Supply Chain Management Journal

Supply Chain through Intangible Liabilities Methodology Domingo NEVADO Victor Raul LOPEZ Jose Luis ALFARO University of Castilla-La Mancha, Spain [email protected] Abstract Supply Chain Management (SCM) is a key factor within the intellectual capital components for the generation of future value in an organization because their correct management contributes to the company survival and competitiveness. However, there are not some papers dedicate to the study of the factors that hinder the above objective although these factors can be grouped into the concept of intangible liabilities. This paper carries out a study of intangible liabilities by analyzing different definitions in order to establish a classification that allows us to measure and value them. Most of the literature that includes the concept of intangible liabilities treats them as a mere reduction in intangible assets and only on a few occasions as a “future” obligation. Therefore, they could be reported, in accounting terms, as debt, obligations or future contingencies that may arise. As such, when they are cancelled, the firm would have to eliminate resources that include economic profits. In addition, we study the SCM as key intangible to enterprise competitiveness because it contributes to improve business performance so from the point of view of the margin as in improving delivery times, product quality, services and customer satisfaction. But often this is not possible, due to the existence of intangible liabilities related to SCM that limit a correct management. Therefore, we establish relationships between these liabilities and we propose several indicators to manage them. Keywords: intangibles liabilities, model, indicators, management, models, SCM Introduction Nowadays Supply Chain Management (SCM) is a matter of study and debate in many professional forums. It is a concept that integrates logistics activities between the companies in the chain in order to reduce time and costs. It combines the enterprise logistics functions with the functions of the members of its supply chain. However, in the business day to day is trying to achieve logistics savings, but notes that there is an investment lack in management and planning in favor of implementation techniques. Moreover, generally, there is less cooperation between companies of the same channel than desirable, due to cultural and

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educational issues. That is, the SCM is an important intangible for the organization, but in most cases is not adequately managed. In this regard, intangible assets have been considered largely responsible for the competitive advantages of both companies and also countries. Authors such as Nonaka and Takeuchi (1995), Davenport and Prusak (1998) and Drucker (2003) postulate that the future competitiveness of enterprises will depend on their ability to create and use knowledge in an environment where key resources are information and knowledge. For this reason, many papers have studied the different variants and designations of intangibles. For example, the Resources and Capacities Theory

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(Teece, Pisano and Shuen, 1997; Itami, 1987) and later studies focused on the effective use of that knowledge, acquiring the nomenclature known as Intellectual Capital. Different concepts, models and studies have been developed under the Intellectual Capital. However, another variant that is closely related to Intellectual Capital, namely Intangible liabilities, is receiving little attention from the literature. In addition, there are discrepancies over the concept itself and how to treat it. In this paper we aim to measure these liabilities and analyse their relationship with the supply chain, aspects that have not been addressed by the literature to date. Knowing the value of these liabilities would make it easier for companies to manage them. Section 1 of the paper addresses the concept of intangible liabilities. In Section 2, we analyse the main models used to measure them and propose a new model based on Nevado and Lopez (2002). Section 3 considers the relationship

between the intangible liabilities and Supply Chain Management (SCM) and, finally, section 4 presents the main conclusions obtained in this paper. 1. Intangible liabilities: concept and approach As emphasized in the introduction, many pages have been written about intellectual capital, proposing different models to measure it. However, there has been little concern for studying the origin of intangible assets and the obligations they entail. This may be due to the absence of a link between intangible liabilities and intangible assets or, if a link does exist, to the fact that it is not easy to demonstrate or explain due to the intangible nature of these assets and liabilities. There are few studies on intangible liabilities (Harvey and Lusch, 1999; Caddy, 2000; Garcia-Ayuso and Larrinaga, 2004; Garcia Parra, M, 2006).

Table 1: Intangible liabilities. Literature Review Authors Harvey and Lusch (1999) Caddy (2000) Cañibano (2001) Konar et al. (2001) Viedma (2003)

Perspective Possible obligation. Reduction Reduction Reduction Possible obligation Reduction

Rosset (2003) Porto (2003)

Possible obligation Obligation. Reduction

Simo et al. (2004)

Reduction

García Parra et al. (2004) Garcia-Ayuso et al. (2004) Lozano and Fuentes (2005) Viedma (2011)

Obligation. Reduction

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Reduction Reduction Actions

Objective / Treatments Definition and classification Determine the existence of liabilities Mention of its existence Obligations focused environment Mention of its existence. Destruction of wealth Mention of non-monetary obligation Decrease health workers and obligation for the company Definition and analysis of human liabilities Identification and analysis Mention of its existence. Lower value assets As element that decreases intellectual capital Actions to enhance or strengthen the assets

