Profiling Your Profitability

I want to expand on that thought of a profitability proile.  A profitability profile is the result of analyzing which transactions have been profitable and to what degree.

This analysis doesn’t need to be down to the penny with 100% accuracy to be of value.  In fact, that’s simply impossible in most cases because some costs just aren’t captured at the transaction level such as inventory holding and obsolescence costs, warranty costs, R&D, tooling, capacity investment and so forth, all of which are exacerbated by demand variability and forecast error.  However, meaningful and useful  approximations are feasible.

Once you have analyzed the profitability by transaction, then you need to segment the business.  You want to understand what customer, channel and product combinations have been more or less profitable.  This requires you to segment the business by customer and product attribute.

What is likely to emerge is an understanding of overlapping product offerings whether some simplification is possible.  This data should also form the foundation for an analysis of pricing power and risk as well as margin leakage.

 There will be some obvious immediate actions that can be executed – raising prices on or foregoing unprofitable transactions, eliminating unprofitable SKU’s that are low volume, shifting some customers to lower cost channels.

There will also be longer term, more fundamental questions that need to be answered:

1)      What is the optimal product mix?

2)      How can we build tighter linkages with our most profitable customers?

3)      How does the price book need to be altered?

4)      How does the price approval process need to be configured?

5)      How can we align business functions for the most profitable mix of offerings and customers?  (e.g. If we want to orient our offerings around platforms, how does manufacturing need to change?  What do we need from our vendors?  Will the distribution channel need to adjust?  Does this affect the way we market and sell or process warranty work and returns?)

Next time, I’ll spend a few words on how you need to follow the profitability profile with a detailed analysis of the decisions that drove the unprofitable or marginally profitable transactions in the first place.

As a final thought to ponder over the weekend, I thought I would try my hand at a slightly different twist on the definition of supply chain (with apologies to Jonathan Byrnes from whose words I compiled it):  “Working intensively with counterparts across organizational boundaries to monitor, co-manage and maximize the profitable productivity of assets over the long run and jointly create important new value in the process.”

Thanks once more for spending a moment with me here at Supply Chain Action.

Have a wonderful weekend!

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About Arnold Mark Wells
Industry, software, and consulting background. I help companies do the things about which I write. If you think it might make sense to explore one of these topics for your organization, I would be delighted to hear from you. I am employed by Opalytics.

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