某咨詢分析方法ProductLineProfitability課件

Author:GiseleGarrawayContributor:SteveBerezProfitabilityProductLineMarch19981CU7030298IMBAuthor:GiseleGProductLineProfitabilityAgenda

PLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeaways2CU7020998JZAProductLineProfitabilityAgenPLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeawaysProductLineProfitabilityAgenda

3CU7020998JZAPLPoverviewProductLineProfiProductLineProfitabilityPLPDescription

Productlineprofitability(PLP)isadiagnostictoolthathelpsusdeterminethe“true”profitabilityofeachproductwithinamulti-productportfolio.PictureFramesOperatingMargin2.3%5.3%7.0%10.0%4CU7020998JZAProductLineProfitabilityPLPProductLineProfitabilityProfitImprovementTools

PLPanalysisisoneoftheBaindiagnostictoolsthatcanidentifysourcesofprofitimprovement.0%5%10%15%20%125ProfitabilityRelativeMarketShareBainprofit

improvementtoolkitPLPBDPRCPVMR5CU7020998JZAProductLineProfitabilityProfProfitLineProfitabilityWhyBainUsesPLP

SeniormanagerscanusePLPanalysistomakeimportantdecisionsaboutproductlines.Forwhichproductsshouldweincreaseprices?Whereshouldwefocusourcostreductionefforts?Whichproductlinesshouldwedrop?WhichproductsshouldwefocusR&Deffortson?Whereshouldweprovidesalesincentives?6CU7020998JZAProfitLineProfitabilityWhyProductLineProfitabilityTypicalAccountingSystemVersusBainPLP

Unliketypicalaccountingsystems,PLPinvolvesdrivingbelowgrossmarginandallocatingcoststogettoanoperatingmarginforeachproductline.TypicalaccountingsystemBainPLPCostcollection:Byfunction

(e.g.R&D,advertising)ByproductlineCostassigned

toproducts:CostofgoodssolddirectlabordirectmaterialsAllcosts,includingallindirectcostsoverheadadvertisingdistributionKeyproduct

profitabilitymeasure:Grossmargin

(revenue-costofgoodssold)OperatingmarginCostallocationmethod:AccountingstandardsActivity-basedcostdriversDisadvantage:OftendoesnotreflecttruecommitmentofresourcesandthereturnsfortheiruseDifficulttocaptureallactivitiesthatdrivecosts7CU7020998JZAProductLineProfitabilityTypiProductLineProfitabilityDirectandIndirectCosts

Traditionalaccountingsystemsoftenallocateonlydirectcosts,notindirectcosts,toproducts.And,insomecases,thedirectcostsareallocatedinappropriately.Indirect

costsDirect

costsDefinitionTypicalaccountingallocationPLPallocationCostsgenerallyincurredbythefirmoutsideoftheproductionprocess.ThesecannoteasilybeidentifiedwithorassignedtoaparticularproductCostsincurreddirectlyintheproductionoftheproductorservice.ThesecostscaneasilybeidentifiedwithaparticularproductNotallocatedorallocatedbasedonpercentofsalesAllocatedbasedonactualcostdriversTrackedusingaccountingstandardsVariancessometimesnottrackedbyproductAlldirectcosts,includingvariances,aretrackedbyproduct8CU7020998JZAProductLineProfitabilityDireProductLineProfitabilityInappropriateDirectCostAllocation

Someaccountingsystemsallocatedirectcoststoproductsbasedonoriginalexpectationsaboutproductionresults.Theseassumptionscannotaccountforchangesinrawmaterialsuseandlabortime.AccountingstandardActualforlastquarterDifferenceRevenueperwidget:$6.00$6.00Rawmaterials:$1.75$1.93StandardexcludeslossIncreasedlossduetochangeinsupplierqualityProductionfloorlabor:0.30hoursx8.00/hour=$2.400.45hoursx8.00/hour=$3.60Standardexcludesswitch-overfrommainproduceIncreasedlaborduetoreworkfromlostGrossmargin:6.00-(1.75+2.40)=1.856.00-(1.93+3.60)=0.47Grossmarginpercent:31%8%9CU7020998JZAProductLineProfitabilityInapProductLineProfitabilityGrossMarginVersusOperatingMargin

