Service Background

EPO (Enterprise Profit Optimization) is a recent trend in business management seeking for simultaneously optimizing the supply-side and demand-side functions of an organization toward a common objective: the profit.

EPO helps to solve current problems that occur, in the mediate term, when demand and supply management systems decisions are not aligned:

• Releases of promotions for products with limited capacity.

• Manufacturing resources not used by lack of demand.

• Inefficiencies and high costs by variations in production volumes.

• Low profitability of products for those who do not have meet its demand.

Service OBJECTIVE

EPO is a planning service that allows for an integrated analysis of the impact on profitability of sales and marketing actions -on the demand side- and those of operations -in the supply chain-.

EPO service can be used to assess objectives at the strategic, tactical, and operational levels:

• At the strategic level, it is concerned with the acquisition and geographic location of resources.

• At the tactical level, it concerns the allocation of these resources among the markets and products that the company decides to operate.

• At the operational level, it is concerned with the optimal execution of the business.

EPO may require different configurations depending on the desired objectives.

EPO supports decisions by evaluating the current scenario (the as is), or comparing it with a proposed scenario (the to be): setting the as is is a requirement.

Service SCOPE

Planning implementation:

• At the tactical level.

• At the operational level, it is concerned with the optimal execution of the business.

Service APPROACH

The services involves 5 steps:

1. Visual Model Generation

2. Data Capture and Validation

3. Model Validation

4. Analysis Execution

5. Communication of Results

Step 1 – Create a visual model of a process or organization to analyze

Process Flow Diagram: Describes the operations of a process, partial or an entire organization, through database objects (2 or + of a total of 4 Objects: Inventory, Purchasing, Sales and Conversion-Production) its materials, conversions and flows connected by database links (5 types of Links: Purchases-to-Inventory, Inventory-to-Sales, Inventory-to-Conversion, Conversion-to-Inventory and Inventory-to-Inventory)

Financial Reporting Hierarchy: Communicates the financial results of an organization with unlimited # of business units and consolidation entities generating a complete set of fully customizable EEFF for each scenario generated through database objects (Financial Reporting, Source of Funds, Use of Funds) and flows connected by BD links (Financial Report-to-Financial Report, Source of Funds-to-Financial Report and Financial Report-to-Use of Funds).

1.1 Define the materials, their inputs and outputs for each modeled process object:

1.2 Define the flow of materials from one object to another object through the use of Links:

Summary oF Objects, Links, Data and Costs

Step 2 – Data Capture and Validation

2.1 GLOBAL DATA

Time Period—Defines the base unit of time of the model. They can be of two types Single or Multiple. Models of Individual Time Period (STP Single Time Period) of weekly or monthly repetitive use without seasonality i.e. production program. Multiple Time Period (MTP) of use in LP or seasonality plans.

Organizational Unit (Facility): Defines the financial reporting unit of the base model to allocate income and expenses being its parameters the base currency, overtime rate, etc. It must then be associated with its Financial Reporting object (1 to 1) in order to generate the respective EEFF and define the type of report: Standard, Roll-up or Horizontal Roll-up.

Locations: Represent physical locations where business activities are executed. A location must be associated with a single Financial Reporting Facility that will incur the expenses or income generated from that location.

2.2 OPERATIONAL DATA

Material Conversion: Describes the production capacity of the different conversion objects and their resources. For processes see Tables tab, Table: 1. Process Activity Field Process Units / Hour (Process Unit/Hour) to measure the rate of performance, Input & Output Unit/Process field for consumed units and Output for units created x each process unit. For resources see Tab Tables , Table: 1. Resource Activity -> Downtime Factor for scheduled idle hours i.e maintenance.

Material Distribution: Describes how incoming inventories are distributed to process activities and outbound to sales activities. For process activities see link Inventory-to-Conversion Tab Tables, Table: 1. Primary Distribution field Distribution to measure quantity of material, from the bill of materials, consumed per process. Input & Output Unit/Process is used as a conversion factor for all materials that are not on the bill of materials. In distributed inventory towards Sales Activities see link Inventory-to-Sales Tab Tables , Table: 1. Mix Distribution field Distribution to describe the number contained in an associated Item descriptions unit.

Material Yield: Describes how incoming inventories are distributed to process activities and outbound to sales activities. For process activities see link Inventory-to-Conversion Tab Tables, Table: 1. Primary Distribution field Distribution to measure quantity of material, from the bill of materials, consumed per process. Input & Output Unit/Process is used as a conversion factor for all materials that are not on the bill of materials. In distributed inventory towards Sales Activities see link Inventory-to-Sales Tab Tables , Table: 1. Mix Distribution field Distribution to describe the number contained in an associated Item descriptions unit.

