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CIMA BiteSize Briefing

Improving profitability without

cutting costs

Chartered Institute of

Management Accountants

London, Wednesday 27th June 2012

© Bellis-Jones Hill 2012

08:00 – 08:30 Breakfast

08:30 – 08:35 Introductions

08:35 – 09:00 Deploying corporate performance management insights to

improve profitability and manage costs

09:00 – 09:15 How can improved customer value management and pricing

develop improved bottom-line performance?

09:15 – 09:45 How can targeted product rationalisation and customer

segmentation deliver profitable growth?

09:45 – 10:00 Q&A

10:00 – 10:30 Refreshment break and networking


Agenda Improving profitability without cutting costs

Solutions Provider and leading authority in Corporate Performance Management Consulting & Software

Experts in delivering rapid packaged agile solutions aimed at specific business issues

A highly experienced team used to working with customer organisations at all levels

Clients include: Barclays, HomeServe, Noble, RSA, Skandia, Travis Perkins, Skipton

Introducing Bellis-Jones Hill


Bellis-Jones Hill’s deliverables

• INSIGHTS

• TRANSFORMATION

• MANAGEMENT




08:00 – 08:30 Breakfast








09:45 – 10:00 Q&A


Using corporate performance insights…


…to improve profitability and manage costs

A true picture of the profitability of your business, by:

#Product #Customer #Channel #Organisational unit

Visibility of your true cost base for all direct and indirect (overhead) costs

Sales structure transparency including revenues, sales prices, discounts &

rebates and true profit margins

Understanding of your:

# Staff / Resource capacities & results # Supply chain fitness

# Competitive strengths # Potential in different markets

Clarity on the scope for performance improvements

A robust framework for continuous measurement, improvement and

management of profitability performance

Using corporate performance insights

to drive business success


Providing you with an Analytical Stethoscope on what’s driving

the profitability and success of your business…

Profit

Sales Costs

Price Unit Cost

What do we mean by profitability?


Volume Margin Revenue ROS

ROI

Return Product

Service

Customer

Market

Business Unit

Competitor

Growth Incremental

Sustainable

Loss

Quality

Channel

Discount

Gross

Net Time

Future

Activity

It is important that we all know!

Profitability (ROI,

ROS, etc.)

Growth

Cash flow

Value increase

Shareholder return

Business success

Pricing

R&D/innovation

Product/service

range

Marketing/sales

effort

Distribution

channels

Make vs. buy

Supply chain

Pay and

productivity

Overheads

Synergies

Strategy & tactics

… to understand your business

performance


Making linkages transparent


Profitability (ROI,

ROS, etc.)

Growth

Cash flow

Value increase

Shareholder return

Business success

Pricing

R&D/innovation

Product/service

range

Marketing/sales

effort

Distribution

channels

Make vs. buy

Supply chain

Pay and

productivity

Overheads

Synergies

Strategy & tactics

Differentiation

Concentration

Growth

Entry/exit

Capital intensity

Customer

power

Technology

change

Market structure

Perceived value

Scale

Capital intensity

Key factor costs

Position relative to

competitors

Gaining insight on business

performance




08:00 – 08:30 Breakfast








09:45 – 10:00 Q&A


Pricing Optimisation Project

Price elasticities

Consumer perceptions

Recommend

Price Strategy

Implement

Model

For each major product line, what are the:

Usage/buying behaviours

Steps 1 - 6 Step 7 Steps 8 Steps 9


Step 1: Using PSL Pricing DNA tool, establish price elasticity per

product and compare with category database for re-assurance

Category

Involvement

Brand

Commitment

Product

Value

Shelf

Impulsivity

Shopper

Engagement

INELASTIC

LOW HI

• Infrequent

• No flyers

• Lots of Brands

• Brand loyal • Frequent

Switching

• Product most

important

• Price most

important

• Product value

comparison

• Searches for

low prices

• Promo driven

• Expandable

• Try new SKUs

• Not impulse

purchase


Step 2: Identify key value drivers per product/category for

consumer and weight their importance


ta Take input from price elasticity analysis

and validate with customer population

Step 3: Score own product (Brand A) v. competitors across key

value drivers


Step 4: Review the Customer Value Map

Brand A is below the fair value line (potential for price increase)

opportunity


Step 5: Understand the consumer buying behaviour for Brand A

Bought 2-3 times per year (lack of price sensitivity)

