Thriving After COVID – Essential Step 3 – Profit Analytics Drives Coke’s Bold Strategy

Richard Sharpe Analytics & Big Data

Thriving After COVID – Essential Step 3 - Profit Analytics Drives Coke’s Bold Strategy

Coke did

On August 22, one of the world’s most iconic brands announced that they will reduce the number of brands in their portfolio by 50%. James Quincey, CEO of The Coca-Cola Company, stated in The Wall Street Journal;

"now is the time for Coca-Cola to cull the portfolio of the many small, less profitable, resource-depleting brands"

It is hard to find a company that has not experienced a significant impact from COVID and the Coca-Cola Company is no different requiring strategic action. Coke announced cost cutting measures such as a workforce reduction of 4,000 employees. But Coke also is taking decisive action by cutting half of its product brands.

“All told, the 200 brands slated to be discontinued account for only about 1% of the company’s profits. They consume too much attention and resources, Coke leaders said.”
Atlanta Journal Constitution October 22, 2020

Are you prepared to walk into your Board Room and recommend cutting half of your products based on their profit contributions?

Roadblock 3: Moving Beyond Traditional Product Portfolio Decisions

Portfolio decisions are based on a number of key criteria. Often the focus is to maintain a competitive advantage by anticipating customer demands that drive increasing revenues. This reminds me of a story for an Apparel company.

The head of the supply chain was dealing with a significant increase in SKU proliferation. Apparel supply chains are very similar to many industries in that they are very complex. They operate on a global footprint that involves multiple tiers of suppliers and service providers. He needed to find a way to reduce the cost and complexity of his operation.

His question was “can we measure the profit contributions below the SKU level to the actual performance by the article’s color?” Fortunately, his organization had trusted, actionable data. They had built accurate, detailed Revenue and Cost to Serve information, down to the color level. At the next product planning meeting he came armed with meaningful profit analytical insights and stated;

“We have never made one dollar of profit on any item that we have sold across all categories with the color fuchsia. Why are we including this (fuchsia colored products) in our next set of product releases?”
Executive Vice President – Supply Chain Operations

Continuing to measure SKU performance, his company was able to cut inventory, increase profitability, release capital for more productive uses and reduced operational complexity.

Einstein quote

Meaningful Analytics To Drive Smart Portfolio Decisions

Summary

COVID has served as a wake-up call. Shareholders and stakeholders are going to mandate that company executives can measurably demonstrate they are adding resiliency in their ability to generate and protect shareholder value.

Here are the key takeaways:

  • Standard accounting measurements do not provide the detailed visibility needed when measuring product and customer performance.
  • For most companies, the 80-20 Rule overstates the specific products and customers that provide the vast majority of profit contributions.
  • Having fact based, trusted profit analytics MUST be a key catalyst for establishing portfolio strategies for corporate growth and profitable performance.
  • Potentially redirecting resources away from marginal and unprofitable products and customers increases the return on operating investments in addition to reducing complexity.
  • Global supply chains must be managed by having visibility to changing profit opportunities and potentially disruptive events. This visibility must be available and used on an ongoing basis.

Empowering the organization with repeatable, fact-based profit contribution analytics provides the foundation for thriving and not just surviving in stable and disruptive times.

The Coca-Cola Company recognized this. They acted in a very bold and proactive manner.

Will you have the courage to push to focus on only products that drive sustainable profits to guide your company to thrive and not just survive? Do you have the information you need to back it up? Are you ready to cross the bridge?

Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a profit contribution analytics firm that specializes in helping clients efficiently and continuously transform multiple sources of data into actionable operational insights.

Thriving After COVID – Essential Step 2 – Tackling Uncertainty

Richard Sharpe Analytics & Big Data

Thriving After COVID – Essential Step 2 – Tackling Uncertainty

Einstein quote

Summary

COVID has rocked the operational foundations for industries and companies. End to end business fundamentals from consumer buying behaviors to readdressing lowest cost sourcing are all part of figuring out this unforeseen puzzle.

What are you using as the informational building blocks in re-tooling your business?

Is the driving criteria the same type of financial measurements used pre-COVID?

Do you know what small percentage of your customers and products are actually driving the vast majority of your profits and net cash flow?

We will get to the other side of this COVID chasm. The question is when you get there, how well are you positioned to thrive in this new environment? Will you have used this time to smartly re-tool your business or will you be in the same position as your competitors who have used traditional cost accounting and revenue measurements to survive?

