某咨询分析方法ProductLineProfitability

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1、 Author:Gisele GarrawayContributor:Steve BerezProfitabilityProduct LineMarch 19981Product Line ProfitabilityAgenda PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeaways2PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeawaysProduct Line ProfitabilityAgenda 3Product Li

2、ne ProfitabilityPLP Description PineCherryMapleOakRevenuesOperating profit$500MM$35MM0%20%40%60%80%100%Percent of TotalProduct line profitability(PLP)is a diagnostic tool that helps us determine the“true”profitability of each product within a multi-product portfolio.Picture FramesOperating Margin2.3

3、%5.3%7.0%10.0%4Product Line ProfitabilityProfit Improvement Tools PLP analysis is one of the Bain diagnostic tools that can identify sources of profit improvement.0%5%10%15%20%0.10.20.5125ProfitabilityRelative Market ShareBain profit improvement tool kitPLPBDPRCPVMR5Profit Line Profitability Why Bai

4、n Uses PLP Senior managers can use PLP analysis to make important decisions about product lines.For which products should we increase prices?Where should we focus our cost reduction efforts?Which product lines should we drop?Which products should we focus R&D efforts on?Where should we provide sales

5、 incentives?6Product Line ProfitabilityTypical Accounting System Versus Bain PLP Unlike typical accounting systems,PLP involves driving below gross margin and allocating costs to get to an operating margin for each product line.Typical accounting systemBain PLPCost collection:By function(e.g.R&D,adv

6、ertising)By product lineCost assignedto products:Cost of goods solddirect labordirect materialsAll costs,including all indirect costsoverheadadvertisingdistributionKey product profitability measure:Gross margin(revenue-cost of goods sold)Operating marginCost allocation method:Accounting standardsAct

7、ivity-based cost driversDisadvantage:Often does not reflect true commitment of resources and the returns for their useDifficult to capture all activities that drive costs7Product Line ProfitabilityDirect and Indirect Costs Traditional accounting systems often allocate only direct costs,not indirect

8、costs,to products.And,in some cases,the direct costs are allocated inappropriately.R&DG&ASellingDistributionAdvertisingOverheadDirect laborPackagingIngredientsCoffee production costs0%20%40%60%80%100%Percent of TotalIndirectcostsDirectcostsDefinitionTypical accountingallocationPLPallocationCosts gen

9、erally incurred by the firm outside of the production process.These cannot easily be identified with or assigned to a particular productCosts incurred directly in the production of the product or service.These costs can easily be identified with a particular productNot allocated or allocated based o

10、n percent of salesAllocated based on actual cost driversTracked using accounting standardsVariances sometimes not tracked by productAll direct costs,including variances,are tracked by product8Product Line ProfitabilityInappropriate Direct Cost Allocation Some accounting systems allocate direct costs

11、 to products based on original expectations about production results.These assumptions cannot account for changes in raw materials use and labor time.Accounting standardActual for last quarterDifferenceRevenue per widget:$6.00$6.00Raw materials:$1.75$1.93 Standard excludes loss Increased loss due to

12、 change in supplier qualityProduction floor labor:0.30 hours x 8.00/hour=$2.400.45 hours x 8.00/hour=$3.60 Standard excludes switch-over from main produce Increased labor due to rework from lostGross margin:6.00-(1.75+2.40)=1.856.00-(1.93+3.60)=0.47Gross margin percent:31%8%9Product Line Profitabili

13、tyGross Margin Versus Operating Margin R&DSales and marketingDistributionOverheadCost of goods soldT-54K-93J-88$535$480$345$0$200$400$600Cost per UnitIf accounting systems do not allocate all indirect costs to products,managers may misjudge products relative contribution to profits.Indirect costsPri

14、ce:$750$600$450Gross margin:40%33%44%Operating margin:29%20%23%On a gross margin basis,J-88s are the most profitable;however,T-54s are most profitable when all indirect costs are allocated10Product Line ProfitabilityPotential for Mismanagement Failure to tie direct and indirect costs to individual p

15、roduct lines can cause firms to mismanage their businesses.Sales and marketingDistributionProduct developmentSpend advertising dollars on wrong productsSet up compensation and incentives to encourage sales of unprofitable productsPrioritize delivery schedules inappropriatelyEstablish wrong truck loa

16、d ratiosFund unprofitable productsKill profitable products11Product Line ProfitabilityPaths to Low Profitability Multi-product businesses that do not understand their products true profitability become low profit firms.If gross margins are based on inappropriate accounting standards and indirect cos