Ifaccountingsystemsdonotallocateallindirectcoststoproducts,managersmaymisjudgeproducts’relativecontributiontoprofits.IndirectcostsPrice:$750$600$450Grossmargin:40%33%44%Operatingmargin:29%20%23%Onagrossmarginbasis,J-88sarethemostprofitable;however,T-54saremostprofitablewhenallindirectcostsareallocated10CU7020998JZAProductLineProfitabilityGrosProductLineProfitabilityPotentialforMismanagement

Failuretotiedirectandindirectcoststoindividualproductlinescancausefirmstomismanagetheirbusinesses.Salesand

marketingDistributionProductdevelopmentSpendadvertisingdollarsonwrongproductsSetupcompensationandincentivestoencouragesalesofunprofitableproductsPrioritizedeliveryschedulesinappropriatelyEstablishwrongtruckloadratiosFundunprofitableproductsKillprofitableproducts11CU7020998JZAProductLineProfitabilityPoteProductLineProfitabilityPathstoLowProfitability

Multi-productbusinessesthatdonotunderstandtheirproducts’trueprofitabilitybecomelowprofitfirms.IfgrossmarginsarebasedoninappropriateaccountingstandardsandindirectcostsarenotallocatedappropriatelyHighgrossmargin(potentiallylownetprofit)productsaregiveninvestmentcapitalLowgrossmargin(potentiallyhighnetprofit)productsarestarvedofinvestmentcapitalNewproductlineextensionsareintroducedAdditionalcomplexityfromgrowingnumberofSKUsincreasesdirectcostsProductlineextensionsareignoredandprofitableproducts’growthslowsPoorprofitabilitycontinues,drivinghighpricesandpoorpositioningversuscompetitors12CU7020998JZAProductLineProfitabilityPathPLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeawaysProductLineProfitabilityAgenda

13CU7020998JZAPLPoverviewProductLineProfiProductLineProfitabilityApplications

BainhasusedPLPextensively.Someexamplesofourworkinclude:AirtransportationCommunicationsSituation:Anairtransportationcompanyhadvariouslinesofbusiness,butnoactivity-basedaccountingsystem.Managementdidnotknowwhichbusinesses,routes,orcustomerswhereprofitableAftersufferingfourconsecutiveyearsofnegativenetincome,avoiceprocessingservicecompanywasinterestedinunderstandingtheeconomicsandmarketpositioningoftheirproductlinesResult:Bainidentifiedunprofitablebusinesses,routes,andcustomerswhichinsomecasesweresubsequentlycutorpricingwasalteredtoimproveprofitability.Ananalysisofcostsindicatedthatprofitabilitywasmuchworsethanthought,leadingtoamandateforcompany-widecostreductionandrevenueenhancementBainassessedtheprofitabilityofthreemajorproductlinesandidentifiedsavingsof$20-$25MMonacostbase$110MM14CU7020998JZAProductLineProfitabilityApplPLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeawaysProductLineProfitabilityAgenda

15CU7020998JZAPLPoverviewProductLineProfiProductLineProfitabilityPLPSteps

PLPanalysisinvolvessixmajorsteps.Understandclient’scurrent

P&LsandcostcollectionsystemsDeterminethemajor

activitiesperformedIdentifycostsandcost

driversforeachactivityAllocatecoststoeachproductAnalyzeprofitabilityby

productorgroupofproductsMakerecommendationsKeySuccessFactorsIdentifyallpeopleandsystemsthatreportfinancialdataUnderstandlinkagesamonganddifferencesbetweenthevarioussourcesofdataTiecoststooperations,notaccountingcategoriesFocusonthelargestcostelementsQuantifydriversforeachproductPressuretestassumptionswithclientsCalculateoverseveralyearsorperiodstoeliminateanyseasonalorone-timeeffectsMakesureabsoluteprofitofproductlinescanbereconciledwiththetotalbusiness’profitsConsiderstrategicandoperationalalternativesMaptheclient'svaluechainfrombeginningtoend16CU7020998JZAProductLineProfitabilityPLPProductLineProfitabilityKelly'sGourmetJellies-Background

PLPcouldbeusedtohelpKelly’sGourmetJelliesunderstandtheprofitabilityofitsjarversusbucketbusiness.Situation:Kelly’sGourmetJelliesisaregionalproducerofhigh-quality,premiumpricedfruitjellies.Kelly’shastwomajorproductlines:8-ozjarstogrocerystoresforretailsaleand1gallonbucketstouniversities,hotels,restaurants,andcountryclubsComplication:IndirectcostsarenotallocatedtoproductsQuestion:Are8-ozjarsmoreprofitablethangallonbuckets?17CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityPLPSteps