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After analysing these papers, we can conclude that most of them consider intangible liabilities as a mere reduction in intangible assets. Only in some cases are they treated as a "future" obligation of the company (Harvey and Lusch, 1999). Table 1 presents a summary of the different approaches taken to analyse intangible liabilities. In relation to the concept of intangible liabilities, García (2006) suggested the following definition after conducting a study in this field of research: "Debts and obligations of the company due to the tacit knowledge associated with business agents. These debts and obligations emerge as a result of perceptions and interpretations of the rights and obligations of these". Furthermore, he establishes that the most widely agreed features of intangible liabilities would be: • They are present and non-monetary obligations and debts. • They are one of the origins of intangible assets. • They appear as a result of a company using the tacit knowledge of the actors involved. • When the debt matures and in order to cancel it, the company will have to eliminate resources that include economic profits. Now, the above definition suggests that the origin of these intangible liabilities is associated with the tacit knowledge of business agents. Furthermore, they are also considered present and non-monetary debts and obligations. From our point of view, this should refer to the entire spectrum of Intellectual Capital and we think that they are monetary and it is possible to establish a model to measure them. Therefore, taking into account the review of the literature review and on the basis of our proposal, we consider intangible liabilities to be debts, obligations, contingencies and shares of the company stemming from its intellectual capital and which at maturity, the company will have to get rid of

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resources, leading to a decrease in future profits. That is, intangible liabilities could be considered the origin or financing of intangible assets, or actions for their empowerment. Hence, intangible liabilities would be either a debt to fund intangible assets or contingencies that originate them. That is, obligations that are indeterminate as to the amount or when they are cancelled or actions to be taken to increase intellectual capital. Therefore, intangible liabilities stem from the existence of intellectual capital in its different facets; human and structural (processes, relational, communicational, R&D+i), as considered in the intellectual capital model by Alfaro, López and Nevado (2011). 2. Intangible liabilities management model One of the greatest challenges faced by researchers in this field is to ascertain how to measure intangible liabilities in a similar way to intellectual capital in order to manage them and explain the relationships between them. Several premises and existing frameworks must consider in order to measure intangible liabilities: Accounting framework: international standards: IAS 38 (intangible assets), IAS 37 (provisions, contingent assets and contingent liabilities) and IAS 22 (business combinations). • IAS 38. Intangible liabilities are practically not mentioned. • IAS 37. Provisions would be current and probable obligations of the company as a result of past events. They are clearly specified in nature to the date that financial statements refer to, but are indeterminate as to their amount or maturity date, when the company is expected to get rid of resources embodying economic benefits. Provisions may be determined by a legal or contractual disposition or an implicit or tacit obligation. Standard 15 of the Spanish General Accounting Plan

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Supply Chain Management Journal

stipulates that in financial statements will report any contingencies in relation to obligations other than those referred to in the preceding paragraph. Similarly, the International Financial Reporting Standards (IFRS) for banking institutions establishes that contingent obligations must be recognised in the balance as liabilities when it is probable that the Bank has incurred in a liability. The key is to determine the probability that the fact could be considered as: Likely, when the possibility of that happening is greater than otherwise. A provision would be their accounting treatment. Possible, when probability is lower than non-occurrence. In this case, it would be a contingent liability that should be reflected in the financial statements with notes (accounts). Remote, when the probability of occurrence is very low. Not report on financial statements. According to international standards and the General Accounting Plan of Spain, valuation establishes that provisions will be measured on the last day of the financial year at the present value of the best estimate of the amount needed to cancel or transfer the obligation to a third party, registering

the adjustments due to updating the allowance as financial expenses as they accrue. Initially, the accounting rules in this area do not refer to intangible liabilities, although the idea of generic contingency could include some nuances of intangible liabilities that could serve for measuring them. • Goodwill. Accounting regulations refer to positive and negative goodwill. The most common is positive goodwill, which is often associated to intellectual capital. However, negative goodwill, which occurs when the value of acquired identifiable assets less liabilities exceeds the cost of the business combination. It is reported as income in the profit and loss account. In this case, a company is purchased for a price below its book value. As a result, the acquired company would not have intangibles, or they would have no value to appear on the balance sheet. In this case, it could be considered an intangible liability. But in our opinion, this is not accurate. Furthermore, it must be said that both positive and negative goodwill would only be present when one company buys another. Meanwhile, it is assumed that it would not be possible to register any goodwill.