Albert Einstein once said; “The definition of insanity is doing the same thing over and over again but expecting different results!”

The focus of this blog series is to challenge you to act on this unprecedented opportunity by breaking down potential roadblocks and not following the traditional “herd mindset” in dealing with COVID.

But how do you get there? What are the roadblocks that come to mind?

Roadblock 2: Uncertainty In Moving Beyond Traditional Accounting Measurements

A profitable manufacturing company wanted to better understand the profit contributions for every customer delivery location in servicing their wholesale, distributor and direct to serve customers. When measuring each customer location based on the Net Landed Profit, less than 3% of customer locations gave them 80% of their overall profits. Equally important, their 11th best customer as measured by revenue contributions, was totally unprofitable. Standard accounting information obscured this important discovery. These new insights allowed re-tooling the operation that drove significant financial improvements.

“We are treating all of our customers with the same level of service regardless of their profit contributions. This is crazy!”
Senior Vice President – Global Operations

Einstein quote

11th Best Customer Based On Revenue – $260,000 Profit Leakage

Standard accounting measurements are a valuable part of running a business. They provide critical information in measuring the overall financial health of an operation. However, they are not designed to provide specific cost and profit insights related to every product being sold to every customer location through every channel.

Post COVID sustainable success will be based on focusing resources on the customers and products that matter the most by identifying and correcting areas that are causing profit leakage.

Said another way, thriving in a post-COVID environment will require not using a “One Size Fits All” go to market strategy. Those who use the Net Landed Cost to Serve to get at true profitability will have the edge.

Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a profit contribution analytics firm that specializes in helping clients efficiently and continuously transform multiple sources of data into actionable operational insights.

Thriving After COVID – Essential Step 1 – Data

Richard Sharpe Analytics & Big Data

Thriving After COVID – Essential Step 1 - Data

solutions exist that can validate and transform transactional data into actionable insights quickly and efficiently

overcoming data challenges

Summary

How is your company working through the impact of COVID-19? How are you deciding what products to sell and what should be eliminated? How are you deciding the priority of applying your Supply Chain Risk Management resources to your most important suppliers?

Is the driving criteria for these decisions the same type of financial measurements used pre-COVID? Standard financial measurements that do not tell you what small percentage of your customers and products are actually driving the vast majority of your profits and net cash flow?

This is the time for the smartly re-tooling of your business based on profit contributions by customer, product and channel. Re-tooling that breaks away from the “Herd Mentality” that your competitors are pursuing?

But how do you get there? What are the roadblocks that come to mind?

Roadblock 1: Data

A popular and profitable apparel company wanted to better understand the profit contributions for every product, customer and channel. They had tried to do this analysis internally and failed. At the urging of their new EVP of Global Supply Chain a subsequent meeting was held with their CFO.

Mike walked up to the projector screen to see the actual cost and profit details by product and customer and said:

“I just don’t think our data is good enough to provide this type of analysis. It is fragmented and inconsistent. I do not trust it enough to deliver these types of results.” - CFO of a leading Apparel Company


bridge

4 months later …. $25 Million Opportunity To Reduce Inventory Working Capital

Today, solutions exist that can validate and transform transactional data into actionable insights quickly and efficiently. Companies that move from the crutch of data limitations to addressing data as a significant asset will be the ones that are crossing the bridge to have sustainable profit margin contributions. Actionable data that is specific, accurate, trusted and repeatable.

Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a profit contribution analytics firm that specializes in helping clients efficiently and continuously transform multiple sources of data into actionable operational insights.

Dickens quote

Thriving After COVID – 3 Essential Steps (Overview)

Richard Sharpe Analytics & Big Data

Thriving After COVID – 3 Essential Steps (Overview)

double punch

Summary

The impact of COVID-19 on global supply chains is unprecedented. For some, it has been a time of ongoing demand surges to meet customer demands. For others it has been a time of devastation and the need for restructuring just to survive.

Regardless of which position a company is in, most will continue to measure the impact of their COVID supply chain actions by traditional, higher level financial measures of revenue and profit. But what is being masked under these standard financial measurements? What percentage of your specific customers and products are actually driving 80% of your profits?

This is the time for the intelligent re-tooling of your business based on profit contributions by customer, product and channel. Re-tooling that breaks you away from the “Herd Mentality” that your competitors are pursuing.


