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1、Author: Gisele Garraway,Contributor: Steve Berez,Profitability,Product Line,March 1998,1,CU7030298IMB,Product Line Profitability,Agenda,PLP overview Applications PLP steps Client example Challenges Key takeaways,2,CU7020998JZA,PLP overview Applications PLP steps Client example Challenges Key takeawa
2、ys,Product Line Profitability,Agenda,3,CU7020998JZA,Product Line Profitability,PLP Description,Product line profitability (PLP) is a diagnostic tool that helps us determine the “true” profitability of each product within a multi-product portfolio.,Picture Frames,Operating Margin,2.3%,5.3%,7.0%,10.0%
3、,4,CU7020998JZA,Product Line Profitability,Profit Improvement Tools,PLP analysis is one of the Bain diagnostic tools that can identify sources of profit improvement.,0%,5%,10%,15%,20%,0.1,0.2,0.5,1,2,5,Profitability,Relative Market Share,Bain profit improvement tool kit,PLP BDP RCP VMR,5,CU7020998JZ
4、A,Profit Line Profitability,Why Bain Uses PLP,Senior managers can use PLP analysis to make important decisions about product lines.,For which products should we increase prices? Where should we focus our cost reduction efforts? Which product lines should we drop? Which products should we focus R how
5、ever, T-54s are most profitable when all indirect costs are allocated,10,CU7020998JZA,Product Line Profitability,Potential for Mismanagement,Failure to tie direct and indirect costs to individual product lines can cause firms to mismanage their businesses.,Sales and marketing,Distribution,Product de
6、velopment,Spend advertising dollars on wrong products Set up compensation and incentives to encourage sales of unprofitable products,Prioritize delivery schedules inappropriately Establish wrong truck load ratios,Fund unprofitable products Kill profitable products,11,CU7020998JZA,Product Line Profit
7、ability,Paths to Low Profitability,Multi-product businesses that do not understand their products true profitability become low profit firms.,If gross margins are based on inappropriate accounting standards and indirect costs are not allocated appropriately,High gross margin (potentially low net pro
8、fit) products are given investment capital,Low gross margin (potentially high net profit) products are starved of investment capital,New product line extensions are introduced,Additional complexity from growing number of SKUs increases direct costs,Product line extensions are ignored and profitable
9、products growth slows,Poor profitability continues, driving high prices and poor positioning versus competitors,12,CU7020998JZA,PLP overview Applications PLP steps Client example Challenges Key takeaways,Product Line Profitability,Agenda,13,CU7020998JZA,Product Line Profitability,Applications,Bain h
10、as used PLP extensively. Some examples of our work include:,Air transportation,Communications,Situation:,An air transportation company had various lines of business, but no activity-based accounting system. Management did not know which businesses, routes, or customers where profitable,After sufferi
11、ng four consecutive years of negative net income, a voice processing service company was interested in understanding the economics and market positioning of their product lines,Result:,Bain identified unprofitable businesses, routes, and customers which in some cases were subsequently cut or pricing
12、 was altered to improve profitability. An analysis of costs indicated that profitability was much worse than thought, leading to a mandate for company-wide cost reduction and revenue enhancement,Bain assessed the profitability of three major product lines and identified savings of $20-$25MM on a cos
13、t base $110MM,14,CU7020998JZA,PLP overview Applications PLP steps Client example Challenges Key takeaways,Product Line Profitability,Agenda,15,CU7020998JZA,Product Line Profitability,PLP Steps,PLP analysis involves six major steps.,Understand clients current P PLP Model,The Bain teams first step was
14、 to understand Vulcans total costs and their relative importance. The team studied a representative facility, Petersburg.,41,CU7020998JZA,Product Line Profitability,Vulcan - PLP Methodology (P.1),Revenue:,Actual revenue by order item,The team went through each cost component and developed a methodol
15、ogy to allocate costs to foil and coated sheet products.,Conversion:,Adjust standard hours by part-number and method-number for each piece of equipment using November 1996 and March 1997 actual vs. standard hours comparison capture actual operating hours for each piece of equipment using revised equ
16、ipment time sheets determine how accurately standards capture actual hours understand drivers of difference between standard and actual calculate adjustment factor to apply to full year 1996 by each piece of equipment,Paint:,Actual paint cost by part-number and method-number,Metal:,Use daily bookings data to assign actual primary metal price by customer sales order Use actual price/lb for alloys and hardeners Add melt and dross loss by alloy type,42,CU7020998JZA,Product Li
