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Finance Brings Value Discipline to Strategy Execution May 30, 2006

Posted by exertia in Finance, Management.
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Interesting comments from Costco's CFO Richard Galanti in the report "Finance Brings Value Discipline to Strategy Execution: Different Paths to One Truth" from CFO Research Services, in collaboration with Deloitte Consulting LLP:

“We tend to be arrogantly simple.” When planning a new store, Costco is willing to trade off academic sophistication in favor of practicality. He explains, “We use a very basic cash-on-cash, return-on-investment calculation. One might argue that the rate in a new market should be a little different from that in an existing market, where we have a high degree of predictability. But from our viewpoint, keeping it simple is more important.”

"… No matter who you are in the company, one-fifth of your bonus [is tied to] inventory shrinkage. Low inventory shrinkage indicates a clean operation because shrinkage is not just pilferage. It includes things that are damaged, get stale, or lost. It can be caused by paperwork problems in accounting due to discrepancies between the actual shipments and billings. So low shrinkage is indicative of a clean operation in our mind, from many operating perspectives.”

“We’re not going to explain the capital asset pricing model to a buyer … We try to keep things basic and simple—much like our business itself. We sell 4,000 items, not 200,000 items. We don’t advertise. We cut out a lot of the complexities of the retail business and by cutting out those complexities and those costs, we can sell goods at prices lower than anybody else out there—and that’s what makes us successful.” So instead of explaining arcane financial economics, Galanti reduces things to the essential elements that managers need to execute strategy effectively. For example, reduction of inventory shrinkage through theft, loss, or paperwork inconsistency is a metric that goes into the incentive pay of everyone eligible for a bonus. The beauty of the metric, Galanti says, is that everyone can do something to influence it. Buyers can make sure that easyto- pilfer items arrive in hard-to-pilfer packages.Warehouse managers can minimize losses by running a tighter ship. Even accounting personnel can impact the metric by keeping a close eye on the paperwork.

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