Case In Point

A well-known, profitable retailer with 1,500 stores wanted to understand the impact of their current store discount policy. The analysis measured the SKU - store selling price against the Cost to Serve (CTS) for that SKU to each store.

The result, 25% of the 60,000 products had wide variances in profit performance across stores. Many were being sold at a price below the CTS for that store. This analysis provided visibility to a $35 million-dollar potential profit improvement opportunity.

Actions

But how do you get there? What are the roadblocks that come to mind? Most likely, they fall into three categories:

  1. concern over your data
  2. uncertainty on how to move beyond standard cost accounting measurements
  3. securing the right resources to harvest this information to get meaningful insights

The next three posting of this blog will address each of these roadblocks to provide an effective bridge to accurate and specific profit contribution visibility on an ongoing basis.

bridge

Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a profit contribution analytics firm that specializes in helping clients efficiently and continuously transform multiple sources of data into actionable operational insights.

COVID-19 & Tariffs – Actionable Resiliency

Richard Sharpe Analytics & Big Data

COVID-19 and Tariffs – Actionable Resiliency

double punch

Summary

Let’s be honest. Supply Chain Risk (SCR) is a topic that is widely discussed but rarely prioritized with significant investments in time and money. This is about to change!

The timing of the Trade War and COVID-19 has created a one-two punch with significant financial consequences. As of the day this was written, the Dow Jones Industrial Average had it biggest one day point drop in it’s history.

This should serve as a wake-up call. Shareholders will assume that earnings will take a hit from COVID-19 and the Trade War. However, they also expect companies to have SCR strategies that minimize the financial impact of these and future significant disruptions. The winners will perform noticeably better than their competitors by minimizing the effect on profit goals.


Points of Focus

SCR best practices are based on accurate and repeatable total cost and profit contribution information associated with every customer, product, supplier and the operating assets that enable the supply chain to operate.

Once these financial insights are visible, short-term and long-term mitigation strategies can be evaluated. Examples are:

Short Term (offsetting disruption related costs and profit impact)

  • Adjust customer service levels based on the segmentation of customers by specific cost or profit criteria (reducing order fulfillment costs)
  • Allocation of products to the most profitable customers if production is disrupted (preserving key customer relationships)
  • Create differentiated strategies for raising prices or lowering discounts based on customer segmentation by profit contribution (addressing Tariff increases)
  • Terminate unprofitable customers that are adding costs and diminishing profits (lowering operating costs while raising profits)
  • Prioritizing short term mitigation efforts toward the most profitable products first (profit protection)

Longer Term (adding resiliency for future disruptions)

  • Prioritization of continuity plans associated with the regional concentration of production of highly profitable products or product components (e.g. the impact of the COVID-19)
  • Diversification of specific supply chain assets (e.g., supplier, lanes, ports, etc.) that are associated with high levels of profit contributions that would have a significant impact if it became inoperable

SCR best practices facilitate the allocation and prioritization of resources in order to have the most protective impact on minimizing costs and maintaining expected earnings. It avoids the weakness of strategies based on a “One Size Fits All” mentality.


Takeaways

Companies have been dealing with the impact of tariff increases for an extended period of time. Now the COVID-19 is having a rippling effect in every industry.

The compounding financial impact will be a catalyst for companies to embrace the creation and institution of Supply Chain Risk best practices. Best practices that require accurate, specific and repeatable cost and profit contribution information.

What is your Supply Chain Risk approach today? Will the lessons learned from COVID-19 and the Trade War be taken to heart by adopting SCR best practices?

The stakes are high and future disruptions are part of the new normal in managing global supply chains. We can’t tell you what the next global disaster will be, or where it will happen. But we can guarantee it will happen again.

Will you be ready?


Please join us on a webinar: Are You Ready for a Supply Chain Crisis?

1-Hour Webinar | FRI, MAR 13, 2020 | 1:00 – 2:00 PM EDT

REGISTER HERE


Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.

Tariffs – What Did Your Company Do?

Richard Sharpe Analytics & Big Data

Tariffs – What Did Your Company Do?

Summary: Tariffs have been an ongoing part of American history.

The date: December 16, 1773

Big Data Maturity

The event: 342 chests of imported tea where dumped into a harbor by colonists declaring “Taxation without representation”

The outcome: the catalyst for the start of the War of Independence and the eventual formation of the United States

Protectionism versus open free trade have long been a part of political landscapes. I am not advocating the pros or cons of the utilization of tariffs. However, when imposed, tariffs become a key consideration in global sourcing decisions. Effective ways to proactively handle tariff-related risks are now top of mind for supply chain executives.