Understandclient’scurrent

P&LsandcostcollectionsystemsDeterminethemajor

activitiesperformedIdentifycostsandcost

driversforeachactivityAllocatecoststoeachproductAnalyzeprofitabilityby

productorgroupofproductsMakerecommendationsKeySuccessFactorsIdentifyallpeopleandsystemsthatreportfinancialdataUnderstandlinkagesamonganddifferencesbetweenthevarioussourcesofdata18CU7020998JZAProductLineProfitabilityPLPProductLineProfitabilityKelly's-SourcesofCostInformation

AnimportantfirststepinPLPanalysisisunderstandingtheclient’sfinancialreportingsystem.OrderdatabaseContentsReportTimingResponsibilityQuantitiesofjarsorderedbycustomerQuantitiesofbucketsorderedbycustomerPriceperorderWeeklyMarketing/salesanalystMonthlymanufacturing

summaryOunceproduction

byflavorEmployeetimereportsMonthlyKitchensupervisorExpensereport/vendorpaymentssystemStorageinventoryIngredientinvoicesUtilitypaymentsMonthlyAccountinganalyst19CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityKelly's-CurrentProfitReporting

Kelly’scurrentaccountingsystemshowsthatonagrossmarginbasis,8-ozjarsaremoreprofitablethanonegallonbuckets.Overall,Kelly’searnsa9.4%EBITmargin.Sales:$468,000$252,000Grossmargin:$243,360$105,840Kelly’sGourmetJellies

ProfitandLoss

Jan-Dec1996SalesCostofgoodssoldGrossmargin$720,000($370,800)$349,200Operatingexpenses($281,334)EBIT$67,866EBITmargin9.4%20CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityKelly's-OperatingExpenses

Over$280Kofoperatingexpensesarenotallocatedtojarsorbuckets.Labor Kitchenmaintenance Administrative Warehouse DeliverySalescommissionMaintenancesupplies-kitchenMaintenancesupplies-trucksUtilities-kitchenUtilities-warehouseDepreciation Kitchenequipment Warehouse Officeequipment DeliveryequipmentSellingexpensesOtherG&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$281,33421CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityPLPSteps

Understandclient’scurrent

P&LsandcostcollectionsystemsDeterminethemajor

activitiesperformedIdentifycostsandcost

driversforeachactivityAllocatecoststoeachproductAnalyzeprofitabilityby

productorgroupofproductsMakerecommendationsKeySuccessFactorsMaptheclient'svaluechainfrombeginningtoend22CU7020998JZAProductLineProfitabilityPLPProductLineProfitabilityKelly'sJellies-ProcessFlow

Typicallymanagementinterviewsandplanttourshelpdelineatethekeyactivitiesthatdrivecosts.PreservingStoringSellingDeliveryCorporateFunctions23CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityPLPSteps

Understandclient’scurrent

P&LsandcostcollectionsystemsDeterminethemajor

activitiesperformedIdentifycostsandcost

driversforeachactivityAllocatecoststoeachproductAnalyzeprofitabilityby

productorgroupofproductsMakerecommendationsKeySuccessFactorsTiecoststooperations,notaccountingcategoriesFocusonthelargestcostelements24CU7020998JZAProductLineProfitabilityPLPProductLineProfitability

Afterkeyactivitiesaredetermined,allcostsshouldbeassignedtoactivities.Next,thecostdriverwilldeterminehowcostsshouldbeallocated.ActivityCostsAllocation/costdriverRationalePreservingMaintenancelaborMaintenancesuppliesUtilities-kitchenEquipmentdepreciation$5,955$5,955$3,375$26,206$41,491OuncesBothproductsusethesamejelly,soouncesisthebestproxyforrelativeuseofequipmentandfacilitiesBoxesofjarsandbucketscanbestackedontopofeachotherStoringWarehouselaborUtilities-warehouseWarehousedepreciation$6,590$12,706$7,624$26,920CubicfeetKelly’s-CostDrivers25CU7020998JZAProductLineProfitabilityAfProductLineProfitability

