A structured approach to margin management

Report
A structured approach to margin
management
William (Bill) Surphlis
Managing Partner
Grant Thornton Productivity Improvement
T +1 416 366 0100 ext. 7223
E [email protected]
Productivity
How do you increase it?
Process
•
•
•
•
•
Process mapping
Best practices
Activity lists
Observations
Planning guidelines
System
•
•
•
•
•
Volume forecasting
Resource planning
Cycle controls
Operating reports
Production meetings
Management
•
•
•
•
•
Supervisory model
Active supervision
Management style
Coaching approach
Problem solving
Typical observation summaries
Detail summary
Employee "A" and Employee "B"
Code
Description
Time (min)
%
Value-added activities
2910
44%
Non value added
3734
56%
6644
100%
Total
44%
56%
Management operating system example
Supervisor behaviors
Proactive management
Proactive improvement
Training
Administration
Process work
Reactive management
Two performance dimensions
Good execution
Executing a
bad plan
well
Executing a
good plan
well
Executing a
bad plan
poorly
Executing a
good plan
poorly
Operational
efficiency
Good planning
Demand management
and scheduling
4 steps to defending margins
•
Our most common client needs:
– Desire to improve margins in a sustainable manner
– Existence of price/cost pressures across product line
– Lack key components of formal margin management activity
• Accurate data based on actual performance
• Clear responsibility/accountability
• Recurring review structure
• Departmental improvement projects that have strategic priority
Q. What is your Gross Margin Threshold that
triggers a review?
A. ???
Defending margins starts with
sound margin management.
4 steps to defending margins
Step 1: Quick results and data validation
• Quick results
– Utilize a workshop or meetings with key staff to identify cost reduction
opportunities
• Prioritize those that require low capital and short implementation
window
– Increase prices
• Utilize minor price increases (<5%) according to product type and
customer strategy
• Larger increases suitable for non-strategic customers
4 steps to defending margins
Step 1: Quick results and data validation
• Data validation
– Decide on data to use for decision making
• Gross Margin
• Contribution
• Fixed cost allocation
– Review accuracy/relevance of all data used to calculate SKU/customer
metric
• Integration of actual data essential
• Consideration for frequency of updating costs
4 steps to defending margins
Step 2: Margin management structure
• Establish threshold that will trigger review
– Gross Margin <25% or under total firm value
• Design meeting structure
– Monthly review of SKU based data
– Quarterly review of customer based data
– Departmental updates on high priority projects
• Assign responsibility
– Initially resides with President/CEO and potential transfer a year following
implementation
• Begin communication and set context
– Clarify context and reasons for establishing program
– Communicate to staff team
4 steps to defending margins
Step 3: Data analysis
• Deliver data set for review by management team
• Feedback and "gut test" iterative process
• Client example:
– High value SKUs: 80% of Gross Margin $ generated from 54(17%) SKUs
– Low value SKUs: 255(82%) generated only 20% of Gross Margin $, some
at a significant loss
– How many SKUs account for 80% of your overall GM$?
4 steps to defending margins
Step 4: Taking action
• Begin review meetings
• Identify action plans for all products below threshold
– Increase price
– Recipe/BOM modification
• Focus on most expensive ingredients
– Reduce amount or cost of packaging
– Quantity reduction
• Maintain price
•
– Reduce material waste in process
– Reduce labour cost in process
– Increase production using current labour and equipment
– Capital investment for core and strategic products
Assign actions and track progress
Margin management
Key industry themes
• Need to understand your costs to manage margins
– Data analysis and repositories that reflect activities performed
• Need processes and tools to make thoughtful decisions
– Dynamic and flexible management systems
• Most organizations lack a good understanding of where they make
and/or lose money
– Focus on what makes you money
• Understand your market position and competitive forces
– How can you best compete
Margin management
Key industry themes
• Pricing and portfolio management
– Develop a responsive, portfolio-based pricing model that considers internal
and external perspectives and ensure controls exist at the execution level
• Sales management and effectiveness
– Productivity of your sales organization and market initiatives
– Develop a system that maximizes active selling and prospecting and directs
and tracks sales activity in line with the company objectives
– Implement forecasting procedures and accuracy measures
• Organizational structure
– Redefinition of the organization structure to maximize company and
functional performance through motivating the right people in the chosen
direction
Margin management assessment
"Focus on what makes you money"
• Types of analysis include:
1. Productivity assessment
2. Market, category and channel assessment
3. Portfolio segmentation and rationalization (by sales, customer, geography,
distribution, brand, product, SKU, etc.)
4. Activity based costing
5. Overhead allocations (by cost centre, sq ft, function, department, etc.)
6. Porter's 5 Competitive Forces
7. Growth Share Matrix
8. 80/20 rules
9. Glenday Analysis
10. Pricing strategies
11. Seasonality
Sample data analysis and management tools
Contribution margin analysis-airline co.