Points of Focus: How did companies deal with the recent tariff increases? A recent Reuters article highlights the results of a global survey done by DHL. Two hundred and sixty seven (267) companies were asked what actions they were taking to offset the financial impact of tariffs. Over one-third responded “Nothing”.

However, many companies did respond by expediting their shipments of products into the U.S. or raising prices or lowering discounts. These decisions to help offset the financial impact of tariff increases are based on a “one size fits all” approach.

But a few companies took a very proactive and sustainable approach in developing tariff related strategies; strategies that drove actions that positioned the company to actually thrive in this trade war environment.

One such company is The Home Depot. As highlighted in this article, The Home Depot evaluated every SKU that had a tariff related impact. They then determined the best way to mitigate the impact of the negative financial impact of the tariff increases including aggressively working with their suppliers.


Takeaway: Doing nothing or using a “one size fits all” tariff-related strategy does not provide sustainable performance in maintaining or growing margin contributions. In fact, these types of strategies can lead to significant reductions in profits and ultimately the long-term viability of a company.

Creating strategies that mitigate the impact of potential tariffs or that minimize the impact of imposed tariffs should be part of every supply chain resiliency plan. The companies that take this proactive position will out perform their competitors and will thrive versus just survive.

Which path will your company take?

Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.

Best Practice Bridge

Global Analytics Survey – Recognition, Frustration & Best Practices

Richard Sharpe Analytics & Big Data

Global Analytics Survey – Recognition, Frustration & Best Practices

Recognition

For three years, Competitive Insights has had the privilege to help orchestrate the Annual Analytics & Big Data Benchmark Study published in Supply Chain Quarterly and DC Velocity each year. As in past years, the responses from the participating companies indicate that most feel that they are early in their journey in achieving that full potential that is possible form Big Data Analytics as demonstrated below:

Big Data Maturity

 

Frustration

So what is holding companies back from realizing the full value that can be derived from the sustainable use of Big Data Analytics? Frustration for achieving success can be associated with people, processes, technologies and data related issues. The complete results of the survey is available by request.

Big Data Impediments

Action

How can companies accelerate their progress and get the most value from their Big Data Analytical initiatives? We endorse a “Crawl, Walk, Run” as a bridge to move from a state of frustration to one of ongoing success.

Best Practice Bridge
 

The following is offered as a quick checklist of best practices that we have seen work throughout the years.

Address the People Considerations

Bridge - People

People

  • Involve other functions early on
  • Avoid “one-off” single design efforts
  • Link value to key initiatives
  • Ensure visibility of Senior Levels

 

Consider the Best Process for Development

Bridge - Process

Process

  • Share success with other functions
  • Be intentional with your focus
  • Adopt a crawl, walk, run approach
  • Measure the direct financial impact

 

Use Focused Technology Techniques

Bridge - Technology

Technology

  • Design for business users (cross-functionally)
  • Apply Agile development techniques
  • Ensure scalability

 
 

Turn Data From a Liability to an Asset

Bridge - Data

Data

  • Gain organizational consensus on enterprise data sources (cross-functionally)
  • Focus the data design (not boil the ocean)
  • Invest in repeatable data validation capabilities (organizational trust)

 

Companies recognize that actionable knowledge that comes from Big Data Analytics is key for survival. Knowledge that allows for informed strategies and decisions that are fact based. Strategies that drive positive and meaningful results. Decisions that allows the organization to out maneuver the competition. Survival will go to those that accurately understand operational performance and the associated drivers.

I would love to know your thoughts on this.  Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.

Blog Tariff baseball

Tariff Increases – Strike 3 “You Are Out!”

Richard Sharpe Analytics & Big Data

Strike OutSummary: In May of this year, the trade war between the U.S. and China threw a curve ball to many U.S. business operations with the U.S. Administration’s decision to impose 25 percent tariffs on $267 billion worth of Chinese goods and then China’s retaliation announcement effective June 1st.

For a number of reasons, many companies have been proactively diversifying their manufacturing and sourcing activities away from China.  However, it is fair to say that the June 1st tariff increases created havoc for most companies that import products from China.  How did they handle this cost increase?

Beyond additional alternative sourcing strategies, most companies relied on generalized policies focused on ways to absorb the costs or applying overall price increases (Strike 1).