ActivityCostsAllocation/costdriverRationaleCommissionsaredirectlyassignable.Mostexpensesdirectlyassignabletoachannel(andthereforetoaproducttype)SellingSalescommissionSellingexpenses$56,880$79,413$136,293Actualcosts;ouncesLaboristhekeyitemandmanhoursdrivelaborcost.Possiblydepreciationcouldbemoreaccuratelyallocatedusingcubicfeetshipped$15,880$1,985$11,117$28,982DeliveringDeliverylaborMaintenancesupplies-trucksTruckdepreciationManhoursProbablythesimplestunitforallocationCorporatefunctionsAdministrativelaborOfficeequipmentdepreciationOtherG&A$6,590$12,706$7,624$26,920OuncesTotaloperatingexpenses:$281,334Kelly’s-CostDrivers26CU7020998JZAProductLineProfitabilityAcProductLineProfitabilityPLPSteps

Understandclient’scurrent

P&LsandcostcollectionsystemsDeterminethemajor

activitiesperformedIdentifycostsandcost

driversforeachactivityAllocatecoststoeachproductAnalyzeprofitabilityby

productorgroupofproductsMakerecommendationsKeySuccessFactorsQuantifydriversforeachproduct27CU7020998JZAProductLineProfitabilityPLPProductLineProfitabilityKelly's-CostDriverCollection

Next,thekeycostdrivermeasuresforeachproductmustbecollectedtodeterminehowtoallocatecostsamongtheproducts.Ouncesproducedandsold:8-ozjarsOnegallon

bucketsTotalData

source1,248,0001,075,2002,323,200VP,salesLaborhoursrequiredtodeliver1MMozofjelly:24hours10hoursDeliverysupervisortrackschedulesAveragewarehouse

storagerequirements:3,100cubicfeet1,900cubicfeet5,000cubicfeetStocksupervisorSalescommissions:8.1%sales4%salesVP,salesSelling/promotionalexpenses:toretail(jarsonly)toinstitutions(bucketsonly)topublic(jarsandbuckets)73,7951,638VP,sales3,98028CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityKelly's-CostAllocation(P.1)*TotalcostsforactivityminusthecostsallocatedtojarsOncecostdrivermeasuresarecollectedforeachproduct,itisrelativelystraightforwardtoallocatecosts.Sales:COGS:Grossmargin:8-ozjarsOnegallonbuckets468,000224,640243,360252,000146,160105,840Preservingcosts:[1,248MMoz/2,323MMoz]

x41,491=22,29041,491-22,290=19,201*Storingcosts:[3,100cuft/5,000cuft]

x26,920=16,69026,920-16,690=10,23029CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityKelly's-CostAllocation(P.2)

8-ozjarsOnegallonbucketsDeliverycosts:[1,248MMx24hrs/MMoz]/[(1.248x24)+(1.0752x10)]

x28,982=21,32728,982-21,327=7,655Selling:commissionpromotions468,000x10%=46,800252,000x4%=10,08073,795+[(1.248/2.323)x3980]-75,9331,638+(3,980-2,138)=3,480Corporateoverhead:[1.248/2.323]x47,648=25,59847,648-25,5978=22,050Totaloperatingexpenses:EBIT208,63834,72272,69633,14430CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityPLPSteps

Understandclient’scurrent

P&LsandcostcollectionsystemsDeterminethemajor

activitiesperformedIdentifycostsandcost

driversforeachactivityAllocatecoststoeachproductAnalyzeprofitabilityby

productorgroupofproductsMakerecommendationsKeySuccessFactorsPressuretestassumptionswithclientsCalculateoverseveralyearsorperiodstoeliminateanyseasonalorone-timeeffectsMakesuretotalabsoluteprofitcanbereconciledwithclient’scalculations31CU7020998JZAProductLineProfitabilityPLPProductLineProfitabilityKelly'sJellies-PLPResults

PLPresultsrevealedthatonegallonbucketsaremoreprofitablethanjars.CurrentAccountingSystemPLPBucketshave:LowerwarehousingcostsLowerpromotionalcostsLowersellingcommissionsLowerlaborcostsinstockinganddelivery32CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityPLPSteps

Understandclient’scurrent

P&LsandcostcollectionsystemsDeterminethemajor

activitiesperformedIdentifycostsandcost

driversforeachactivityAllocatecoststoeachproductAnalyzeprofitabilityby

productorgroupofproductsMakerecommendationsKeySuccessFactorsConsiderstrategicandoperationalalternatives33CU7020998JZAProductLineProfitabilityPLPProductLineProfitabilityOptionsforUnderperformingProducts

