly held company, the SOA expects you to be following these procedures by the end of your fiscal year ending on or after June 15, 2004. But even if you're privately held, I urge you to document and assess your critical supply chain processes, make corrections and do a report on the results. You'll be more competitive for it.