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January 9, 2014

Operational integration in country organisations

The customer facing automotive supply chain has evolved over the years in a tiered fashion considering the product lines, the dealership structure and the legal regulations in countries. It has resulted in a multiplicity of organisational units which are quite adept and responsive to the needs to of the customer, but leave a lot of optimisation and efficiency potential to be realised. The potential is even more discerning given the way IT has evolved over the years in finding new avenues for business to be leaner and agile. The overarching aim of the business to harmonize, consolidate and automate business processes is deeply embedded in the desire for a new integration and optimization paradigm which is taking shape at the country / market level.

How have the country based entities evolved?

A high level cognizance of the origins of the current organizational structure is needed to appreciate the potential of operational integration . Some of these factors are explained as follows:

  • Automotive lines of business are structured as different legal entities in the parent organization i.e. The OEM. Passenger cars, trucks, buses, value added services like car sharing, captive finance etc. have had their own country based organizations and dealer networks catering to the specific needs of the business
  • Many independent large scale country importers or distributors are co-opted as country organisations by leveraging a partnerhip or holding structure model. There are gaps between the OEM central processes, its existing country entities and the new entity. 
  • Consolidation in the automotive space e.g. Renault and Nissan, Fiat and Chrysler etc. has created parallel retail networks which need to be integrated in the long term
  • Country regulations sometimes force OEMs to forge joint venture partnerships with key local players in order to get a foothold in the country market. Later, they may establish their own parallel entities as well. 
  • OEMs open or acquire completely owned retail oulets in order to further the OEM brand via an enhanced customer experience.  However, multiple such retail organizations keep existing as independent entities without process harmonization. 
  • OEMs may have complex cross-holding structures with different retailers in order to enforce a uniform customer experience and meet the capital needs of retailers to hold large inventories in big markets. These further enhance the diversity of entity structure.  

What are the integration opportunities?

With such a diverse and complex structure which has evolved over the years, it is natural that a lot of process redundancies and inefficiencies creep up in business processes which offer multiple optimization opportunities.

  • Consolidation of legal entities - Legal entity administration is very effort intensive with respect to statutory reporting, data maintenance, record keeping, communication with business partners as well as management reporting. Consolidation of legal entities provides an opportunity
        • to minimize the same tasks which span across multiple entities, 
        • bundle some of the processes together like payment runs, 
        • have a uniform communication processes with business partners throughout the country organization 
        • reduce the organisation wide FTE and effort count
        • circumvent the need for a legal entity
  • Harmonization of business processes- There is an overarching need for responsiveness to customer needs, legal changes and real-time reporting. Harmonization of business processes across the entities becomes a critical success factor. A harmonized chart of account, approval work-flow, controlling concept etc at a country level would enable a quick roll-out of new changes like SEPA across the entities with minimal turnaround time. Even if the legal entities are not consolidated, common processes offer an opportunity for cost savings and efficiency.
  • Shared services- consolidation of legal entities and process harmonization also provide an opportunity to bundle processes across entities which can be managed by a single team. Most of non-customer facing processes can be shared. For instance, a central purchasing organization can negotiate better prices with suppliers based on volume bundling from distinct legal entities. A single controlling team can maintain budgets and retain availability control on expenses and purchases. Shared services further enhance the efficiency and standardization focus and help reduce transaction costs.
  • IT consolidation - Different legal entities could be served by dedicated legacy systems which are no longer scalable and increasingly out of strategic fit in the IT landscape. With the same performance and availability, multiple legal entities can be brought on the same hardware / application in order to reduce ownership costs. Legacy systems can have a planned sundown which stops the outgo of expensive license and annual maintenance costs. Investments on functionality upgrade can also pickup again, as the restrictions on fresh development on the new system vis a vis legacy systems are removed. Even if the processes are not harmonized or entities are not consolidated, there are huge cost advantages in the instance consolidation of different systems belonging to legal entities (e.g. if all are SAP systems). A common IT governance can also be ensured. The potential to harmonize business processes also becomes real.

