The Impact of Financial Requriements Imposed by the IKCO on the Profitability of Automotive Component Manufacturers

Introduction- A growing trend of team manufacturing transformed traditional roles in the auto-industry, with employees interacting with counterparts at every level, from engineers to computer technicians to the line workers. The Auto industry is a key sector of priority for Iran. It used to receive considerable preferential treatment over capital allocation and foreign exchange, but these have been gradually withdrawn. By 2001 all manufacturing units ought to have become self-sufficient with regard to foreign exchange requirements. Not being immune from general economic woes of the country, the auto industry also has far lower propensity to react to any general downturn in the economy than most other sectors. Between 1994 and 1998 the auto industry grew by about 30%, five times that of other national industries and eight times the rate of growth of the economy while generating close to 235,000 jobs. So the current industry plays vital rol in Iranian economy.Purpose – Economic survival in current interntational and even domestic markets is heavily dependent on competition with fierce competitiors. Consistent with this view, business enteties can not survive as a going concern unless they consider profitability and wealth creation as key and premier organizational factors and accordingly hold themselves accountable for meeting their clients’ demands and expectations. In this regard, the establishment of a system comprised of operational dos and don’ts within different organizational functions, particularly financial department, should do the trick. The aforementioned operational requirements are currently being imposed by large firms for supply chain firms. Therefore, the present paper aims to investigate the effect of financial requirements of supply chain firms imposed by Iran Khodro Industerial Group (also known as IKCO) on the profitability of automotive component suppliers. Design/Methodology/approach – The authors examine their hypotheses by performing KS test and using t statistic on a sample of 24 observations druing 2008-2009. The time frame is chosen based on the fact that the IKCO implemented its financial requirements from the 2008 onwards. Indeed, the paper utilizes the profitability information of automotive component suppliers both pre and post implementation periods. Findings – After analyzing the IKCO financial requirements (e.g. financial unit obligation to participate in investement feasibility studies, financial unit obligation to design and implement quality costing system and logistic costing system; management and employees obligation to propose alternative approaches to meet target costing objectives, financial unit obligation to participate in cost management activities in line with target costing, financial unit obligataion to prepare and monitor financial ratio reports and also take necessary follow-up actions; the automotive component manufacturers obligation to establish and control cost budgeting system and also prepare cost deviation reports on a periodic basis, the automotive component manufacturers obligation to establish automated integral financial system calculating cost of goods sold (CGS) and prepare necessary reports in order to enhance the CGS), our findings indicate that the IKCO financial requirements not only meet the qualitative needs of the IKCO, but also increase the profitability of automotive component manufacturers. Research limitations/implications – The present study is subject to following limitations. First, the obstinate refusal of automotive component manufacturers to provide detailed information about projects on the improvement of operational and supporting processes. Second, the unwillingness of automotive component manufactures to contribute to studies concerning the financial affairs of business entities. Originality/value – The authors’ research contributes to current accounting literature by providing empirical evidence regarding a positive relationship between financial requirements and the profitability of supply chain firms.