Now, just as the start of the Holiday inventory build-up season, a second curve ball has been thrown; adding a 10% tariff on the remaining $300 Billion on additional products being imported into the U.S. from China.  Adding more fuel to the fire, China allowed the value of its currency to fall.  What are companies doing?

Many are making an intense effort to expedite their product shipments prior to the September 1st deadline.  Beyond that, most likely more of the same default strategies used for Strike 1 will be applied (Strike 2).

So what about Strike 3?  Why do some batters keep striking out while others seem to always be on base?  The winners come into the game knowing what adjustments they would make when the count is ‘against’ them.

What happens to your market position and profit margins if the President raises the tariffs to 25%?

The short-term strategies employed for Strike 1 and 2 above offer no guarantee of survival: 

  • Alternative country sourcing is smart but does not necessarily provide long term protection (e.g., tariffs levied on those countries)
  • Doing nothing is not an option unless you like fire drills
  • Creating generalized changes in pricing and discount strategies burdens all customers regardless of their value (profit contribution) to your company.

Continuing to follow these types of strategies will result in the market saying, “You Are Out” as your competitors poach your most profitable clients while protecting the relationships with their most valued customers. (Strike 3).

 

Points of Focus:  What is essential in developing effective tariff related strategies is to have a clear understanding of the financial importance of each customer that you serve.  This means going beyond measuring net revenues to precisely understand the specific profits generated by the products they are purchasing. For exact examples of creating these insights please refer to my earlier blog posting: Tariffs and Intelligently Protecting Profits

So why don’t companies aggressively pursue having actionable insights to effectively manage issues like tariff increases?  The excuses are all too common:

  • Not everyone in the organization believes this is possible
  • We are too busy and don’t have the time or resources to go after this
  • Our data is siloed and not as accurate or trusted for this type of analysis
  • We don’t know how to do this and are not ready to make a large outside investment to obtain this information
  • We are focused on this quarter’s results and will worry about long term strategies later

Said another way, we are doing good enough to get through this problem.  But just like baseball, you might last a few seasons with this approach but ultimately, your company’s market and financial position will suffer.  The winners worked out the best approaches before they season began.  Long before they face problems, they are putting the pieces in place so they are ready, not matter what “the count”.

The winners in handling tariff increases will have customer-centric strategies that drive desired customer behavior.  Applied strategies that smartly focus on absorbing the costs, increasing selling prices, adjusting discounting strategies or creating product substitution strategies to protect profitable performance and market share.

 

Takeaway: The mindset that “we’re doing well enough’ is a sure formula for Strike 3.  As the well respected business author and speaker Jim Collins states “Good is the enemy of Great”.

It is important to understand the financial performance of the products that customers are buying and then select the right strategies to drive the behavior needed to intelligently protect corporate earnings.  These strategies must take into account specific customer and product profit performance insights and their specific current and future financial performance drivers (e.g. tariff increases); drivers that can have a significant long-term impact.  Companies that overcome the typical excuses listed above will be the companies that win in their respective markets.

I would love to know your thoughts on this.  Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.

blog: Your Moneyball Story

Richard Sharpe Analytics & Big Data

Your Moneyball Story

Summary: Baseball Season is always an exciting time, especially if your Team is knocking it out of the park!  But winning consistently can be a real challenge.  Billy Beane of the Oakland A’s (Moneyball fame) faced this challenge.  Billy became the A’s General Manager in 1997 following a dismal 96-97 year compounded by key players leaving and significant budget cuts.

 

 

Billy knew that critical recruitment decisions could not be made using traditional “experience & opinion” based decisions.  He recognized the value in tapping into the abundance of data available on players in the Major and Minor Leagues.

Fighting traditional decision making techniques, Billy drove his staff to find young players or out of favor players who were more productive offensively and defensively.  The result?  The poorest team in baseball with the smallest budget blew past the competition in successive winning seasons.  That is a truly remarkable story.

What is your company’s Moneyball story?  Are you getting repeatable and meaningful insights from your analytics and data initiatives that challenge or compliment historical decision making processes?

Case In Point:  Let’s look at one area that all companies can relate to, pricing discounts.  Traditional sales management techniques focus on sales volume with discount strategies focused on incenting top line growth.  Discounting can be done in many ways but how do you know that it is driving value to your bottom line?