2.3 FINANCIAL DATA

Fixed Costs: Describes costs that are not affected by activity levels within a given time frame such as depreciation, administrative salaries, lease of locations, etc. They can be applied to resources in the Table Conversion object: 1. Resource Activity Fixed Cost, Facility & Locations field in the Fixed Costs Open & Closed field of the Definition Table of each Business Object.

Variable Costs: Describes the costs that are affected by activity levels within a given time frame such as raw material, transportation, sales commissions, etc. They can be applied to material input in the Table Purchases object: 1. Purchase Activity Cost/Unit field, inventory materials in the Inventory table object Table: 1. Inventory Activity Holding Cost/Unit field, to processes defined in the Table Conversion object: 1. Process Activity Cost/Unit field, to material output in the Sales Table object: 1. Sales Activity field Disc, Ret & Comm Rate, to yields and distributions of materials in the links P2I I2C C2I I2S field Cost/Unit, link I2I Table Transfer Activity field Cost/Shipment, corporate financing activities object Source & Use of Funds Table Funding & Investment Activity field Cost/Amount .

Direct Labor: It can be defined as fixed or variable depending on whether it is affected by changes in production levels. It is configured as such for Facilities or Locations by activating Slack Labor Switch "on" or "off" from the Definition Table of each Business Object. Switch "on" defines them as fixed and all available hours will be incurred whether or not they are used. Switch "off" defines them as variables and only the hours used will be incurred. Normal hours and overtime can be defined by activating Slack Switch "on" or "off" for both normal or extra or "on" or "off" for one or the other. Hour/Man Rate plus a Premium Overtime (OT) and/or a Payroll Loading Factor can be modeled to include employer charge taxes, benefits and other payroll expenses. They can be applied to resources in the Table Conversion object: 1. Resource Activity Field Labor/Hour. For Facility & Locations in the Payroll Load Factor field of the Definition Table of each Business Object.

Prices and Values: Describes the sale price of products to external markets or customers or the transfer price of products or materials in intercompanies. It is defined for external clients in the Sales Table object: 1. Sales Activity price / Unit field. For transfer pricing is defined in the links P2I I2C C2I I2S Table Distribution or Yield field Transfer Price / Unit, in link I2I Table Transfer Activity field Transfer Price / Unit. You can define start and end inventory values in the Value / Begin Unit and Value / End Unit fields of the Inventory Table Inventory Activity object.

Step 3 – Model Validation

Reconcile financial statements generated by the Activity levels of the model vs the actual activity and those generated in a recent accounting period

3.1 Correct validation accounting period

We must first select a past accounting period. For this we must consider three factors: Duration, Relevance and Availability of Information.

Duration refers to the span of time such as week, month, quarter, or year. In the previous section we saw the Time Period is implicit in the operational and financial data of the model therefore the planning horizon sought must be similar with the validation period to be selected. A weekly analysis for production scheduling will be relatively shorter than a Capex analysis being many times the same model changing only the data, CP vs LP, validating the CP first before the LP.

Relevance determined by the representativeness with respect to current activities and their persistence over time for example if we are evaluating the distribution plan of the last quarter we must evaluate the last quarter of last year, another quarter may have the same duration but not the relevance.

Availability of Data for that Period For example for a monthly analysis of sales mix the previous two months have a similar duration and can be considered relevant but the most recent month can be removed from consideration if the operational and financial reports containing the necessary data have not yet been issued.

3.2. Reconcile the Activity Levels of the model vs the actual activity

Volume Units:

Step 1: Reconcile the calculated units vs. actual produced units by forcing the model with the input of the value actually consumed in the Min and Max Units/Period fields of the Process Tables.

Step 2: Reconcile the actual values of consumed materials in Total Volume In / Out fields of the MP Inventories Activity Table. If there is a difference determine if it is due to an anomaly of the period or not. Only if there are no anomalies to adjust the Distribution field in I2C.

Step 3: Reconcile the actual values of materials produced in Total Volume In / Out fields of the PT Inventories Activity Table. If there is a difference determine if it is due to an anomaly of the period or not. Only if there are no anomalies to adjust the Yield field in C2I.

Step 4: We compare the value of Total Solution Units with actual purchases. We adjust the model to buy the actual volume by entering the value in Purchases-Min/Max Total Units

Step 5: Reconcile security inventory-stock policies with MP inventory reports via adjustments in Min Max Begin Units FP achieving Solution Begin Units FP and End Units LP calculated with the current balance.

Step 6: We compare the value of Total Solution Units with the actual sales by entering the value in Sales Min/Max Total Units then reconciling this process according to Step 5 for PT.

Step 7: Reconcile security inventory-stock policies with PT inventory reports via adjustments in Min Max Begin Units FP achieving Solution Begin Units FP and End Units LP calculated with the current balance.

