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Feasibility Study for having an Internal Shared Service Centre for Medium Size Manufacturing Unit

www.rbiz.global [email protected]

Executive summary

2

Mandate was to study the existing accounting set up and conduct a feasibility study for having an Internal Shared Service Centre (ISSC)Mandate was to study the existing accounting set up and conduct a feasibility study for having an Internal Shared Service Centre (ISSC)

As a part of this feasibility study, visited all the units of client, reviewed the process & relevant documents and interviewed several peopleAs a part of this feasibility study, visited all the units of client, reviewed the process & relevant documents and interviewed several people

Cost and Efficiency are the main drivers for setting up a SSC model. Upon review of client’s existing set up in different cities, enough opportunities identified for having an ISSC though not from ‘Cost’ perspective. But, there will definitely be cost advantages in the days to come if and when client’sinternational operations and other group companies gets integrated in this model. There seem to be enough reasons for an ISSC from the ‘Efficiency’ perspective. Couple of models suggested for the Leadership review

Cost and Efficiency are the main drivers for setting up a SSC model. Upon review of client’s existing set up in different cities, enough opportunities identified for having an ISSC though not from ‘Cost’ perspective. But, there will definitely be cost advantages in the days to come if and when client’sinternational operations and other group companies gets integrated in this model. There seem to be enough reasons for an ISSC from the ‘Efficiency’ perspective. Couple of models suggested for the Leadership review


Business Operations

3

Central office of the whole Client’s Group. Several transactions especially treasury are being routed thru couple of offices here. It too has a set of books

Location 1

Location 2

Is the smallest of the Group. Buys raw material pre-dominantly thru auction from 4 centres. Blending in the central premises. 100% Export Oriented Unit. Couple of major buyers from abroad.


Business Operations (Contd)

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1. Sub-location 1 - Controlling office for location 3. Business Head of location 3 sits out of this office. Several persons from Marketing, Accounting, Logistics and Administration operate from this office. Sub-location 1 has its own books

2. Sub-location 2 - Handles only ‘conversion’. All Raw materials and the packing materials are supplied by Hindustan Lever (HL). Finished Goods are prepared as per HL’s specifications. Inspection is being carried out by HL at various intervals. After despatch of finished goods, only Job Work Invoice is prepared. This factory is being run exclusively for HL’s work. No other customer is being entertained from this premises

3. Sub-location 3 - Handles Tata, Nestle, Duncan’s and TPL (both domestic TPL and Export RT) Tata – Same as TDR ops….Blended Tea to Bags….J/W charges. Nestle –Procure materials (both thru Auction and Private parties) from Nestlé’s approved vendors, blending at sub-location 3 premises, packing after Nestlé's approval for Despatch. Regular Sales bill to Nestle. Duncan’s – Blended Tea supplied by Duncan’s….Packing materials are from internal supplier. Sales invoice for Job work Charges + Packing Materials. TPL –Bulk Tea is supplied by TPL –Blending and Flavouring of Bulk Tea at Sub-location 3. Invoice raised for different process –Blending Charges, Transportation, Storage and OH & Admin Charges. For R Twining (RT) Procurement of Bulk Tea and Blending at Sub-location 3. Export Invoice is raised for Bulk Tea Despatches

4. Sub-location 4 - Is the biggest of the Group. Buys 80% of its ‘Raw Materials’ i.e. Original Black Tea from internal vendor, a partnership firm. Rest 20% comes from abroad. (Argentina, China, Japan, Canada, Sri Lanka, South Africa, USA & Vietnam). Also, imports several types i.e. Green Tea, Organic Tea, Black Tea and Herbal Tea. It is a 100% Export Oriented Unit. After ‘Blending’ (and Flavouring and without Blending at times) gets exported. Export consists of both Bulk and Packed tea

Location 3


Accounting Operations

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Several Vouchers are prepared by all the units

Voucher Type Location 1 Sub-location 1

Sub-location 2

Sub-location 3

Sub-location 4

Location 2

Cash payment

Bank payment

Purchases

Sales

Accounting Journals

Debit notes

Credit notes

Contras

Stock journals

Audit journals

1

1

1 Trading only


MIS Reports

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Several MIS reports are processed on a daily, weekly and monthly basis. Usually the base work for these reports is at the unit level. Inputs/Semi-processed reports are being sent to a Manager in Location 3 for consolidation. Below is the list of reports that are usually processed