Aircraft
Contribution $
HS748LTC
$598,000
HS748FFS
$295,000
HS748MAA
$295,000
HS748TTW
$295,000
BEECHWAU
$123,000
BEECHZVJ
$99,000
BEECHSWA
$52,000
BEECHWZK
$48,000
BEECHQWA
$(16,000)
C GR CVNKDL
$(38,000)
C GR CVNWAW
$(38,000)
C GR CVNKAD
$(38,000)
BEECHWAX
$(63,000)
PC – 12WAV
$(100,000)
C GR CVNPCC
$(101,000)
DASH 8 – 100DND
$(108,000)
PC -12GWA
$(114,000)
PC -12YZS
$(115,000)
PC -12KRB
$(117,000)
PC -12KPI
$(124,000)
PC -12BXW
$(154,000)
PC -12PAI
$(154,000)
PC -12PCL
$(157,000)
STARS
8 aircraft generate $1.8M in
contribution
DOGS
15 aircraft generate -$1.437M in
contribution
*Total contribution calculated to be
$368,000 for all 23 aircraft
Sample data analysis and management tools
Growth share matrix-airline co.
STARS
9 routes generate 50%
of annual GM$
CASH
COWS
18 routes generate
another 45% of annual
GM$
?
QUESTION
MARKS
DOGS
37 routes have positive
GM% but low GM$
34 routes have negative
GM% and GM$ totaling
-$1,653,525
Gross Margin
50%
$2,382,554.77
9 routes
STARS (8.4%)
95%
$4,560,745.23
27 routes
CASH COWS (25.2%)
100%
$4,784,243.12
107 routes
100.0%
34 routes show negative Gross Margin of $(1,653,525)
37 routes show positive Gross Margin, but low contribution
DOGS
QUESTION MARKS
Sample data analysis and management tools
Product matrix analysis-food processor
Margin analysis by product (period 5 actual)
Sales Revenue
Gross Margin
Low
Medium
High
Total
Yellow
# of Products
Revenue ($M)
Net GM ($M)
2
$5,664
$1,993
1%
0%
0%
12
$57,567
$13,453
6%
1%
3%
94
$6,503,955
$574,028
45%
68%
123%
108
$6,567,186
$589,473
52%
69%
127%
Green
# of Products
Revenue ($M)
Net GM ($M)
3
$5,498
$1,318
1%
0%
0%
12
$56,131
$6,471
6%
1%
1%
7
$125,321
$4,226
3%
1%
1%
22
$186,949
$12,015
11%
2%
3%
Red
# of Products
Revenue ($M)
Net GM ($M)
25
$28,707
$(577)
12%
0%
0%
11
$47,394
$(8,519)
5%
0%
-2%
41
$2,730,825
$(127,241)
20%
29%
-27%
77
$2,806,926
$(136,337)
37%
29%
-29%
Total
# of Products
Revenue ($M)
Net GM ($M)
30
$39,869
$2,734
14%
0%
1%
35
$161,092
$11,404
17%
2%
2%
142
$9,360,101
$451,013
69%
98%
97%
207
$9,561,062
$465,151
100%
100%
100%
Company COGNOS Summary:
Revenue
Net GM
Net GM (Samples and TS)
Net GM (COGNOS)
$9,561,062
$465,151
$(9,393)
$455,758
4.9%
4.8%
Sample data analysis and management tools
Glenday SKU analysis-food processor
3% of SKUs
23 SKUs represent 50% of sales
50%
30% of SKUs
244 SKUs represent the next 45% of sales
95%
20% of SKUs
165 SKUs represent 4% of sales
99%
46% of SKUs
376 SKUs represent 1% of sales
100%
• 33% of SKU's (267) represent 95% of sales
• 67% of SKU's (541) represent 5% of sales
Plant
# of SKUs
1
141
7,250,646
$85,169,865
10%
2
19
290,465
$7,113,557
1%
3
104
20,005,641
$452,550,853
54%
4
572
840,445
$38,359,136
5%
5
148
5,815,618
$144,578,416
17%
6
19
5,933,473
$114,419,670
14%
1,003
40,136,288
$842,191,497
100%
Total Costs
Sale units
Total cost
% of Total
Sample data analysis and management tools
Margin improvement plan and operating reportfood processor
Sample Case Studies
• Pinty's Delicious Foods (chicken processing)
– ROI from 3.5 to 1
• Swish Maintenance Ltd. (cleaning products)
– ROI from 4.0 to 1
• Sanofi Pasteur (vaccines)
– ROI 5.7 to 1
• Ganong (chocolate)
– ROI 2 to 1
Case Study A
Pinty's Delicious Foods
• Approach
– Rationalized product and customer portfolios
– Installed a system to improve pricing capabilities
– Installing a sales management system
– Management of distribution and logistics costs
– Focus on trade spend investments that generate maximum return
Plan
Actual
19-Nov
29-Oct
08-Oct
17-Sep
27-Aug
06-Aug
16-Jul
25-Jun
04-Jun
14-May
23-Apr
02-Apr
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
-200,000
12-Mar
• Project results
– 3.5:1 Project Return on
Investment in 9 months
– Profit margin increased by
5.1%
– Increased sales by 6%
– 4% increase in order fill ratio
– Accounts receivable reduced
by $2M
– Outstanding trade claim
backlog reduced by 69%
20-Feb
Case Study A (cont'd)
Case Study B
Swish Maintenance Ltd.