Expandable product so more bought = more

consumer

Product bought as part of a range so needed to

encourage multiple purchases (promotions =

multibuys NOT price offs)


Step 6: Review pricing research & analysis

Product is value advantaged versus competition

Product category is expandable

Product/category is relatively price inelastic (meaning

any price changes will have limited impact on

volume)

Product is a “must stock” line in this category

(meaning that the retailer will be unwilling to delist it)



Price elasticities


Recommend

Price Strategy

Implement

Model





Step 7: Build a flexible model (can be in Excel) that allows the

modelling of scenarios and takes into consideration

Product profitability by customer (as low as you

can go!)

Customer margin requirements

Cost implication of upsizing/downsizing packs

Key price points

Implications on promotional discounts

Likely volume changes


Step 8: Price strategy recommendation for Brand A

22% price increase across all customers

New price point recommendations

Retailer % margin maintenance

Increase in overall retailer £ margin (even with

forecast loss of volume)

Promise of greater innovation and investment in

the category


Step 9: What is needed for successful implementation?

Fair strategy (to all customers)

Strong argumentation for price increases

Thorough understanding by KAMs of the rationale,

numbers etc.

Good presentation (clear graphics, numbers) with

relevant supporting documentation

Clear walk away position



Price elasticities


Recommend

Price Strategy

Implement

Model







08:00 – 08:30 Breakfast








09:45 – 10:00 Q&A


CPM capabilities are now much stronger than ever before:

The processing power of current technology has changed

what is possible

Software capabilities are much more comprehensive

Latest tools and techniques used in deployments make

for faster implementations and more agile & easier to use

solutions

Cost of ownership has dramatically reduced

All of these are exciting developments that can only improve

management information and decision making.


Why CPM now?

Moving from … a right state to … “the right state”

New CPM capabilities provide an

opportunity for stronger solutions

Lack of design resulting in non-integrated systems

Robust architecture driving best practice

Lack of data integrity Balance between financial control and business insight

Excessive reliance on manual controls

Data integrity driven by

• common chart of accounts

• common Finance repository


Investment Appraisal

Business Performance Measurement

Accountability

Strategic investment prioritisation

Customer Profitability

Channel dominance

Inefficiency

Cost Control

PROFIT

ON-TIME!

FLEXIBILITY!

…and the message from the top is clear!


Traditional Costing Systems

Standard Costing

Absorption Costing

Marginal Costing

All fail to deal with overhead cost and intangibles in a satisfactory manner…… …and give no insight into underlying drivers

Traditional methods of costing share the same

shortcomings:

Only new Activity-Based Costing approaches

(cost to serve, customer profitability and product

profitability analytics, etc.) are able to provide

management with satisfactory answers.

It is ABC principles that drive organisations to

think in terms of processes and value.


What Is Wrong With Today's

Outlook ? • Today's finance focus is (not surprisingly) almost exclusively on

traditional financial measures

• This is not the language of operational management and ignores

the real causes of performance

• Measurement is directed towards Balance Sheet, P&L cash flow,

budgetary cost performance and high level Variance Analysis

• These measures do not drive value, cost or

performance - they are the final outcomes and give

management little insight into cause... or how to do

better


Revenue

Where Does Profit Come

From ?

Op Profit / Gross Margin

- Overheads

- Cost of Goods Sold

Profit

(Direct Cost = product costs,

service delivery costs)

(Indirect Cost = sales, marketing,

customer service & support,

order processing, invoicing, etc.

In fact almost all customer

driven costs!)