Daily• Machine wise/Brand wise production Report• Pre and Post shipment costing

Weekly• DEPB Status• Sales Report

Monthly• Balance Sheet (Unit-wise and Consolidated along with details)• Profit & Loss Statement (Unit-wise and Consolidated along with details)• Cash Flows• Container wise costing in export shipments• Contribution analysis• Analysis of Debtors both Local and Export• Details of indirect expenses and overhead analysis• Debit notes in job work reports• Foreign Currency crystallized workings• Accrual profits estimates• Forward gain loss estimates


MIS Reports

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Monthly(Contd)

• Manpower report (received from HR)• Stock ageing report• Depreciation report• Raw material consumption report• Estimated Profitability (estimating profits for the month and year with budgetary comparison)• Machine wise Production and Location• Machine wise Costing• Budget Vs Overhead analysis• Fund Requirement Analysis

Ad hoc• Client wise Inventory Holding Report

• These reports are generally prepared in excel sheets and distributed to MD, CEO, Group CFO, CFO, GM Finance, and other finance functionaries. Most of the reports run in various sheets and it requires good amount of time to review and make decisions

• Enough time is spent on preparing these reports. But, as far as my discussion goes, these reports are either skipped or reviewed partially or reviewed when time permit. The ideal scenario would be for the Leadership team to sit down once and agree on the type of reports, content, presentation along with a proper timeline


Current scenario

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Location 1General Manager –

Finance & Accounting

Manager

Asst Mgr

Executive

Executive

Location 3Manager – Finance

Sub-location 1 Sub-location 2 & 3 Sub-location 4 Location 2

Executive

Outsourced1

Outsourced2

Executive

Outsourced1

Outsourced2

Executive

Outsourced1

Executive

1 Manager in Location 3 reports to Location 3 CEO , CFO in Location1 and the Group CFO 2 Sharing responsibility between Client & Client’s group where applicable


Is SSC an option for Client?

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1 Hope this model would have been changed by ERP going live

General

• Centralisation for effective functioning and controlling

• Easier to build a ‘Quality Accounting Team’

• Easier planning and implementation of major repeated tasks e.g., statutory compliance, internal audit, statutory audit and MIS report

Specificto Client

• All location 2 payments are currently processed at location 1 upon receiving payment requests. We just need to extend this just by accounting the transactions too. Saves time

• Invoice negotiation happens out of location 1. Documents any way comes to location 1. Here again, we just need to account

• Sub-location 2, 3 and 4 send their payment requests/cheques to Sub-location 1 for approval/signature Instead, they need to send them to location 1. Here they can just follow the location 2 model i.e. just send a request to process the payments

• Location 2 currently transfers all their Debtors to HO as Location 1 negotiates the bills. Instead, they can account these invoices and credit the debtors directly upon receiving the funds1

• Thanks to the ERP platform, sending Tally backups etc. can now be a history. All we need to do is make a set of people getting access to different sets of books from a centralised location

• We any way need to have a person at different units to take care of the Stock entries. We can use this person, probably along with an outsourced help to take care of ‘Stock accounting’ and to act as a Facilitator (role explained in an another slide)


Is SSC an option for Client?

10

Specificto Client(Contd)

• All MIS can be shifted to a ‘dedicated team’. In any case, location 2 and other units in location 3 send their basic MIS input in different templates to sub-location 1 for ‘verification and consolidation’ before being forwarded to location 1. This model can be taken off with a MIS team taking over from a centralised facility. This team can redo the MIS requirements with the Leadership and deliver directly for decision making. This will result in enough saving in time apart from accuracy and help the staff posted at different factories to focus on ‘Stock Accounting’ and being a ‘Facilitator’

• Major Leadership outputs e.g., Cash flow, monthly MIS can not only be easily customised but also ensure timely and accurate delivery

• Audit can happen out of ISSC. Field visits can be left to Auditor’s discretion and may be limited to ‘Physical Stock Verification’. Audit journals for all locations can be processed out of ISSC

• With ERP in place it is easy for individuals to have access to multiple sets of books with different Specific security options to client