What are the key considerations in operational integration?

Any business initiative which aims to bring about operational integration should aim at creating a solution that delivers immediate benefits, creates minimal business disruption and can be rolled out rapidly in multiple locations. The considerations of such a solution could be:

  • Transaction automation:The need for manual intervention in transaction processing for data validation / reconciliation, grows with volumes especially post entity consolidation or integration. It is increasingly possible to execute transactions from one entity on behalf of another entity, or to automatically link a chain of transaction steps in a business process which span across legal entities. The validations and checks are embedded within the automation framework. Errors handling is quite user friendly. It is possible now to tailor business processes like procure to pay, record to report and order to cash in a much leaner fashion with automation. Any operational integration without commensurate automation benefits is probably half done.
  • Authorization framework: The criticality of rights and authorization cannot be understated when postings are made across legal entities. With increased business processes under the purview of local shared services, duties are to be segregated between users who execute transactions and those who approve it. Hence an authorization remodelling is quite central to the operational integration solution.
  • Migration and cutover strategy: The master data from different legal entities would need to be extended to the parent organization in order to achieve "on behalf" execution or consolidation. The open transactions will be converted and mapped into the new consolidated entity for business continuity reasons. With advanced migration tools, the complexity of migration has decreased by several notches. However, the importance of data cleansing and harmonization should never be lost. Integration initiatives provide an excellent opportunity to do an effective data management.
  • Business partner management: The change management around communication strategy is critical, as business partners may start receiving information from the new entity instead of the old one. The address, logos, contact partner details, hot-lines, vital financial and banking information, business documents (orders, invoices, correspondence, protocols etc) may have a substantial change. Importantly, not only the change management within the organization is necessary but the business partners have to be on-boarded with equal importance. More specifically, workarounds and alternatives should be available if the  bi-directional business partner communication lands in the old paradigm despite go live.

With advanced technology and features (e.g. SAP Landscape Transformation), operational integration can be accomplished with relative ease as compared to the past. With a strong strategy and opportunity focus the country interface of the automotive organization can be transformed to offer a uniform customer experience and service agility while it is extremely efficient at the same time. In the time to come, entity optimization and integration has the potential to become a critical driver for the automotive CFO in his / her pursuit of operational excellence.   


January 7, 2014

Bitcoins - should we care?

News has recently been dominated by the development of the value of Bitcoins. The price of the digital currency has risen from 250 USD from beginning November to a record high 1065 USD on December 8th only to drop half of its value in 24 hours again. Chinese government has prohibited national banks to trade in the currency as it indicated the Bitcoin has a high risk of being used by criminals and for money laundering. This has led to Chinese leading social network Baidu, which used Bitcoins as a trading currency, to stop excepting them. China's high powers evidently felt that the cryptocoin was getting too hot to ignore. So is Bitcoin here to stay or is it just another digital hype?

So for those who are not aware of the currency, what are bitcoins and what's it's use? Bitcoins were invented by a developer under pseudo-name Satoshi Nakamoto in 2009. Bitcoins are not tangible but only exist as a piece of code in a peer-to-peer payment network that is powered by its users with no central authority or middlemen. How are Bitcoins created? New bitcoins are generated by a decentralized process called "mining". This process involves individuals who are rewarded by the network for their services. Bitcoin miners are processing transactions and securing the network using specialized hardware and are collecting new bitcoins in exchange for their services. You can compare the function of this network of miners similar to a central bank, authorized to print and distribute the currency. How are Bitcoins used? From a user perspective, Bitcoin is nothing more than a mobile app or computer program that provides a personal Bitcoin wallet and allows a user to send and receive bitcoins with them. Behind the scenes, the Bitcoin network is sharing a public ledger called the "block chain". This ledger contains every transaction ever processed, allowing a user's computer to verify the validity of each transaction. As Bitcoin is a cryptocurrency; for each transaction, the bitcoin receiver shares a public address where the amount can be send to. With a private key, the receiver can then digitally sign the receipt. How do we know it's secure? The Bitcoin specification starts with the concept of a distributed timestamp server. A timestamp server works by taking a hash function of some data and widely publishing the hash. For Bitcoin, each timestamp includes the previous timestamp hash as input for its own hash. This dependency of one hash on another is what forms a chain, with each additional timestamp providing evidence that each of the previous timestamp hashes existed. To form a distributed timestamp server as a peer-to-peer network, Bitcoin uses a proof-of-work system often referred to as Bitcoin mining. Anybody can become a Bitcoin miner by running software with specialized hardware. Mining software captures transactions broadcast through the peer-to-peer network and performs appropriate tasks to process and confirm these transactions. For new transactions to be confirmed, they need to be included in a block along with a mathematical proof of work.