• Approach
– Analyzed existing sales performance and efficiency data
– Implemented new procedures and policies for sales call planning,
target setting, customer segmentation and sales call reporting
– Delivered customized applied management training to sales
managers
– Increased accountability of sales force by setting and measuring
clearly defined targets and performance expectation
Case Study B (cont'd)
• Project results
– 4:1 project return on
investment
– 18% increase in margins
– 11% increase in revenues
– Increased new account
acquisition volumes
– Increased existing account
penetration
Productivity Improvement
Profit
Improvement
33%
27%
37%
Selling
time
Customer
calls
# Quotes
18%
Case Study C
Sanofi Pasteur
• Situation
– Allocations were based on budgeted numbers, not actual results
– Quality, industrial project management, profit sharing unabsorbed
– 25% of total cost of goods sold unabsorbed
• Approach
– Develop an Activity Based Costing model to help achieve the
following:
• Strategic pricing, capacity planning, transfer pricing
• Actual production cost and accurate variance reporting
• Budgeting on activities
Case Study C (cont'd)
• Project results
– 5.7:1 Project Return on Investment
– Cost base moved from 64% to 9% unexplainable
– System successfully implement and installed globally
120%
100%
23%
80%
31%
13%
60%
40%
64%
60%
20%
9%
0%
Before
After
Support costs
Manager
accountability
No manager
accountability
Case Study D
Ganong
• Situation
– 700+ SKU's, with over 300 active in the last year
– Cost data available is based on initial budgets for each product
– All departments cited a lack of trust in costs as reason for inaction
• Approach
– Install costing system to deliver actuals for labour, materials, and
overhead
– Initiative lead at CEO level to establish priority and formalize a
process
Case Study D
Ganong
• Project results
– Actual cost and margin data updated for review by sales, operations
and executive team
– Currently in decision making stage of SKUs to eliminate or raise
prices
– Education of sales team is a high priority as 95% of GM$ is driven
by 20% of SKUs
Summary of data for active products with GM% of 20 or less
Revenue
% of Total
F09
$14,573,589
33.2%
F10
$11,950,478
F11
$8,101,614
Margin $
% of Total
# of SKUs
% of Total
Avg. GM%
$1,302,147
11.7%
235
42.0%
8.9
26.5%
$998,232
7.8%
225
44.1%
8.4
33.2%
$944,700
13.5%
184
41.8%
11.7
Structured approach
Productivity assessment
"How you can best compete"
•
Types of analysis include:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Interviews with key personnel
Conduct studies to determine the level of opportunity in the operation
Conduct several detailed studies in your organization
Analyze the management systems and data to determine whether gaps exist that
hamper the flow of information for appropriate and timely decision making
Create a summary of opportunities for each of the operations
Understand the capacity and capability constraints of current processes
Estimate value of opportunities if implemented
Create preliminary schedule for implementation with ROI calculations
Estimate a project "cash flow" that can be monitored for schedule attainment during
an implementation
Market assessment
"How can you sell more of the right product"
•
Types of analysis include:
1. Review existing sales and marketing plans and market studies
2. Review and discuss the target markets domestically and internationally
3. Review your plans for sales growth and estimate the additional capacity or capability
required to serve market channels
4. Determine, recommend, and prioritize alternatives for new markets
5. Conduct an overview of your product portfolio, sales and distribution channels to
determine improvement opportunities
6. Conduct a SWOT analysis
7. Conduct preliminary market research
8. Assess market attractiveness and potential of a product
9. Select the best alternative and define the rational by estimating the project cost,
timelines and payback
Questions?
Thank you!
•
An analysis technique that allows practitioners to prioritize and target improvement efforts
on a few high-volume procedures, processes, units or activities (PPUAs). As seen in the
table below, GS maintains that in most cases about 6 percent of PPUAs account for
about 50 percent of volume. Additionally, GS classifies and color-codes all PPUAs into
four different volume groups. For example, if a manufacturer makes 200 different parts,
GS maintains that approximately 12 parts account for 50 percent of sales; these 12 parts
would be in the green group and would ideally be the focus of any initial improvement
activities, as they would yield the greatest benefit.
Cumulative % of
Volume
Cumulative % of
PPUAs
Color Code
50 percent
6 percent
Green
95 percent
50 percent
Yellow
99 percent
70 percent
Blue
Last 1 percent
30 percent
Red

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