Reconciling Activity Levels in Units of Time:

Units of Time: Reconcile, for each defined resource, the actual hours of the validation period consumed to the values listed in the Total Hours ST and AT fields. If there is a difference determine if it is due to an anomaly of the period or not. Only if there are no anomalies to adjust Downtime Factor fields found in the Resource Activity Table and/or Process Units / Hour and Rate Adj fields. From the Process Activity Table. If the calculated hours are less than the real ones reduce the throughput rates and increase downtime factor. If the calculated hours are higher, increase the throughput rates and reduce the

3.3 Reconcile the EEFF generated by the model with those of the Defined Accounting Period:

Validation of financial breakdown of Costs: First we must enter the EEFF reported in the budget Budget Period column of the Financial Report object Table Chart of Accounts. Validate the results in the % O/U Budget fields as % difference and Solution – Budget as the monetary difference of the Financial Report Analysis Results table with respect to the Total Solution and Total Budget fields.

Validate fixed costs originally derived from fixed vs variable classification errors or inconsistency between EEFFs derived mainly from fixed costs in facilities or locations.

Validate variable costs:

View differences in Net Purchases in Analysys Results (AR), if any, adjust Purchase Activity cost/unit field

See differences in Inventory Valuation in Analysys Results (AR), if any, adjust Inventory Activity Value Begin / Unit FP and Value / End Unit both MP and PT. To match BG Chart of Accounts Min Max Beg Balance Adjustment Accrued Expenses

Validate calculated labor costs with payroll (AR) expenses, if any, adjust OT Slack Switch in Facilities and Max OT Hour/P

Validation of financial breakdown of Income: Main sources of differences by them are reconciled in the end. Discrepancies should be attributed to price differences arising from normal price fluctuations in the market. To do this, the average price of the month must be taken. Sales prices are adjusted directly in the Price/Unit field or indirectly in the Disc, Ret & Comm Rate field of the Sales Activity table.

Step 4 – Analysis Execution

Capture strategic, tactical and operational plans that improve future financial performance within 1. Base Scenario, 2. Optimizing it and 3. Exploring Alternatives.

4.1 Base Scenario

Base Scenario: New approach from historical financial accounting perspective to planned future. Basis for the identification of restrictions and opportunities. This scenario should represent the future operating environment of the organization, financial assumptions as well as the future plans of the business managers. To do this, the following adjustments must be made:

Operational Data Adjustment: Represented in productive capacity and the yields and distribution of materials from and to the different processes. Differences in the operational data of the validation period and the following planning period can be derived from changes in material requirements and / or performance as well as improvements in capabilities (CAPEX) or processes. To capture these differences, the Process Unit / Hour (T) Process field is used for conversion for the process and Downtime Factor (T) Resource for the resource. Use Distribution (I2C) field for the materials created and Yield (C2I) for those consumed by your processes.

Adjustment of Financial Data: In the same way, the differences in financial data between the validation period and the planning period derived from changes in Fixed, Variable and Price Costs must be corrected.

Constraint Adjustment: Finally, the restrictions in the Max Hours / Period (T) Resources, Min-Max Begin-End (T) Inventory, Min-Max Units / Period (T) Purchase and (T) Sales fields are adjusted to incorporate production, inventory, purchase and sales plans.

4.2 OPTIMIZED Scenario

Relax Model Constraints: Constraints of the base model are not necessarily those dictated by actual physical or economic constraints, but rather by those that management plans to apply. Relaxing production constraints of the model defined during validation allows to optimize the level of productive activity of the base scenario of planned purchases or sales, reflect the real physical or economic limitations and optimize the level of purchasing activity of each material or sales for each finished product respectively.

Results Analysis: Within the Results Analysis table of each database object – Solution Budget field calculates the difference between the budgeted scenario or base scenario and the optimized base scenario solution and % O/U Budget calculates the percentage variation. Similarly, the Results Analysis Table of the Financial Information object allows to compare the financial impact on the application of the optimized base scenario activity levels line by line.

4.3 ALTERNATIVE ScenarioS

Visualize opportunity costs where you can deepen hypothetical scenarios that can potentially take advantage of the identified opportunity values.

Visualize Opportunity Costs: Refers to the actual economic impact of allowing the model to use a unit + or one - of a material, process or resource defined in the current solution. For example, if we analyze the Sales Mix, a positive value (= max units) the net income would increase by that value if the solution allowed to sell one more unit of that product, negative (= min units) in net income would increase if one less is sold and value 0 when it has no impact on net income. (See Report Opportunity in Values Tools -> Analyze Solve Results)

Scenarios, what if? In a case of optimizing the organization's sales mix with positive opportunity cost associated with a particular product, use business knowledge to explore scenarios that could raise the upper limit in the product sales activity table. Also, if there is a negative opportunity cost value, use business knowledge to explore scenarios that could reduce or eliminate the respective lower limit.