• In any case, for further smoothening, client needs to explore online transfer of funds wherever appropriate• If direct transfer option has some issues or will take some time to implement, the ‘Cheque printing facility’ in

different units need to be explored. This will avoid sending cheques back to respective factories• Tremendous opportunity to integrate client international operations• Establishment of client’s Group SSC in the near to medium term• By revamping its accounting operations, client can not only change with time but also lead the other group

companies to follow


Suggested models

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Model 1 –Create ISSC for all

activities

Model 2 –Create ISSC only for

‘high impact activities’.Outsource routine and

other transactionalactivities to an outside

vendor


Model 1 – Proposed Organization Structure

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1 Recommended Structure based on current business scenario of client2 Job Titles are illustrative

Head of InternalShared Service Center(ISSC)

Team Leader –Operations1

Team Leader –Operations2

FinancialPlanning andAnalysis

Treasury - M1

M2

M3

M1

M2

M1

M2


Model 1 – Proposed Organization Structure

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1 Existing client can be deployed where appropriate2 Stock related entries to remain with the respective Units

Treasury (M1)• All Cash Forecasts• Bank Interactions• Optimise Banking Operations & Utilization of Funds• FOREX Negotiations• Monthly Closing in ERP• Handle Audit Questions

M2 and M3• Cash Payments –All locations• Bank Payments – All locations• Bank Reconciliations• Maintenance of Cash & Bank Payment Vouchers and Supporting• Monthly Closing in ERP• Handle Audit Questions

M1• Purchase and Sales entries of location 2 & 3• Debit and Credit Notes• Inter Branch/Group Reconciliations• Maintenance of Purchase & Sales Vouchers and Supporting's• Monthly Closing in ERP• Handle Audit Questions


Model 1 – Proposed Organization Structure (contd)

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1 Existing client can be deployed where appropriate2 Stock related entries to remain with the respective Units

M2• Journal Vouchers• All Statutory Payments (including TDS) and Returns• Issuance of TDS Certificates• General Ledger Review• Audit Planning and Interaction with Auditors (Both Internal & Statutory)• Maintenance of Journal Vouchers and necessary docs under this responsibility• Monthly Closing in ERP• Handle Audit Questions

M1 & M2• Group Budgeting and Variance Analysis• MIS at Regular Intervals• Submission of MIS Pack to Leadership• Review Group Accounts in General with a specific focus to Audit and Finalisation• Assistance in Income -Tax and Other Statutory Assessments• Work closely with the Corporate Finance Head and assistance in day-to-operations• Monthly Closing in ERP


Model 2 – Voucher Statistics

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1 Extrapolated from Nov/Mid Dec Actual2 Audit Journals are estimated based on previous year

Voucher-wise totalsUnit-wise totals

9,362

2,934 2,867

4,577

10,143

6,216

Location 1 Sub-location 1

Sub-location 2

Sub-location 3

Sub-location 4

Location 2

5,488

10,840

4,902

1,103

10,404

38 123 371

1,970860

Cash payment

Bank payment

Purch-ases

Sales Accounting journals

Debit notes

Credit notes

Contras Stock journals

Audit journals

Ʃ = 36,099


Model 2 – Review of voucher statistics

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1 Others include Stock Journals 5%, Audit Journals 2%, Contras 1%, Debit and Credit notes 1%. Rounded off to nearest Percentile

• Routine transactions are having major volume. This could be outsourced to a third party

• Construct the ISSC to concentrate more on vital business activities (Treasury operations including negotiations, Group Budgeting & in-depth Variance analysis MIS Reports, Business Review, Identification and implementation of cost control measures, Finalisation of accounts, Tax & other statutory assessments)

• This will have a huge impact when other group companies join the ISSC. This model will help the ISSC to work for the Leadership team more on ‘Quality’ than on ‘Quantity’. It can also have access to vital business information of the Group to make effective decisions that will help improve Group business as a whole

• In the similar fashion, all transactional activities of Human Resources (HR Database administration, Handling of paperwork from ‘Entry to Exit’, Payroll, Sourcing and Screening CVs, First Level interviews and scheduling) can be outsourced to let the ‘Group HR’ to concentrate more on the HRD and effective utilisation of available manpower and possible reorganisation

• This will help the Group to have more time to focus high impact activities, leave the routine transactional activities to an outsourced vendor and run the business efficiently for the Group as a whole!