17、ts are not allocated appropriatelyHigh gross margin(potentially low net profit)products are given investment capitalLow gross margin(potentially high net profit)products are starved of investment capitalNew product line extensions are introducedAdditional complexity from growing number of SKUs incre

18、ases direct costsProduct line extensions are ignored and profitable products growth slowsPoor profitability continues,driving high prices and poor positioning versus competitors12PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeawaysProduct Line ProfitabilityAgenda 13Product Line Pro

19、fitabilityApplications Bain has used PLP extensively.Some examples of our work include:Air transportationCommunicationsSituation:An air transportation company had various lines of business,but no activity-based accounting system.Management did not know which businesses,routes,or customers where prof

20、itableAfter suffering four consecutive years of negative net income,a voice processing service company was interested in understanding the economics and market positioning of their product linesResult:Bain identified unprofitable businesses,routes,and customers which in some cases were subsequently

21、cut or pricing was altered to improve profitability.An analysis of costs indicated that profitability was much worse than thought,leading to a mandate for company-wide cost reduction and revenue enhancementBain assessed the profitability of three major product lines and identified savings of$20-$25M

22、M on a cost base$110MM14PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeawaysProduct Line ProfitabilityAgenda 15Product Line ProfitabilityPLP Steps PLP analysis involves six major steps.Understand clients current P&Ls and cost collection systemsDetermine the major activities perform

23、edIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsIdentify all people and systems that report financial dataUnderstand linkages among and differences between the various sources

24、 of dataTie costs to operations,not accounting categoriesFocus on the largest cost elementsQuantify drivers for each productPressure test assumptions with clientsCalculate over several years or periods to eliminate any seasonal or one-time effectsMake sure absolute profit of product lines can be rec

25、onciled with the total business profitsConsider strategic and operational alternativesMap the clients value chain from beginning to end16Product Line ProfitabilityKellys Gourmet Jellies-Background PLP could be used to help Kellys Gourmet Jellies understand the profitability of its jar versus bucket

26、business.Situation:Kellys Gourmet Jellies is a regional producer of high-quality,premium priced fruit jellies.Kellys has two major product lines:8-oz jars to grocery stores for retail sale and 1 gallon buckets to universities,hotels,restaurants,and country clubsComplication:Indirect costs are not al

27、located to productsQuestion:Are 8-oz jars more profitable than gallon buckets?17Product Line ProfitabilityPLP Steps Understand clients current P&Ls and cost collection systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyz

28、e profitability by product or group of productsMake recommendationsKey Success FactorsIdentify all people and systems that report financial dataUnderstand linkages among and differences between the various sources of data18Product Line ProfitabilityKellys-Sources of Cost Information An important fir

29、st step in PLP analysis is understanding the clients financial reporting system.Order databaseContentsReport TimingResponsibilityQuantities of jars ordered by customerQuantities of buckets ordered by customerPrice per orderWeeklyMarketing/sales analystMonthly manufacturing summaryOunce productionby

30、flavorEmployee time reportsMonthlyKitchen supervisorExpense report/vendor payments systemStorage inventoryIngredient invoicesUtility paymentsMonthlyAccounting analyst19Product Line ProfitabilityKellys-Current Profit Reporting 8-oz jarsOne gallon buckets52%42%0%20%40%60%Gross MarginKellys current acc

31、ounting system shows that on a gross margin basis,8-oz jars are more profitable than one gallon buckets.Overall,Kellys earns a 9.4%EBIT margin.Sales:$468,000$252,000Gross margin:$243,360$105,840Kellys Gourmet Jellies Profit and Loss Jan-Dec 1996SalesCost of goods soldGross margin$720,000($370,800)$3

32、49,200Operating expenses($281,334)EBIT$67,866EBIT margin9.4%20Product Line ProfitabilityKellys-Operating Expenses Over$280K of operating expenses are not allocated to jars or buckets.LaborKitchen maintenanceAdministrativeWarehouseDeliverySales commissionMaintenance supplies-kitchenMaintenance suppli

33、es-trucksUtilities-kitchenUtilities-warehouseDepreciationKitchen equipmentWarehouseOffice equipmentDelivery equipmentSelling expensesOther G&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$281,33421Product Line ProfitabilityPLP Steps Understand cli

34、ents current P&Ls and cost collection systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsMap the clients value chain from beginning t

35、o end22Product Line ProfitabilityKellys Jellies-Process Flow Typically management interviews and plant tours help delineate the key activities that drive costs.PreservingStoringSellingDeliveryCorporate Functions23Product Line ProfitabilityPLP Steps Understand clients current P&Ls and cost collection

