Overview

If one were to focus exclusively on the top-line growth of NikoTech from Y1 to Y2, it would appear that things are going well. In an industry where expansion has slowed over the last few years, 23% year-to-year top-line growth ($1.500 billion to $1.845 billion) is more than an acceptable number. Less impressive, however, is the change in net income from $25.2 million in Y1 to $12.6 million in Y2. Obviously, the challenge for NikoTech's management is to continue the acceleration in sales while reversing the 50% slide in net income. The answer to that challenge is to understand the underlying forces that accelerated sales, isolate the causes of returns and allowances, identify what really constitutes cost of goods sold and, finally, realize that when left unabated, general, sales and administrative expenses can be a voracious consumer of gross profit.

Once it is determined that a product has market appeal, the key factors that drive sales at an operating level are product availability and price. Given NikoTech's build-to-order model, product availability certainly relies on accurate forecasting and collaborative planning, but even more so on the rapid sourcing of raw materials, short cycle times and 100% accurate distribution lead times. Native to the build-to-order model is a minimum of finished goods inventory; therefore, aside from low costs, the key competitive factor for NikoTech is velocity across the entire supply chain. Considering the nature of the industry, as well as the relatively small size of NikoTech, controlling costs and reducing cumulative...