Product Line Profitability英文版).ppt

Author GiseleGarraway Contributor SteveBerez Profitability ProductLine March1998 2 CU7020998JZA ProductLineProfitability Agenda PLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeaways 3 CU7020998JZA PLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeaways ProductLineProfitability Agenda 4 CU7020998JZA ProductLineProfitability PLPDescription Productlineprofitability PLP isadiagnostictoolthathelpsusdeterminethe true profitabilityofeachproductwithinamulti productportfolio PictureFrames OperatingMargin 2 3 5 3 7 0 10 0 5 CU7020998JZA ProductLineProfitability ProfitImprovementTools PLPanalysisisoneoftheBaindiagnostictoolsthatcanidentifysourcesofprofitimprovement 0 5 10 15 20 0 1 0 2 0 5 1 2 5 Profitability RelativeMarketShare Bainprofitimprovementtoolkit PLPBDPRCPVMR 6 CU7020998JZA ProfitLineProfitability WhyBainUsesPLP SeniormanagerscanusePLPanalysistomakeimportantdecisionsaboutproductlines Forwhichproductsshouldweincreaseprices Whereshouldwefocusourcostreductionefforts Whichproductlinesshouldwedrop WhichproductsshouldwefocusR Deffortson Whereshouldweprovidesalesincentives 7 CU7020998JZA ProductLineProfitability TypicalAccountingSystemVersusBainPLP Unliketypicalaccountingsystems PLPinvolvesdrivingbelowgrossmarginandallocatingcoststogettoanoperatingmarginforeachproductline Typicalaccountingsystem BainPLP Costcollection Byfunction e g R D advertising Byproductline Costassignedtoproducts Costofgoodssolddirectlabordirectmaterials Allcosts includingallindirectcostsoverheadadvertisingdistribution Keyproductprofitabilitymeasure Grossmargin revenue costofgoodssold Operatingmargin Costallocationmethod Accountingstandards Activity basedcostdrivers Disadvantage Oftendoesnotreflecttruecommitmentofresourcesandthereturnsfortheiruse Difficulttocaptureallactivitiesthatdrivecosts 8 CU7020998JZA ProductLineProfitability DirectandIndirectCosts Traditionalaccountingsystemsoftenallocateonlydirectcosts notindirectcosts toproducts And insomecases thedirectcostsareallocatedinappropriately Indirectcosts Directcosts Definition Typicalaccountingallocation PLPallocation Costsgenerallyincurredbythefirmoutsideoftheproductionprocess Thesecannoteasilybeidentifiedwithorassignedtoaparticularproduct Costsincurreddirectlyintheproductionoftheproductorservice Thesecostscaneasilybeidentifiedwithaparticularproduct Notallocatedorallocatedbasedonpercentofsales Allocatedbasedonactualcostdrivers TrackedusingaccountingstandardsVariancessometimesnottrackedbyproduct Alldirectcosts includingvariances aretrackedbyproduct 9 CU7020998JZA ProductLineProfitability InappropriateDirectCostAllocation Someaccountingsystemsallocatedirectcoststoproductsbasedonoriginalexpectationsaboutproductionresults Theseassumptionscannotaccountforchangesinrawmaterialsuseandlabortime Accountingstandard Actualforlastquarter Difference Revenueperwidget 6 00 6 00 Rawmaterials 1 75 1 93 StandardexcludeslossIncreasedlossduetochangeinsupplierquality Productionfloorlabor 0 30hoursx8 00 hour 2 40 0 45hoursx8 00 hour 3 60 Standardexcludesswitch overfrommainproduceIncreasedlaborduetoreworkfromlost Grossmargin 6 00 1 75 2 40 1 85 6 00 1 93 3 60 0 47 Grossmarginpercent 31 8 10 CU7020998JZA ProductLineProfitability GrossMarginVersusOperatingMargin Ifaccountingsystemsdonotallocateallindirectcoststoproducts managersmaymisjudgeproducts relativecontributiontoprofits Indirectcosts Price 750 600 450 Grossmargin 40 33 44 Operatingmargin 29 20 23 Onagrossmarginbasis J 88sarethemostprofitable however T 54saremostprofitablewhenallindirectcostsareallocated 11 CU7020998JZA ProductLineProfitability