36、 systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsTie costs to operations,not accounting categoriesFocus on the largest cost elemen

37、ts24Product Line Profitability After key activities are determined,all costs should be assigned to activities.Next,the cost driver will determine how costs should be allocated.ActivityCostsAllocation/cost driverRationalePreservingMaintenance laborMaintenance suppliesUtilities-kitchenEquipment deprec

38、iation$5,955$5,955$3,375$26,206$41,491OuncesBoth products use the same jelly,so ounces is the best proxy for relative use of equipment and facilitiesBoxes of jars and buckets can be stacked on top of each otherStoringWarehouse laborUtilities-warehouseWarehouse depreciation$6,590$12,706$7,624$26,920C

39、ubic feetKellys-Cost Drivers 25Product Line Profitability ActivityCostsAllocation/cost driverRationaleCommissions are directly assignable.Most expenses directly assignable to a channel(and therefore to a product type)SellingSales commissionSelling expenses$56,880$79,413$136,293Actual costs;ouncesLab

40、or is the key item and manhours drive labor cost.Possibly depreciation could be more accurately allocated using cubic feet shipped$15,880$1,985$11,117$28,982DeliveringDelivery laborMaintenance supplies-trucksTruck depreciationManhoursProbably the simplest unit for allocationCorporate functionsAdmini

41、strative laborOffice equipment depreciationOther G&A$6,590$12,706$7,624$26,920OuncesTotal operating expenses:$281,334Kellys-Cost Drivers 26Product Line ProfitabilityPLP Steps Understand clients current P&Ls and cost collection systemsDetermine the major activities performedIdentify costs and cost dr

42、ivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsQuantify drivers for each product27Product Line ProfitabilityKellys-Cost Driver Collection Next,the key cost driver measures for each product must be colle

43、cted to determine how to allocate costs among the products.Ounces produced and sold:8-oz jarsOne gallonbucketsTotalData source1,248,0001,075,2002,323,200VP,salesLabor hours required to deliver 1MM oz of jelly:24 hours10 hoursDelivery supervisor track schedulesAverage warehousestorage requirements:3,

44、100 cubic feet1,900 cubic feet5,000 cubic feet Stock supervisorSales commissions:8.1%sales4%salesVP,salesSelling/promotional expenses:to retail(jars only)to institutions(buckets only)to public(jars and buckets)73,7951,638VP,sales3,98028Product Line ProfitabilityKellys-Cost Allocation(P.1)*Total cost

45、s for activity minus the costs allocated to jarsOnce cost driver measures are collected for each product,it is relatively straightforward to allocate costs.Sales:COGS:Gross margin:8-oz jarsOne gallon buckets468,000224,640243,360252,000146,160105,840Preserving costs:1,248MM oz/2,323MM ozx 41,491=22,2

46、9041,491-22,290=19,201*Storing costs:3,100 cu ft/5,000 cu ftx 26,920=16,69026,920-16,690=10,23029Product Line ProfitabilityKellys-Cost Allocation(P.2)8-oz jarsOne gallon bucketsDelivery costs:1,248MM x 24hrs/MM oz/(1.248 x 24)+(1.0752 x 10)x 28,982=21,32728,982-21,327=7,655Selling:commission promoti

47、ons468,000 x 10%=46,800252,000 x 4%=10,08073,795+(1.248/2.323)x 3980-75,9331,638+(3,980-2,138)=3,480 Corporate overhead:1.248/2.323 x 47,648=25,59847,648-25,5978=22,050Total operating expenses:EBIT208,63834,72272,69633,14430Product Line ProfitabilityPLP Steps Understand clients current P&Ls and cost

48、 collection systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsPressure test assumptions with clientsCalculate over several years or

49、periods to eliminate any seasonal or one-time effectsMake sure total absolute profit can be reconciled with clients calculations31Product Line ProfitabilityKellys Jellies-PLP Results 8-oz jarsOne gallon buckets52%42%0%20%40%60%Gross MarginPLP results revealed that one gallon buckets are more profita

50、ble than jars.8-oz jarsOne gallon buckets7.4%13.2%0%5%10%15%Operating MarginCurrent Accounting SystemPLPBuckets have:Lower warehousing costsLower promotional costsLower selling commissionsLower labor costs in stocking and delivery32Product Line ProfitabilityPLP Steps Understand clients current P&Ls