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14

39

Cash and Bank payment

Accounting journals

Purchases

SalesOthers1


Areas that can be outsourced

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1 Based on general observations; in-depth study is yet to be conducted

Finance and Accounting

• Cash Receipts and Payments• Bank Receipts and Payments• Journals• Debit & Credit Notes• Bank Reconciliations• Voucher & other data maintenance• Preliminary Audit handling• Assistance in Tax and statutory hearings• (Information and Data collation)

Human Resources

• Payroll for all the group companies (this can be done almost immediately and can be a testing ground for the outsourcing agency)

• HR Database maintenance and administration• Adrenalin implementation and maintenance


Capacity utilization and resources

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Capacity utilization Resources

• In a typical 8 hr. work schedule scenario, a processor can process ~50 vouchers (end-to-end). A centre with a staff size of 10 -12 people can take up to ~600 vouchers/day. Clear indication on how many group companies this center would handle can be provided, once a high-level review is conducted on the group company’s operations

• In all positions, existing resources can be explored including the ISSC Head. The only area, I would go outside is to hire the ‘reporting individuals’. There, a couple of experienced individuals (i.e. with one or two years from the reporting background) will make a huge difference


Revised Organization Structure – Corporate Finance Head

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Corporate Finance Head

• Create this position from the Corporate Finance Perspective

• Finalization of Group Accounts and Audit

• Responsible for Group Internal Audit

• Responsible for Group Statutory Audit

• Income Tax and other Statutory compliances

• Group budgeting and Controlling

To keep in mind

• This position will have to sit out of ISSC

• Work in tandem with the Head of ISSC and always look for “Centralising” opportunities

• Take help from ISSC for day-to-day operations

• ISSC can have a dedicated team (with one or two qualified individuals) to support this position. But, this team will have to do all basic work themselves and take other ISSC/Location team members’ only when necessary

Common for both Model 1 & 2


Proposed Organization Structure – Facilitator

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A ‘facilitator’ will need to be housed in the respective units. The role of a Facilitator will be to take care of:• Stock Journals• Office and/or Stores coordination• Petty Cash Disbursements• Weekly updates to ISSC

− Petty Cash Disbursements− Sales invoices− Purchase invoices− Other invoices/bills− Journal updates− Scrap sale updates

Common for both Model 1 & 2


Model 1 - Timeline

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Feb Mar Apr May Jun Jul

Activity

Submission of Client Feasibility Report

Discussion with Leadership & Stakeholders and Decision Making

Establishment of ISSC, Introduction of new organisation structure across the accounting staff and staff orientation at location 2 and 1. Work in parallel on reshuffling the existing resources and hiring of possible new hires. The ideal scenario would be for the board to designate a senior official as ‘ISSC Project In-charge’ who in turn work with various stake holders (Human Resources, IT and others) for implementation

Location 2 and 1 to work out of ISSC, Orientation to location 3 Accounting Staff; Management to work on new set of MIS

Go Live for location 3

‘Cooling off ‘, Fix possible issues and bring MISon board

Conduct a Feasibility study for client International Operations, Group HR and other possible functions

Submission of Feasibility Report and next steps

Note: Assuming a

positive Response andGo-ahead for

thismodel


Model 2 - Timeline

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Feb Mar Apr May Jun Jul

Activity

Submission of client Feasibility Report

Discussion with Stakeholders, identify the type of accounting & other functional activities to be outsourced, identify & finalise the outsourcing vendor

Outsourced vendor to be ready to process the agreed activities from his end, pilot a few transactions of all the agreed types

Establish ISSC to process the agreed activities from its end, pilot a few transactions of all the agreed types

Go Live for both Outsourced Vendor and ISSC

‘Cooling off ‘, Fix possible issues and bring MIS on board

‘Conduct a Feasibility study for client International Operations, Group HR and other possible functions

‘Submission of Feasibility Report and next steps


Why should we ignore cost now?

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Current monthly establishment cost in client in accounting

• Location 1

• Location 2

• Location 3

Total

xxx

xxx

xxx

xxx

1 Source – Payroll statistics

• Given its current cost structure, one may think there is no ‘cost option’. The answer may be yes in the shorter term. Client’s Leadership may want to consider this as an ‘investment’ and not as ‘Cost’. When the international operations and other group companies joining the ISSC in the near term there will be enough opportunity for cost saving

• Opportunity for client to consider other functions like Human Resources, Purchase and even Logistics in the near term

• During my visit I have sensed that the members of accounting department, especially in locetion 3, are extremely busy. I am not sure whether or not it is an ‘artificial’ or ‘self-imposed’ pressure. With SSC model, we can ensure well structured responsibilities and proper ‘work-life balance’