Ifaproductlineisunprofitableorprofitablebutunderperforming,therearefivealternativestoconsider.Canwe

reducecosts?Canwe

increaseprice?Canwe

increasevolume?Shouldwekeepproductasa

lossleader?Shouldwedroptheproduct?Whatisourrelativecostposition?Whereisourrelativedisadvantage?Howpricesensitivearecustomers?Howwillcompetitorsrespond?Willapriceincreaseencouragetheentryofnewcompetitors?Havewefullypenetratedexistingaccounts?Haveweaggressivelytargetednewaccounts?Istheproductaneffectivelossleader?Whatwillbethecostimpactonotherproducts?Howwillcompetitorsreact?Howwillcustomersreact?34CU7020998JZAProductLineProfitabilityOptiProductLineProfitabilityKelly’s-Recommendations

PLPanalysiscanprovideoperationalimprovementtacticsforKelly’sJellies.8-ozjarsGallonbucketsRe-negotiatepromotionprogramswithkeyaccountsLowersalescommissionsSethigherproductpriceRe-routedeliveryschedulesIncreasesalescommissionsGrowcustomerbase-encouragenewaccounts35CU7020998JZAProductLineProfitabilityKellProductLineProfitabilityAgenda

PLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeaways36CU7020998JZAProductLineProfitabilityAgenProductLineProfitabilityVulcan*-Background*DisguisedclientexampleBainusedPLPanalysistohelpa$300MMaluminummanufacturerunderstandwhereitmademoneyandwhereitneededtofocusitsgrowthinitiatives.CoatedsheetFoilUses:RVs,campers,buses,vans,roofing,siding,garagedoors,manufacturedhomesConsumerdurables,disposablecookwareandfoodcontainers,pharmaceuticalpackagingClientsituation:BecomingmoreofacommoditybusinesswithtoughpricingpressureConsideredmoreprofitablethancoatedsheetproductline37CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-SalesSource:1991-1997IncomeStatementsSalesdeclinedsharplyfroma1994high,although1997showssomesignsofimprovement.CAGR(1991-94)CAGR(1994-97)SalesVolume3.1%(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)%38CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-EBITSource:1991-1997IncomeStatementsEBITwasprojectedtoincreasein1997,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)%39CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-ProcessFlowTheBainteamvisitedakeyplantandinterviewedmanufacturingemployeestounderstandthekeyactivitiesandprocessflow.Coatedsheetandfoilproductswentthroughasimilarprocessuptotherollingphase.MeltingCastingCoilingFoilrollingShipCoatingShipIngotsRolling40CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-TotalPetersburgCostsSource:1996IncomeStatement;PLPModelTheBainteam’sfirststepwastounderstandVulcan’stotalcostsandtheirrelativeimportance.Theteamstudiedarepresentativefacility,Petersburg.41CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-PLPMethodology(P.1)

Revenue:ActualrevenuebyorderitemTheteamwentthrougheachcostcomponentanddevelopedamethodologytoallocatecoststofoilandcoatedsheetproducts.

Conversion:Adjuststandardhoursbypart-numberandmethod-numberforeachpieceofequipmentusingNovember1996andMarch1997actualvs.standardhourscomparisoncaptureactualoperatinghoursforeachpieceofequipmentusingrevisedequipmenttimesheetsdeterminehowaccuratelystandardscaptureactualhoursunderstanddriversofdifferencebetweenstandardandactualcalculateadjustmentfactortoapplytofullyear1996byeachpieceofequipmentPaint:Actualpaintcostbypart-numberandmethod-numberMetal:UsedailybookingsdatatoassignactualprimarymetalpricebycustomersalesorderUseactualprice/lbforalloysandhardenersAddmeltanddrosslossbyalloytype42CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-PLPMethodology(P.2)

Freight:ActualfreightcostsbyorderitemWorkingcapital:Actualaccountsreceivablebygeneralproductcategory(foilvs.coatedsheet)andfinishedgoodsbypart-numbermethod-numberSelling:Allocatedbyactualsalesperson’stimespentbymarketG&A:Allocatedasapercentageofsalesdollars43CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-PetersburgMaterialCostsSource:PetersburgMetalReceiptsTheBainteambeganbyexaminingthelargestcostarea,directmaterials.44CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-MatchingData