51、and cost collection systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsConsider strategic and operational alternatives33Product Line

52、ProfitabilityOptions for Underperforming Products If a product line is unprofitable or profitable but underperforming,there are five alternatives to consider.Can we reduce costs?Can we increase price?Can we increase volume?Should we keep product as a loss leader?Should we drop the product?What is ou

53、r relative cost position?Where is our relative disadvantage?How price sensitive are customers?How will competitors respond?Will a price increase encourage the entry of new competitors?Have we fully penetrated existing accounts?Have we aggressively targeted new accounts?Is the product an effective lo

54、ss leader?What will be the cost impact on other products?How will competitors react?How will customers react?34Product Line ProfitabilityKellys-Recommendations PLP analysis can provide operational improvement tactics for Kellys Jellies.8-oz jarsGallon bucketsRe-negotiate promotion programs with key

55、accountsLower sales commissionsSet higher product priceRe-route delivery schedulesIncrease sales commissionsGrow customer base-encourage new accounts35Product Line ProfitabilityAgenda PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeaways36Product Line ProfitabilityVulcan*-Background

56、*Disguised client exampleBain used PLP analysis to help a$300MM aluminum manufacturer understand where it made money and where it needed to focus its growth initiatives.Coated sheetFoilUses:RVs,campers,buses,vans,roofing,siding,garage doors,manufactured homesConsumer durables,disposable cookware and

57、 food containers,pharmaceutical packagingClient situation:Becoming more of a commodity business with tough pricing pressureConsidered more profitable than coated sheet product line37Product Line ProfitabilityVulcan-SalesSource:1991-1997 Income StatementsCustomerIntra-company1991 1992 1993 1994 1995

58、1996 1997$0$100$200$300$400$500Revenue(Millions of 1996 Dollars)CustomerIntra-company1991 1992 1993 1994 1995 1996 1997 0 50 100 150 200 250 300Sales Pounds(Millions of Pounds)Sales declined sharply from a 1994 high,although 1997 shows some signs of improvement.CAGR(1991-94)CAGR(1994-97)SalesVolume3

59、.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)%38Product Line ProfitabilityVulcan-EBITSource:1991-1997 Income Statements 1991199219931994199519961997YTD$0MM$5MM$10MM$15MM$20MM$25MM$30MMEBIT(Millions of 1996 Dollars)EBIT was projected to increase in 1997,bu

60、t to remain far below 1994-95 levels.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)%39Product Line ProfitabilityVulcan-Process FlowThe Bain team visited a key plant and interviewed manufacturing employees to understand the key activities and process flow.Coated sheet an

61、d foil products went through a similar process up to the rolling phase.MeltingCastingCoilingFoil rollingShipCoatingShipIngotsRolling40Product Line ProfitabilityVulcan-Total Petersburg CostsSource:1996 Income Statement;PLP ModelWorking capitalSellingFreightG&AConversion costsPaintAlloys and hardeners

62、AluminumTotal Petersburg costs$300.9MM0%20%40%60%80%100%Percent of Total CostsThe Bain teams first step was to understand Vulcans total costs and their relative importance.The team studied a representative facility,Petersburg.41Product Line ProfitabilityVulcan-PLP Methodology(P.1)Revenue:Actual reve

63、nue by order itemThe team went through each cost component and developed a methodology to allocate costs to foil and coated sheet products.Conversion:Adjust standard hours by part-number and method-number for each piece of equipment using November 1996 and March 1997 actual vs.standard hours compari

64、soncapture actual operating hours for each piece of equipment using revised equipment time sheetsdetermine how accurately standards capture actual hoursunderstand drivers of difference between standard and actualcalculate adjustment factor to apply to full year 1996 by each piece of equipmentPaint:A

65、ctual paint cost by part-number and method-numberMetal:Use daily bookings data to assign actual primary metal price by customer sales orderUse actual price/lb for alloys and hardenersAdd melt and dross loss by alloy type42Product Line ProfitabilityVulcan-PLP Methodology(P.2)Freight:Actual freight co

66、sts by order itemWorking capital:Actual accounts receivable by general product category(foil vs.coated sheet)and finished goods by part-number method-numberSelling:Allocated by actual salespersons time spent by marketG&A:Allocated as a percentage of sales dollars43Product Line ProfitabilityVulcan-Petersburg Material CostsSource:Petersburg Metal ReceiptsPaintA lloys and hardenersAluminum1996 Petersburg material costs$186.6MM0%20%40%60%80%100%Percent of Total CostsThe Bain team began by examining