PotentialforMismanagement Failuretotiedirectandindirectcoststoindividualproductlinescancausefirmstomismanagetheirbusinesses Salesandmarketing Distribution Productdevelopment SpendadvertisingdollarsonwrongproductsSetupcompensationandincentivestoencouragesalesofunprofitableproducts PrioritizedeliveryschedulesinappropriatelyEstablishwrongtruckloadratios FundunprofitableproductsKillprofitableproducts 12 CU7020998JZA ProductLineProfitability PathstoLowProfitability Multi productbusinessesthatdonotunderstandtheirproducts trueprofitabilitybecomelowprofitfirms Ifgrossmarginsarebasedoninappropriateaccountingstandardsandindirectcostsarenotallocatedappropriately Highgrossmargin potentiallylownetprofit productsaregiveninvestmentcapital Lowgrossmargin potentiallyhighnetprofit productsarestarvedofinvestmentcapital Newproductlineextensionsareintroduced AdditionalcomplexityfromgrowingnumberofSKUsincreasesdirectcosts Productlineextensionsareignoredandprofitableproducts growthslows Poorprofitabilitycontinues drivinghighpricesandpoorpositioningversuscompetitors 13 CU7020998JZA PLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeaways ProductLineProfitability Agenda 14 CU7020998JZA ProductLineProfitability Applications BainhasusedPLPextensively Someexamplesofourworkinclude Airtransportation Communications Situation Anairtransportationcompanyhadvariouslinesofbusiness butnoactivity basedaccountingsystem Managementdidnotknowwhichbusinesses routes orcustomerswhereprofitable Aftersufferingfourconsecutiveyearsofnegativenetincome avoiceprocessingservicecompanywasinterestedinunderstandingtheeconomicsandmarketpositioningoftheirproductlines Result Bainidentifiedunprofitablebusinesses routes andcustomerswhichinsomecasesweresubsequentlycutorpricingwasalteredtoimproveprofitability Ananalysisofcostsindicatedthatprofitabilitywasmuchworsethanthought leadingtoamandateforcompany widecostreductionandrevenueenhancement Bainassessedtheprofitabilityofthreemajorproductlinesandidentifiedsavingsof 20 25MMonacostbase 110MM 15 CU7020998JZA PLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeaways ProductLineProfitability Agenda 16 CU7020998JZA ProductLineProfitability PLPSteps PLPanalysisinvolvessixmajorsteps Understandclient scurrentP Lsandcostcollectionsystems Determinethemajoractivitiesperformed Identifycostsandcostdriversforeachactivity Allocatecoststoeachproduct Analyzeprofitabilitybyproductorgroupofproducts Makerecommendations KeySuccessFactors IdentifyallpeopleandsystemsthatreportfinancialdataUnderstandlinkagesamonganddifferencesbetweenthevarioussourcesofdata Tiecoststooperations notaccountingcategoriesFocusonthelargestcostelements Quantifydriversforeachproduct PressuretestassumptionswithclientsCalculateoverseveralyearsorperiodstoeliminateanyseasonalorone timeeffectsMakesureabsoluteprofitofproductlinescanbereconciledwiththetotalbusiness profits Considerstrategicandoperationalalternatives Maptheclient svaluechainfrombeginningtoend 17 CU7020998JZA ProductLineProfitability Kelly sGourmetJellies Background PLPcouldbeusedtohelpKelly sGourmetJelliesunderstandtheprofitabilityofitsjarversusbucketbusiness Situation Kelly sGourmetJelliesisaregionalproducerofhigh quality premiumpricedfruitjellies Kelly shastwomajorproductlines 8 ozjarstogrocerystoresforretailsaleand1gallonbucketstouniversities hotels restaurants andcountryclubs Complication Indirectcostsarenotallocatedtoproducts Question Are8 ozjarsmoreprofitablethangallonbuckets 18 CU7020998JZA ProductLineProfitability PLPSteps Understandclient scurrentP Lsandcostcollectionsystems Determinethemajoractivitiesperformed