Table 2: How to report intangible liabilities according to international standards Framework

With rules IAS 38: Intangible assets

Accounting

They do not exist

IAS 37: Provisions, No intangible liabilities, but the idea of contingent liabilities and generic contingency could include some contingent assets nuances of intangible liabilities IAS 22: combinations

Management and strategic

Reference

Does not exist.

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Business Negative intangible company would not

goodwill could be considered liabilities, but only when one purchases another, and this still be very accurate

Little mention. Assimilated to the actions to be taken to enhance or strengthen intangible assets

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Supply Chain Management Journal

Management and strategic framework. There are no studies on intangible liabilities for the purpose of their management. There are only mentions of actions required to enhance intangible assets, without addressing the causes behind their strengthening, which are often motivated by intangible liabilities. Taking into account the above, researchers face great difficulties to ascertain how to understand and measure intangible liabilities. In our opinion, intangible liabilities involve three aspects: 1) Impairment of intangible assets and wealth. 2) Debts, obligations and contingencies of the company due to tacit knowledge. 3) Actions to strengthen or enhance intangible assets. The impairment of intangible assets would be covered by the same model that measures intellectual capital by way of a decrease.. Therefore, conceptually, intangible liabilities do exist, because they have reduced wealth

or intellectual capital. That is, for the assessment or measurement purposes, they would be captured by the intellectual capital model, decreasing it, providing the model is well defined and grounded. Therefore, we believe that an increase or decrease in intangible assets is due to the debts, obligations and contingencies stemming from the tacit knowledge associated with all business operators and organisational structure, that is, its intellectual capital. Bearing in mind that cancelling such debt, obligations and contingencies entails removing resources that would include economic profits. In this line, from a strategic perspective, intangible liabilities would be all the actions to be taken to achieve intangible assets. On the basis of the above, we could classify intangible liabilities using the same criteria as intangible assets, namely human and structural. As a result, we could establish, in line with the model by Nevado and López (2002) for intellectual capital, that:

Intellectual liabilities = = Human liabilities + Structural liabilities + Non explicit liabilities 1. Human liabilities would be debts, obligations, contingencies and actions that stem from the tacit knowledge of individuals, their skills, training and motivation. 2. Structural liabilities would be debts, obligations, contingencies and actions that stem from the tacit knowledge that is embodied in the structure of any organisation. Thus, following a more disaggregated perspective, we have: Process liabilities: concerning the quality of processes, products and services. Relational or commercial liabilities: in relations with clients and suppliers,

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Communications liabilities: in marketing, advertising, promotion, image. R&D+i liabilities: to achieve innovation and development potential. 3. Non explicit liabilities: any liabilities not included in the previous items. In order to measure intellectual liabilities, we must therefore, firstly establish what the intangible asset is and hence be able to relate it to its possible origin, debt, obligations, contingencies and actions being responsible for the creation of that intangible asset (Table 3).

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Supply Chain Management Journal

Table 3: Model: Components and indicators of intangible assets and liabilities Components

Human

Processes

Intangible assets (IA) - Pay systems - Recruitment system - Social climate - Job training - Motivation - Organisational flexibility

- Financing remuneration - Liabilities in recruitment - Financing of training - Contingency of employees (health workers) - Selection of the training process - Empowerment social relations - Adaptation of workstations

- Quality assessment: processes, products and services

- Financing of quality - Contingencies in processes - Design and improvement of the value chain - Rapid development of production - Logistics - Adapt new trends

Relational or comercial

- Client portfolio - Satisfaction and loyalty of the portfolio - Status of the portfolio of suppliers

Communication

- Business Marketing: (advertising, promotion, public relations, personal selling) - Potential contracted media - Investment in new technologies - Investment in new products and services - Investment and improvement in the business information system - Capabilities or competencies

Research, development and Innovation

Non explicit

Intangible liabilities (IL)

- Intangible assets not considered in the previous capital

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Intangible Asset Indicators - Remuneration -Temporality - Social aid - Labour dysfunctions Training - Satisfaction and motivation - Productivity - External rotation (dropouts) -Internal rotation (promotion) - Prevention and evaluation costs - Cost of non quality - Information technologies

- Contingencies in business assets - CRM

- Market - Customer satisfaction - Quality of suppliers

-

- Cost of product marketing - Distribution - Potential media

Funding of advertising Contingencies media Analysis of agencies Promotion actions