Fallacy Of Today’s Cost

Measurement

(Direct Cost)

(Indirect Cost)

Low Discretion

High Discretion

Measured closely, in detail and usually

accurately

Measured only at high level and often

inaccurately


The Nature of our

Processes & Activities


Process

What do we do

and why?

Profit

How can we improve it?

Performance

How well do we do it and

how do we measure?

Unlocking Organisational Insight


Understanding Processes

As previously stated, traditional financial measures

tell only of outcome. Management needs more

causal information in today’s dynamic environment.

Efficiency is improved and costs reduced by:

i. Decreasing the Cost per Unit of a Driver

AND/OR

ii. Decreasing the Driver Volume

But traditional financial reporting fails to reflect this


Activity

Activity

Activity

Activity

Activity

Activity

Activity

Activity

Activity

Activity

Activity

Input

Output

Start of Process Every process has

a clear starting point and an output

Every activity has an input or driver from preceding activities

...and provides outputs or drivers to activities that follow

Output

What Is A Process?


Analysis of activity

Sustaining activity with no identifiable

customer

Strategy Dev’t

Mgmt. Accounting

Budgeting

Treasury

Tax Management

etc. etc.

Activity driven by External

Customers

Sales Visits

Call Handling

Order Processing

Invoicing

Debt Collection

Marketing

etc. etc

Personnel

Payroll

Reporting

Capex Review

I.T

Office Services

etc. etc.

Activity Driven by Internal Customer

Needs

Activity Driven by Products and

Services

Material Acquisition

Supplier Payment

Scheduling

R & D

Design

Marketing

etc.etc

Example Processes


Customer Service Warehouse Finance

Processes move across the functions in a company

Distribution

Take Order

Negotiate Terms

Sales

Receive Order

Validate Order

Order Entry

Check Stock

Allocate Shortages

Produce Pick Ticket

Allocate Workload

Pick Product

Assemble Order

Pack Order

Produce Advice Note

Plan Schedule

Produce Load Plan

Produce Documents

Load Truck

Despatch Truck

Deliver Order

Receive P.O.D.

Credit Check

Receive Payment

Issue Reminder

Chase Debtors

Review Credit

Clear Account

Order Fulfilment


Customer A

£18K gross margin

0 debt chases

£0 incurred cost

£18K adjusted margin

Customer Driven Cost

Customer B

£20K gross margin

12 debt chases

£3K incurred cost

£17K adjusted margin

Cost of debt chasing

= £250,000

Number of debt

chases =1000

Average unit driver

cost = £250/chase


Understanding the profitability

journey

Comparisons of customer level profit needed here

Residual profit

Number of customers

Accumulated

Customer

Profit

Point of maximum negative profit

Point of maximum profit


Figure 1: The Cumulative Contribution Analysis curve

Understanding the profitability

journey


Contribution

as a %

of Sales

Positive

Negative

0

ProblemLosers

A

CB

D

WinnersPotential

Low High

Sales revenue per customer

Analysis of customer profitability

Positive contribution

Lo

w s

ale

s v

olu

me

Negative contribution

Hig

h s

ale

s v

olu

me

Contribution

as a %

of Sales

Positive

Negative

0

ProblemLosers

A

CB

D

WinnersPotential

Low High

Sales revenue per customer

Analysis of customer profitability

Positive contribution

Lo

w s

ale

s v

olu

me

Negative contribution

Hig

h s

ale

s v

olu

me

Figure 2: Decision

Grid Analysis



08:00 – 08:30 Breakfast








09:45 – 10:00 Q&A



Summary points? Improving profitability without cutting costs

Understanding and managing costs (direct and indirect) is

critical in todays rapidly changing and economically challenging

environment.

Your business and its customer base is developing: use Pricing

and Customer Value Analysis to capture this insight.

CPM capabilities are now much stronger than ever before.

ABC/M deliverables that were technically difficult before are now

much faster and more agile than previously possible.

Segmentation for profit is critical: be selective, systematic and

avoid the scattergun approach.

46

• Bullet point…