Take a look at the following graph of customer sales verses applied discounts.  Clearly higher sales with lower discounts (the green area) is great.  But what about customers with higher sales and higher discounts (the yellow area)?  A traditional sales assessment would say that this is acceptable to meet revenue growth requirements.  Said another way, the Sales Umpire would say “Your Safe”.

Blog046_Safe2

But let’s add another dimension to evaluate the performance of these customers. Let’s look at the profit generated by these sales.  As you can see below, 38 customers were actually unprofitable.

Blog046_Out2

Giving much higher discounts than average for a customer that is marginal or unprofitable could be the basis for the Umpire to yell “You are out”.  Or it could be smart information that can be used to create more “value based” discounting strategies.

Action:   Supply chains are complex with a lot of variables that can impact Cost To Serve and Net Landed Profit performance.  In today’s highly competitive and volatile market, understanding the financial impact of decisions made to manage these variables is imperative.  It is most likely that in your company there are well established norms associated with driving top line growth and discounts.  What hidden gems are waiting to be found in your operation?

Takeaway:  Billy Beane challenged his staff to fill playing positions in a new way.  Beane focused on player selection based on a specific performance analytics.  They defied conventional wisdom and built their Team using analytics and the data that was available.  Billy found value in players that other teams did not see.

Are there Moneyball opportunities in your operation?  It may not be easy, but at the end of the day, if your measuring yardstick is “earnings per share” versus “sales per share” are you ready to play ball?

 

I would love to know your thoughts on this.  Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.

blog: Tariffs and Intelligently Protecting Profits

Richard Sharpe Analytics & Big Data

Tariffs and Intelligently Protecting Profits

Summary:  The trade wars are in full force with the Administration’s decision to impose 25 percent tariffs on $267 billion worth of Chinese goods and China’s retaliation announcement effective June 1.  The short term and possibly long-term financial consequences for companies are very serious.

For some time now, many companies have been looking at alternative options for manufacturing capacity as production costs have increased in China.  But when potential tariff increases were announced last year, companies immediately began to stockpile their inventory levels before the increases took effect.

Now that significant increases in tariffs are a reality, how should companies explore the options to manage these additional costs?  Options include absorbing the costs, increasing selling prices, adjust discounting strategies or creating product substitution strategies. One thing is certain.  Approaching this problem with a “one size fits all” strategy can be disastrous.

Points of Focus:  What is essential in developing effective strategies that intelligently protect profits is to have a clear understanding of the financial importance of each customer.  This means NOT just measuring net revenues but understanding the specific profits generated by the products they are purchasing.

Take a look at the following graph that segments customers based on their profit contributions.  In summary, 2,843 customers provide 80% of the total profit for this company while 110,174 customers are very marginal or unprofitable.

Blog047_CustomerSegmentation

A typical performance distribution

If the marginal and unprofitable customers are buying products that have an increased tariff, their profit contributions will only become worse.  Therefore, additional strategies need to be developed to address these customers to minimize additional profit drainage.

However, to begin to protect positive profit earnings from the impact of significant tariff increases, a good place to start is on the smaller number of customers that bring the most to the bottom line. Concentrating on these high-performance (“Key”) customers is critical. If they are not handled correctly, the result could be significant issues related to their future earnings potential for your company

Immediate Action: It is important to understand the financial performance of the products that the Key customers are buying and then select the right strategies to drive the behavior needed to intelligently protect corporate earnings.  Strategies that take into account overall profit performance (net earnings for all products), the specific product financial performance drivers as well as the mix of the purchased products that are impacted by the tariff increases.

Having accurate and specific customer / product financial performance visibility can then support questions like:

  • Which customers are buying high volumes of relatively low margin products of which many are now affected by the tariff increases? (possible strategy – pricing/discount adjustments)
  • Which customers are primarily buying products that have a strong margin and have a limited impact from the tariff increases? (possible strategy – do nothing approach)
  • Which customers are buying products that have a wide mix of margin contributions and will be impacted by the tariff increases? (strategy – dependent on the product insights)

Takeaway:  Proactively handling the impact of tariff increases is a critical issue.  Addressing it with generalized information is like asking a Scout Leader to lead a Troop out of a dangerous ravine without having a map or a compass.

The key is to use accurate and specific customer-product-centric financial information.  Information that can be used to develop sustainable profit protection strategies which will effectively minimize the overall negative impact of significant tariff increases.

I would love to know your thoughts on this.  Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe

Richard Sharpe

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.