- Debts of technologies - Debts of new products and services - Obligations in the improvement of business information system - Obligations in capabilities - Contingencies in R&D - Innovation resource allocation - Management of the information system - Intangible liabilities not included in previous liabilities

- Research and development - Productivity - Internal rotation (promotion) - Potential mobility

- Indicators not included in the previous groups

Intangible Liability Indicators - Loans for remuneration - Loans for training - Indicators of health workers - Indicators of well-being - Absenteeism indicators

- Loans for quality - Loans for ICT

- Billing time to clients - Time of payment to suppliers - Indicators of delinquency - Loans for advertising - Indicators on contingencies media

- Loans for R&D - Indicators of rejection of projects

Indicators not included in the previous groups

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Supply Chain Management Journal

Secondly, it would be necessary to establish indicators capable of measuring this intangible liability. There are two types of possible indicators: 1. Absolute indicators (AI): valued in monetary units and used in the composition of the indicator, as well as in the accounting model to be developed. Unrelated to other variables.

m

2. Relative or efficiency indicators (EI): percentage rates that fluctuate between 0 and 100 (0 and 1 at unitary level), 0 being the value that indicates the least favourable situation and 100 the most favourable. Based on the above, intangible liabilities could be measured in the following way with k efficient indicators to each m liability (human and structural) k

IL = ∑ AI c ⋅ ∑ wi EI ic c =1

3. Intangible Liabilities on Suply Chain Management Supply Chain Management (SCM) is responsible for carrying out the planning, organisation and control of all activities that are part of the supply chain. Such activities are related to the management of: monetary flows and information services in a company’s own supply chain. The main aim is to maximise the product value handed over to the final consumer and, at the same time, to seek a reduction in company costs. In short, supply chain management is primarily responsible for providing customers with adequate products and delivering them on time and to the correct place at the required price and applying the lowest costs. The supply chain brings together the business processes of multiple companies, as well as the different divisions and departments of the company. Defined in a simple way, SCM encompasses those activities associated with the movement of goods from the supply of raw materials to the final consumer. This includes selection, purchasing, production programming, order processing, inventory control, transport, storage and service to the client. But the most important thing is

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i =1

that SCM also includes the information systems required to control these activities. SCM plays a key role in company competitiveness. It is a basic intangible asset because it contributes to the improvement of business results both in terms of profit margin and also in terms of improving deadlines, product quality and service and customer satisfaction. In this sense, good SCM is fundamental and various tools related to information systems will help to improve it. For example, new technologies, and in particular the Internet, help to decrease the costs stemming from interaction with suppliers. We can therefore deduce from the above that good management of the supply chain is a fundamental intangible asset. However, this is on many occasions impossible due to the existence of intangible liabilities associated with the chain that limit appropriate management. In this case, we should try to avoid them, which requires determining and managing them with an information and measurement system using indicators. Table 4 shows the main intangible liabilities of a supply chain, as well as the indicators to manage them. Also, we propose possible solutions to achieve a reduction in them.

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Supply Chain Management Journal

Table 4. Intangible liabilities, indicators and supply chain solutions Intangible liabilities

Indicators

Problems with customers

Clients lost over the previous year Satisfaction of clients (variation)

Wars between departments

Failures in workflow Manual processes: errors

Weak leadership

Market share (variation)

Profit over investments difficult to measure and costs difficult to quantify

Strategic perspective and improving information systems and management

ROI

Problems due to the allocation of funds Slow pace of projects, which increases costs.

Loans for quality Loans for ICT Project development days

Lack of compatibility with existing systems.

ERP agility ERP support

Difficult to integrate small suppliers into the supply chain

Number of suppliers Volatility of suppliers

Quality and security of data

Database flaws detected

Sabotage of employees. Ask for more than what they need

Measurements of performance in all channels

Conclusions A correct management of SCM has become a challenge for any company that wants to create value in the future and therefore increase their intellectual capital, concretely, in their processes capital component. SCM generates more value for the company, contributing to improve business results in terms of both profit and also deadlines, product quality and service and customer satisfaction. In order to manage the supply chain correctly, it is essential to determine the intangible liabilities that limit it. In this sense, we propose indicators to measure them and also solutions to improve them.

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Solutions Segment customers and adapt the supply chain to serve these markets profitably. Align the planning of demand with the supply chain Adaptation of the Organization, improvement and re-engineering of processes. Adaptation of the dynamics of the markets and the ability to evolve to meet the demands of consumers.