Sincemetalpricewasnotcapturedintheshipmentsdatabase,ithadtobematchedwiththebookingsdatabasetogetanaccuratemetalprice.1996DailySalesBookingsData1996OrderItemsShippedDataOrderdatePromiseddateCustomernameOrderedlbsUnitsalespriceFixed/floatmetalpriceOrderdateOriginalpromisedateCustomernameOrderedlbsUnitsalesprice45CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-TotalMetalCosts*Drossisthenon-usablescumthatrisestothetopwhenaluminumismeltedFrommanufacturinginterviews,theteamlearnedthatthetotalactualmetalcostwouldbeaffectedbythemeltanddross*lossassociatedwithfoilandcoatedsheet.PrimarymetalMeltanddross*lossActualmetalcost+ActualalloysandhardenercostUseindustrystandardmix+46CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-ConversionCostMethodology*Method-numberdistinguishedamongthevariousroutingsaproductcouldtakethroughthemill’sequipmentConversioncostsweredrivenbyproductionandsupportfunctionactivities.ActualconversioncostFixedVariableFixedVariableProductionSupporte.g.,hotmillColdmill3ChestermillsHenricomillse.g.,MISAccountingBuildingandgroundsSchedulingDirectlyassignedtoequipmentAllocatedtopartnumberbyfixedcostdrivers47CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-ConversionCostSources*Method-numberdistinguishedamongthevariousroutingsaproductcouldtakethroughthemill’sequipmentTheteamusedseveralVulcansourcestobuildconversioncostsfromthebottomup.ActualconversioncostbyproductionandsupportcostcentersFixed/variablesplitsfrommanagementinterviewsProductiondatabyproductioncostcenterStandardoperatinghoursandpoundsBypart-numberandmethod-number*RevisedequipmenttimesheetsbyproductioncostcenterActualoperatinghoursbyoutputworkorderitemNovember1996February-March199748CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-ProductionandSupportCosts

Vulcanfinancemanagersagreedtothemethodologyofassigningproductionandsupportdollars.ProductiondollarsDirectlyassignedSupportdollars

(e.g.,MIS,accounting)+AllocatedwithineachpieceofequipmentbyactualhoursAllocatedbyfixedcostdriversStep1-

Equipmentcostcenter:Step2-

Part-number/method-number:Actualconversioncost49CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-ActualHoursMethodology

Anothermethodologywasrequiredtoadjuststandardhourstotheactualhoursspentconvertingtheingotstofoilorcoatedsheet.ActualproductiondataPlantpersonnelexperienceModelaccuracyofstandardsDeterminecostdriversAdjuststandardhoursbasedoncostdriversActualhoursbypart-numberandmethod-number50CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-FixedCostDrivers

AllocationMethodBypoundsBypoundsBysalesdollarsBypoundsMISTrafficPurchasingBypoundsweighted1.5xforfoilweighted1.3xforcoatedsheetTheteamdevelopedanallocationmethodforfixedcosts,too.51CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-TotalConversionCostsSource:1996PlantCostSummaryReportTheteamallocatedconversioncoststofoilandcoatedsheet.CoatedFoilMISAccounting52CU7020998JZAProductLineProfitabilityVulcProductLineProfitabilityVulcan-ProductLineProfitabilitySource:BainProductLineProfitabilityModelFoilcontributesmostofthetotalgrossmargindollars.53CU7020998JZAProductLineProfitabilityVulc

ProductLineProfitabilityVulcan-ProfitBeforeTax

Source:BainProductLineProfitAnalysisFoilcontributedallofVulcan’sprofits.Coatedsheetlostover$15.9MM.54CU7020998JZAProductLineProfitabilityVul

ProductLineProfitabilityVulcan-Recommendations

TheteamusedthePLPresultstomakespecificrecommendationsforVulcan’sproducts.CoatedsheetFoilGivesecondprioritytocoatedsheetproductonbottleneckequipmentIdentifyopportunitiesforcostreductionGrowthefoilbusinesslookfornewsegmentsInvestinfoilcapacity55CU7020998JZAProductLineProfitabilityVulProductLineProfitabilityAgenda

PLPoverviewApplicationsPLPstepsClientexampleChallengesKeytakeaways56CU7020998JZAProductLineProfitabilityAgenProductLineProfitabilityChallenges

ThereareafewkeystrategiestokeepinmindwhendealingwithPLP-relateddataandclientissues.DataissuesClient(people)issuesDonotdrawconclusionsbasedonasingleyearorperiodofdata;insteadanalyzemorethanoneyearorperiodtoeliminateone-timeeffectsorseasonaleffectsWhenmakingprojectionsbasedonPLPanalysis,rememberdifferentpro