Other points

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Infrastructure Requirement

• There seem to be enough space in location 1 as the Leadership is currently in favour of housing this operation in location 1

• Location 1 seems well connected as enough accounting and other activities are being carried out from both sub-locations of location 1. So, in terms of infrastructure we do not need anything NEW

• To give this new operation an ISSC feel, the Leadership should identify and designate a space. Once done, the machines, printers, scanners etc. should get moved to this new space

Possible location options

• Though the Leadership is inclined towards location 1, enough consideration has to be given to the south e.g., Cochin or Chennai

• When the centre grows in the coming months / years, there will definitely be cost advantages in all types of expenses when we compare location 1 vs. South

Suggestions to derive maximum out of this model

• Top Leadership communication to Location CEOs• Staff announcement thru email etc. (or the medium that is

generally followed by the Group)• Simultaneously work on the International Operations• Focus on the Group Companies• Work on other functions e.g., Human Resources, Payroll

while working for the Group Companies


General SSC equipment with approximate cost

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Description Make/Model Technical Background Qty Unit Price Amount

Computers HP Compaq Business Desktopdc7900 - Core 2 Duo E8400 3 GHz

SFF - 1 x Core 2 Duo E8400 / 3 GHz – RAM 2 GB - HDD 1 x 250 GB - DVD±RW (±R DL)/DVD-RAM - GMA 4500 – Gigabit Ethernet Windows 7 Pro 15 xx xxx

Monitors HP Compaq LA1951G LCD Monitor 19 in LCD Monitor, 1000:1 contrast ratio, 1280 x 1024 max resolution, 5 ms response time, Pivot (rotation) adjustment, Height adjustment, Tilt adjustment, Swivel adjustment, VGA (HD-15) interface, DVI interface, Silver, 3 year warranty

15 xx xxx

Scanner "Canon DR4010C or 5010C" 40/50 Pages Per minute with kofax VRS 1 xx xxx

Server HP DL360 G6 "Intel® Xeon® E5540 Quad Core Processor 2.53 GHz1066 MHz Front Side Bus, 6 GB(3 x 2 GB) Standard Memor, 8 MB (1 x 8) 1 xx xxx

Printer HP 4015DN Network enabled 52PPM B&W Laser 2 xx xxx

Security Camera System Mix & Match Cameras+DVR 16 Channel HDD recorder with SonyCameras 1 xxx

Video Conferencing Polycom Table Top HDX 4000 or VVX1500 1 xx xxx

PBX/Phones Siemens/Ericsson/Avaya/NEC IP based solution with logical partitioning 1 xx xxx

LAN Switches Cisco/Juniper Cisco 3750 with PoE 2 xx xxx

Router Cisco/Juniper 1 xx xxx

High Speed Internet Access VSNL/Airtel 2 Meg DSL Internet Access X 2 from different providers 2 xx xxx

UPS MGE/APC/Liebert 30 KVA 1 xx xxx

Beamer/LCD screens Panasonic 3000 Lumens with Wireless and WXGA 1 xx xxx


General SSC equipment with approximate cost

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Description Make/Model Technical Background Qty Unit Price Amount

ISDN lines for Telephone BSNL/Airtel/Reliance 30 Channels ISDN PRI 1 xx xxx

Speaker phones Polycom VTX1000 1 xx xxx

Software licenses Microsoft Windows 2003 ServerMS Office 2007Symantec EndPoint Protection V

151515

xxxxxx

xxxxxxxxx

Total xxx

1 Descriptions are for a new set up from scratch2 Vendor pricing may vary depending on the volume/relationship3 Best available quality in the market4 Possibility to pursue with Cheaper quality / alternate vendor5 Existing client infrastructure can be used where appropriate


What should we do next?

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• Feedback on the Recommendation• Identify a location, move assets and start

grouping existing people• Hire possible new resources• Identify an easiest location and start working

on the documentation• Track the Migration critically to eradicate

possible issues• Start working on the other locations


List of Documents Reviewed

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Documents reviewed

• Memorandum and Articles of Association• Last three year’s Financial Statements• Last available Internal Audit Report• Sample vouchers of all types across units• Flow of different types of transactions in ‘Tally’• All types of Registers (Cash, Bank, Purchase, Sales etc.) in Tally• Trial Balance• Voucher Statistics• Sample MIS Reports