Identifycostsandcostdriversforeachactivity Allocatecoststoeachproduct Analyzeprofitabilitybyproductorgroupofproducts Makerecommendations KeySuccessFactors IdentifyallpeopleandsystemsthatreportfinancialdataUnderstandlinkagesamonganddifferencesbetweenthevarioussourcesofdata 19 CU7020998JZA ProductLineProfitability Kelly s SourcesofCostInformation AnimportantfirststepinPLPanalysisisunderstandingtheclient sfinancialreportingsystem Orderdatabase Contents ReportTiming Responsibility QuantitiesofjarsorderedbycustomerQuantitiesofbucketsorderedbycustomerPriceperorder Weekly Marketing salesanalyst Monthlymanufacturingsummary OunceproductionbyflavorEmployeetimereports Monthly Kitchensupervisor Expensereport vendorpaymentssystem StorageinventoryIngredientinvoicesUtilitypayments Monthly Accountinganalyst 20 CU7020998JZA ProductLineProfitability Kelly s CurrentProfitReporting Kelly scurrentaccountingsystemshowsthatonagrossmarginbasis 8 ozjarsaremoreprofitablethanonegallonbuckets Overall Kelly searnsa9 4 EBITmargin Sales 468 000 252 000 Grossmargin 243 360 105 840 Kelly sGourmetJelliesProfitandLossJan Dec1996 Sales Costofgoodssold Grossmargin 720 000 370 800 349 200 Operatingexpenses 281 334 EBIT 67 866 EBITmargin 9 4 21 CU7020998JZA ProductLineProfitability Kelly s OperatingExpenses Over 280Kofoperatingexpensesarenotallocatedtojarsorbuckets LaborKitchenmaintenanceAdministrativeWarehouseDeliverySalescommissionMaintenancesupplies kitchenMaintenancesupplies trucksUtilities kitchenUtilities warehouseDepreciationKitchenequipmentWarehouseOfficeequipmentDeliveryequipmentSellingexpensesOtherG A 5 955 12 262 6 590 15 880 56 880 5 955 1 985 3 375 12 706 26 206 7 624 2 621 11 117 79 413 31 765 281 334 22 CU7020998JZA ProductLineProfitability PLPSteps Understandclient scurrentP Lsandcostcollectionsystems Determinethemajoractivitiesperformed Identifycostsandcostdriversforeachactivity Allocatecoststoeachproduct Analyzeprofitabilitybyproductorgroupofproducts Makerecommendations KeySuccessFactors Maptheclient svaluechainfrombeginningtoend 23 CU7020998JZA ProductLineProfitability Kelly sJellies ProcessFlow Typicallymanagementinterviewsandplanttourshelpdelineatethekeyactivitiesthatdrivecosts 24 CU7020998JZA ProductLineProfitability PLPSteps Understandclient scurrentP Lsandcostcollectionsystems Determinethemajoractivitiesperformed Identifycostsandcostdriversforeachactivity Allocatecoststoeachproduct Analyzeprofitabilitybyproductorgroupofproducts Makerecommendations KeySuccessFactors Tiecoststooperations notaccountingcategoriesFocusonthelargestcostelements 25 CU7020998JZA ProductLineProfitability Afterkeyactivitiesaredetermined allcostsshouldbeassignedtoactivities Next thecostdriverwilldeterminehowcostsshouldbeallocated Activity Costs Allocation costdriver Rationale Preserving MaintenancelaborMaintenancesuppliesUtilities kitchenEquipmentdepreciation 5 955 5 955 3 375 26 206 41 491 Ounces Bothproductsusethesamejelly soouncesisthebestproxyforrelativeuseofequipmentandfacilities Boxesofjarsandbucketscanbestackedontopofeachother Storing WarehouselaborUtilities warehouseWarehousedepreciation 6 590 12 706 7 624 26 920 Cubicfeet Kelly s CostDrivers 26 CU7020998JZA ProductLineProfitability Activity Costs Allocation costdriver Rationale Totaloperatingexpenses 281 334 Kelly s CostDrivers 27 CU7020998JZA ProductLineProfitability PLPSteps Understandclient scurrentP Lsandcostcollectionsystems Determinethemajoractivitiesperformed Identifycostsandcostdriversforeachactivity Allocatecoststoeachproduct Analyzeprofitabilitybyproductorgroupofproducts Makerecommendations KeySuccessFactors