Bitcoins are created at a decreasing and predictable rate. The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence. When taking todays Bitcoin value (15 dec 2013) of 872USD, this means that the ultimate value in circulation is approximately 18 billion USD. One would consider this is as just a small amount compared to currencies such as Euros and USD's in circulation. But 2 important things should be considered. First the currency is only worth, when it's being used. When money is deposited on a savings bank and not spend, it's useless. Bitcoin payments are easy to make and can be used for small payments against minimum fees. If a bitcoin is being rotated from owner every day, the trading value per year can ultimately develop to 6 trillion USD, more than the Indian yearly GDP. Obviously, the circulation rate will not be once in 24 hours, but the advantages to do so are known. We will come back to that later. Second, a digital currency is a good replacement for national currencies that are non-tradeable or problem plagued. It's best example is the Chinese Renminbi which is only allowed to be exported or used in international transactions on a limit base, ultimately making it less advantageous for consumers to hold on to, unless they travel to China often and have the opportunity to spend it. For this reason Bitcoin is seen as a perfect substitution for Chinese consumers making payments outside of China. One third of all Bitcoin transactions are performed by Chinese. Also when a currency is plagued by volatility, the Bitcoin can be used to circumvent inflation, capital controls, and international sanctions. Bitcoins are used by some Argentinians as an alternative to the official currency, which is stymied by inflation and strict capital controls. In addition, some Iranians use bitcoins to evade currency sanctions.

Another major advantage of Bitcoin payments are that there are either no fees or extremely small fees. Users may include fees with transactions to receive priority processing, which results in faster confirmation of transactions by the network. Additionally, merchant processors exist to assist merchants in processing transactions, converting bitcoins to a currency of choice and depositing funds directly into merchants' bank accounts daily. As these services are based on Bitcoin, they can be offered for much lower fees (a payment of 0.0005 BTC for a 1,000 BTC transfer) than with PayPal or credit card networks (which usually request a 1 or 2% fee over the transaction amount)
Moreover, Bitcoin payments can be considered as secure, controllable and transparent - Bitcoin users are in full control of their transactions; The recipient holds a private key which is kept secret. Only the private key can decode information encrypted with the public key; therefore the keys' owner can distribute the public key openly without fear that anyone will be able to use it to gain access to the encrypted information. All information concerning the Bitcoin money supply itself is readily available on the block chain for anybody to verify and use in real-time. No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secure. This allows the core of Bitcoin to be trusted for being completely neutral, transparent and predictable.

Even with the Chinese government banning the speculation of the currency by its banks or act as a middleperson for bitcoin payments, it seems like the Bitcoin use is unstoppable. Just todays issue of Business insider published that a Swedish company has sold 28 million USD worth of bitcoinminers, which has the processing capacity to mine around 4000 bitcoins per day. Techies show that bitcoinmining is lucrative and will stay lucrative until the last Bitcoin has been issued. And with its transaction processing advantage, more and more retailers are allowing customers to pay with the currency, it looks like the Bitcoin is here to stay. At least until a better, cheaper and more reliable currency is on the market.

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