Consider strategic SCM and manage supplies strategically Adapt the logistics network service requirements and the profitability of customer segments. Identify new opportunities offered by the Internet and new technologies in the area of SCM Align the objectives of customers and suppliers taking into account that they have different corporate cultures, different interests, different resources, etc Undertake both personnel and technology investments. Develop a technology strategy for the entire supply chain. Change management

Specifically, it must improve on teamwork and cooperation among channel members, decisions should be taken at all stages that must be negotiated between two or more areas of the company and it is basic to build a network to compete as a single entity increasing productivity and reducing costs. All supported with management indicators. Strategic management is necessary, where logistics operations in the supply chain result in a more efficient operations involving less inventory, better customer service and lower labor costs. To achieve these business supply chain must make significant efforts added especially regarding the information flow. Finally, it

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should evolve from simple exchange of information to meetings among channel members for better logistics practices. References Alfaro J.L., López, V.R., Nevado, D. (2011), An alternative to measure national intellectual capital adapted from business. African Journal of Business Management, Vol. 5(16), 18 august: 6707-6716. Caddy, I. (2000), Intellectual Capital: recognizing both assets and liabilities. Journal of Intellectual Capital, Vol. 2 (1):129-46. Cañibano, L. (2001), La relevancia de los intangibles en el análisis de la situación financiera de la empresa. IVIE, 26 de noviembre 2001:1-18. Davendport, T., Prusak, L. (1998), Working knowledge: How organizations manage what they know. Boston: Harvard Business School Press. Drucker, P. (2003), Llega una nueva organización a la empresa. Gestión del conocimiento. Harvard Business Review. Bilbao. Ediciones Deusto. García-Ayuso, M., Larrinaga, C. (2004), El lado oculto de los intangibles: activos y pasivos ligados a la sostenibilidad. Revista Finanzas & Contabilidad, Vol.57, enero/febrero:34-41. García-Parra, M., Simo, P., Mundet, J., Guzman, J. (2004), Intangibles: activos y pasivos. Management & Empresa. Vol.37: 32-41. García-Parra, M. (2006), Pasivos intangibles frente a activos -intangibles: una aproximación a nuevas formas de identificación y medición. Tesis Doctoral. UPC. Harvey, M.G., Lusch, R. F. (1999), Balancing the intellectual capital books: intangible liabilities. European Management Journal. Vol. 17(1), February:85-92. IAS 22 (2005), Business Combinations. http://www.ifrs.org/IFRSs/Official+Unacc ompanied+IFRS+Translations.htm IAS 37 (2005), Provisions, contingent liabilities and contingent assets.

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http://www.ifrs.org/IFRSs/Official+Unacc ompanied+IFRS+Translations.htm IAS 38 (2009), Intangibles Assets. http://www.ifrs.org/IFRSs/Official+Unacc ompanied+IFRS+Translations.htm Itami, H. (1987), Mobilizing invisible assets. Harvard University Press, Cambridge, MA. Konar, S., Cohen, M.A. (2001), Does the market value environmental performance?. Review of Economics & Statistics, Vol. 83(2):281-289. Lozano, M.C., Fuentes, F. (2005), La importancia del intangible en la empresa de Internet: una propuesta de medición contable. Economic Analysis Working Papers, Vol. 4(6):1-62. Nevado, D., López, V.R. (2002), Capital intelectual. Valoración y Medición. Prentice-Hall. Madrid. Nonaka, I., Takeuchi, H. (1995), The Knowledge – creating company: how japanese companies create the dynamics of innovation. Oxford University Press. NY. Porto, N. (2003), Algunos aspectos a considerer en la contabilidad de los intangibles. Estudios académicos de contabilidad en homenaje a D. José Rivero Romero:489-504. Rosett, J.G. (2003), Labour Leverage, Equity Risk And Corporate Policy Choice. European Accounting Review, Vol. 12(4):699-732. Simo, P., García-Parra, M. (2004), Pasivos humanos: antitésis del capital intellectual. Intangibles, Vol.4:24-29. Teece, D.J., Pisano, G., Shuen A. (1997), Dynamic capabilities and strategic management. Strategic Management Journal, Vol. 18(7):509-533. Viedma, J.M. (2003), Los pasivos intangibles y el capital intellectual en la universidad. I Congreso Internacional y Virtual de Intangibles. http://psicondec.rediris.es/interdisciplina riedad/Congreso_virtual_2003/38.pdf Viedma, J.M. (2011), ICBS Intellectual Capital Benchmarking System: A Practical Methodology for Successful Strategy Formulation in the Knowledge Economy. ECIC, 2011. Nicosia:461-474.

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