Quantifydriversforeachproduct 28 CU7020998JZA ProductLineProfitability Kelly s CostDriverCollection Next thekeycostdrivermeasuresforeachproductmustbecollectedtodeterminehowtoallocatecostsamongtheproducts Ouncesproducedandsold 8 ozjars Onegallonbuckets Total Datasource 1 248 000 1 075 200 2 323 200 VP sales Laborhoursrequiredtodeliver1MMozofjelly 24hours 10hours Deliverysupervisortrackschedules Averagewarehousestoragerequirements 3 100cubicfeet 1 900cubicfeet 5 000cubicfeet Stocksupervisor Salescommissions 8 1 sales 4 sales VP sales Selling promotionalexpenses toretail jarsonly toinstitutions bucketsonly topublic jarsandbuckets 73 795 1 638 VP sales 3 980 29 CU7020998JZA ProductLineProfitability Kelly s CostAllocation P 1 Totalcostsforactivityminusthecostsallocatedtojars Oncecostdrivermeasuresarecollectedforeachproduct itisrelativelystraightforwardtoallocatecosts Sales COGS Grossmargin 8 ozjars Onegallonbuckets 468 000224 640243 360 252 000146 160105 840 Preservingcosts 1 248MMoz 2 323MMoz x41 491 22 290 41 491 22 290 19 201 Storingcosts 3 100cuft 5 000cuft x26 920 16 690 26 920 16 690 10 230 30 CU7020998JZA ProductLineProfitability Kelly s CostAllocation P 2 8 ozjars Onegallonbuckets Deliverycosts 1 248MMx24hrs MMoz 1 248x24 1 0752x10 x28 982 21 327 28 982 21 327 7 655 Selling commissionpromotions 468 000 x10 46 800 252 000 x4 10 080 73 795 1 248 2 323 x3980 75 933 1 638 3 980 2 138 3 480 Corporateoverhead 1 248 2 323 x47 648 25 598 47 648 25 5978 22 050 Totaloperatingexpenses EBIT 208 638 34 722 72 696 33 144 31 CU7020998JZA ProductLineProfitability PLPSteps Understandclient scurrentP Lsandcostcollectionsystems Determinethemajoractivitiesperformed Identifycostsandcostdriversforeachactivity Allocatecoststoeachproduct Analyzeprofitabilitybyproductorgroupofproducts Makerecommendations KeySuccessFactors PressuretestassumptionswithclientsCalculateoverseveralyearsorperiodstoeliminateanyseasonalorone timeeffectsMakesuretotalabsoluteprofitcanbereconciledwithclient scalculations 32 CU7020998JZA ProductLineProfitability Kelly sJellies PLPResults PLPresultsrevealedthatonegallonbucketsaremoreprofitablethanjars CurrentAccountingSystem PLP Bucketshave LowerwarehousingcostsLowerpromotionalcostsLowersellingcommissionsLowerlaborcostsinstockinganddelivery 33 CU7020998JZA ProductLineProfitability PLPSteps Understandclient scurrentP Lsandcostcollectionsystems Determinethemajoractivitiesperformed Identifycostsandcostdriversforeachactivity Allocatecoststoeachproduct Analyzeprofitabilitybyproductorgroupofproducts Makerecommendations KeySuccessFactors Considerstrategicandoperationalalternatives 34 CU7020998JZA ProductLineProfitability OptionsforUnderperformingProducts Ifaproductlineisunprofitableorprofitablebutunderperforming therearefivealternativestoconsider Canwereducecosts Canweincreaseprice Canweincreasevolume Shouldwekeepproductasalossleader Shouldwedroptheproduct Whatisourrelativecostposition Whereisourrelativedisadvantage Howpricesensitivearecustomers Howwillcompetitorsrespond Willapriceincreaseencouragetheentryofnewcompetitors Havewefullypenetratedexistingaccounts Haveweaggressivelytargetednewaccounts Istheproductaneffectivelossleader Whatwillbethecostimpactonotherproducts Howwillcompetitorsreact Howwillcustomersreact 35 CU7020998JZA ProductLineProfitability Kelly s Recommendations PLPanalysiscanprovideoperationalimprovementtacticsforKelly sJellies 8 ozjars Gallonbuckets Re negotiatepromotionprogramswithkeyaccountsLowersalescommissionsSethigherproductpriceRe routedeliveryschedules IncreasesalescommissionsGrowcustomerbase encouragenewaccounts 36 CU7020998JZA