Profiling Your Profitability

I want to expand on that thought of a profitability proile.  A profitability profile is the result of analyzing which transactions have been profitable and to what degree.

This analysis doesn’t need to be down to the penny with 100% accuracy to be of value.  In fact, that’s simply impossible in most cases because some costs just aren’t captured at the transaction level such as inventory holding and obsolescence costs, warranty costs, R&D, tooling, capacity investment and so forth, all of which are exacerbated by demand variability and forecast error.  However, meaningful and useful  approximations are feasible.

Once you have analyzed the profitability by transaction, then you need to segment the business.  You want to understand what customer, channel and product combinations have been more or less profitable.  This requires you to segment the business by customer and product attribute.

What is likely to emerge is an understanding of overlapping product offerings whether some simplification is possible.  This data should also form the foundation for an analysis of pricing power and risk as well as margin leakage.

 There will be some obvious immediate actions that can be executed – raising prices on or foregoing unprofitable transactions, eliminating unprofitable SKU’s that are low volume, shifting some customers to lower cost channels.

There will also be longer term, more fundamental questions that need to be answered:

1)      What is the optimal product mix?

2)      How can we build tighter linkages with our most profitable customers?

3)      How does the price book need to be altered?

4)      How does the price approval process need to be configured?

5)      How can we align business functions for the most profitable mix of offerings and customers?  (e.g. If we want to orient our offerings around platforms, how does manufacturing need to change?  What do we need from our vendors?  Will the distribution channel need to adjust?  Does this affect the way we market and sell or process warranty work and returns?)

Next time, I’ll spend a few words on how you need to follow the profitability profile with a detailed analysis of the decisions that drove the unprofitable or marginally profitable transactions in the first place.

As a final thought to ponder over the weekend, I thought I would try my hand at a slightly different twist on the definition of supply chain (with apologies to Jonathan Byrnes from whose words I compiled it):  “Working intensively with counterparts across organizational boundaries to monitor, co-manage and maximize the profitable productivity of assets over the long run and jointly create important new value in the process.”

Thanks once more for spending a moment with me here at Supply Chain Action.

Have a wonderful weekend!

Leading for Profit

My guess is that you may have already read the book, Islands of Profit in a Sea of Red Ink by Jonathan Byrnes.  He suspects that 40% of your business is unprofitable, but nobody knows because your metrics are aggregate and profitable transactions subsidize the rest.  Byrnes’ book is replete with insights for managing profitably, including:

 

 

1. Identifying unprofitable business is job one. 
2. The big question, then, is how to manage for profitability (or value) going forward. 
3. In most companies, no one is responsible for managing the interaction of key tradeoffs to increase profitability to its full potential. 

Managing your company’s assets for increased profit is the essence of supply chain management.  To that end, product development, marketing and selling, forecasting, supply chain design, capacity and production planning, and sourcing must be orchestrated as interrelated processes.  This requires cross-functional coordination enabled by advanced analytics that explicitly and simultaneously evaluate many critical tradeoffs, giving you the head start you need to seize new areas of profitability.

I see three sequential priorities for transforming the supply chain management of an enterprise:

1)      Profitability profiling by product and customer, down even to the invoice level.  Combined with a pricing power/risk and margin leakage analysis, this identifies where prices can be immediately increased and where costs to serve some customers need to be slashed, yielding an immediate impact.

2)      Detailed analysis of the decisions that are driving the unprofitable or marginally profitable transactions

3)      Designing improved, integrated decision and planning processes as well as the tools to sustain the them, enabling the capture of new areas of profitability

For the weekend, I leave you to ponder this quote by Byrnes, “Middle management excellence is the key leverage point for great performance.”

Thanks for stopping by.  Have a wonderful weekend!

Pricing, Promotion, Analytics and SCRM

First, I’d like to take this Veterans Day (it is this Sunday) as an occasion to express my appreciation to those who have sworn to uphold and defend our Constitution with their very life.  From one vet to another, “Happy Veterans Day”.  For those of us who have served or do serve as Marines, a “Happy 236th Birthday“.  May all of us remain faithful to the courage, honor and commitment required of Marines in all areas of our lives – Semper Fidelis!

Second, I’ve put together a few thoughtful questions and some questioning thoughts that I hope will stimulate your mind on three important topics – pricing and promotion of consumer goods, making the most of analytical decision support, and supply chain risk management.

On pricing and promotion in consumer goods

If you are a consumer goods manufacturer, you likely purchase syndicated data to evaluate product trends and share by category, market and channel.  If you are more advanced, you have figured out how to leverage this data in your demand planning process so that your SKU forecasts are more accurate.  But, many firms have not yet incorporated it for the purpose of analyzing and optimizing pricing and promotion decisions.  If you haven’t, why haven’t you?

On making the most of analytical decision support

I have argued in previous posts that the process of analytical decision-making is not just math and data, but it is an interactive process through which the analyst must use his or her experience and skill to artfully find information despite defects in the data and deficiencies in the data model.  One case-in-point would be multi-stage, stochastic, inventory optimization (MESIO – for more, see “Who Is Spending Your Cash?”, the 30 September post from Supply Chain Action).  Consider the possible objectives of an effort to improve inventory (a portion of working capital) efficiency.  Here are a number of possible goals:

1. Achieve a stated average time between stockouts
2. Minimize the total value short
3. Minimize the total stockout occasions
4. Minimize the cost per unit short
5. Minimize the cost per unit short per period
6. Minimize the combined costs of shortage, overage and replenishment (think about shipping an individual unit versus a more economical pack size)
7. Achieving a target likelihood of no stockouts in a period
8. Achieving a target likelihood of demand satisfied directly from the shelf (think fill rate)
9. Using idle capacity to build stock that will sell in a specified period of time

Most off-the-shelf applications will only give you one or two of these objectives and necessarily prohibit interaction of the modeler with the model because the software company needs to protect its intellectual property.

This does not mean that an off-the-shelf application will not work for your business.  It may, indeed, be the best answer and provide an enterprise-scale solution that is fully integrated with your other planning operations.  The point is that you have to do some careful thinking and testing in order to validate that it will work and that you will have whatever ability to interact with the model that your analysts will require.

On supply chain risk management

How do you evaluate the resiliency of your value network?  Do you have the capability to electronically represent your value network from one end to the other?  Have you determined how to represent the value (in terms of materiel, currency and data) that pulses along the paths in the value network?  Have you quantified the consequences of a disruption (from whatever cause) that would impact that flow?  If so, do you have a plan for dealing with such an interruption?  What have you done to make sure key people know the plan and can execute it?

Thanks again for dropping by Supply Chain Action.

Until next week, remember this thought from an anonymous source, “Make sure what you do today is important because you are exchanging a day of your life for it.”

Have a wonderful weekend!