ProductLineProfitability Agenda PLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeaways 37 CU7020998JZA ProductLineProfitability Vulcan Background Disguisedclientexample BainusedPLPanalysistohelpa 300MMaluminummanufacturerunderstandwhereitmademoneyandwhereitneededtofocusitsgrowthinitiatives Coatedsheet Foil Uses RVs campers buses vans roofing siding garagedoors manufacturedhomes Consumerdurables disposablecookwareandfoodcontainers pharmaceuticalpackaging Clientsituation Becomingmoreofacommoditybusinesswithtoughpricingpressure Consideredmoreprofitablethancoatedsheetproductline 38 CU7020998JZA ProductLineProfitability Vulcan Sales Source 1991 1997IncomeStatements Salesdeclinedsharplyfroma1994high although1997showssomesignsofimprovement CAGR 1991 94 CAGR 1994 97 Sales Volume 3 1 9 8 17 5 1 4 6 4 10 9 CAGR 1991 94 CAGR 1994 97 6 1 8 3 32 3 20 5 13 8 11 0 39 CU7020998JZA ProductLineProfitability Vulcan EBIT Source 1991 1997IncomeStatements EBITwasprojectedtoincreasein1997 buttoremainfarbelow1994 95levels CAGR 1991 94 CAGR 1994 97 EBIT sales 4 5 5 4 4 9 7 1 7 9 1 7 4 2 20 4 24 7 40 CU7020998JZA ProductLineProfitability Vulcan ProcessFlow TheBainteamvisitedakeyplantandinterviewedmanufacturingemployeestounderstandthekeyactivitiesandprocessflow Coatedsheetandfoilproductswentthroughasimilarprocessuptotherollingphase Melting Casting Coiling Foilrolling Ship Coating Ship Ingots Rolling 41 CU7020998JZA ProductLineProfitability Vulcan TotalPetersburgCosts Source 1996IncomeStatement PLPModel TheBainteam sfirststepwastounderstandVulcan stotalcostsandtheirrelativeimportance Theteamstudiedarepresentativefacility Petersburg 42 CU7020998JZA ProductLineProfitability Vulcan PLPMethodology P 1 Revenue Actualrevenuebyorderitem Theteamwentthrougheachcostcomponentanddevelopedamethodologytoallocatecoststofoilandcoatedsheetproducts Conversion Adjuststandardhoursbypart numberandmethod numberforeachpieceofequipmentusingNovember1996andMarch1997actualvs standardhourscomparisoncaptureactualoperatinghoursforeachpieceofequipmentusingrevisedequipmenttimesheetsdeterminehowaccuratelystandardscaptureactualhoursunderstanddriversofdifferencebetweenstandardandactualcalculateadjustmentfactortoapplytofullyear1996byeachpieceofequipment Paint Actualpaintcostbypart numberandmethod number Metal UsedailybookingsdatatoassignactualprimarymetalpricebycustomersalesorderUseactualprice lbforalloysandhardenersAddmeltanddrosslossbyalloytype 43 CU7020998JZA ProductLineProfitability Vulcan PLPMethodology P 2 Freight Actualfreightcostsbyorderitem Workingcapital Actualaccountsreceivablebygeneralproductcategory foilvs coatedsheet andfinishedgoodsbypart numbermethod number Selling Allocatedbyactualsalesperson stimespentbymarket G A Allocatedasapercentageofsalesdollars 44 CU7020998JZA ProductLineProfitability Vulcan PetersburgMaterialCosts Source PetersburgMetalReceipts TheBainteambeganbyexaminingthelargestcostarea directmaterials 45 CU7020998JZA ProductLineProfitability Vulcan MatchingData Sincemetalpricewasnotcapturedintheshipmentsdatabase ithadtobematchedwiththebookingsdatabasetogetanaccuratemetalprice 1996DailySalesBookingsData 1996OrderItemsShippedData Orderdate Promiseddate Customername Orderedlbs Unitsalesprice Fixed floatmetalprice Orderdate Originalpromisedate Customername Orderedlbs Unitsalesprice 46 CU7020998JZA ProductLineProfitability Vulcan TotalMetalCosts Drossisthenon usablescumthatrisestothetopwhenaluminumismelted Frommanufacturinginterviews theteamlearnedthatthetotalactualmetalcostwouldbeaffectedbythemeltanddross lossassociatedwithfoilandcoatedsheet Primarymetal Meltanddros