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1、 Author: Gisele GarrawayContributor: Steve BerezProfitabilityProduct LineMarch 19981CU7030298IMBbcBOS Product Line ProfitabilityAgenda PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeaways2CU7020998JZAbcBOS PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeawaysProduc
2、t Line ProfitabilityAgenda 3CU7020998JZAbcBOS Product Line ProfitabilityPLP 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 FramesOperating Margin2.3%5.3%7.0%10.0%4CU7020998JZ
3、AbcBOS Product Line ProfitabilityProfit Improvement Tools PLP analysis is one of the Bain diagnostic tools that can identify sources of profit improvement.0%5%10%15%20%0.10.20.5125ProfitabilityRelative Market ShareBain profit improvement tool kitPLPBDPRCPVMR5CU7020998JZAbcBOS Profit Line Profitabili
4、ty 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&D efforts on?Where should we pro
5、vide sales incentives?6CU7020998JZAbcBOS Product Line ProfitabilityTypical Accounting System Versus Bain PLP Unlike typical accounting systems, PLP involves driving below gross margin and allocating costs to get to an operating margin for each product line.Typical accounting systemBain PLPCost colle
6、ction:By function(e.g. R&D, advertising)By product lineCost assignedto products:Cost of goods solddirect labordirect materialsAll costs, including all indirect costsoverheadadvertisingdistributionKey product profitability measure:Gross margin(revenue - cost of goods sold)Operating marginCost allocat
7、ion method:Accounting standardsActivity-based cost driversDisadvantage:Often does not reflect true commitment of resources and the returns for their useDifficult to capture all activities that drive costs7CU7020998JZAbcBOS Product Line ProfitabilityDirect and Indirect Costs Traditional accounting sy
8、stems often allocate only direct costs, not indirect costs, to products. And, in some cases, the direct costs are allocated inappropriately.IndirectcostsDirectcostsDefinitionTypical accountingallocationPLPallocationCosts generally incurred by the firm outside of the production process. These cannot
9、easily be identified with or assigned to a particular productCosts incurred directly in the production of the product or service. These costs can easily be identified with a particular productNot allocated or allocated based on percent of salesAllocated based on actual cost driversTracked using acco
10、unting standardsVariances sometimes not tracked by productAll direct costs, including variances, are tracked by product8CU7020998JZAbcBOS Product Line ProfitabilityInappropriate Direct Cost Allocation Some accounting systems allocate direct costs to products based on original expectations about prod
11、uction results. These assumptions cannot account for changes in raw materials use and labor time.Accounting standardActual for last quarterDifferenceRevenue per widget:$6.00$6.00Raw materials:$1.75$1.93Standard excludes lossIncreased loss due to change in supplier qualityProduction floor labor:0.30
12、hours x 8.00/hour = $2.400.45 hours x 8.00/hour = $3.60Standard excludes switch- over from main produceIncreased labor due to rework from lostGross margin:6.00 - (1.75 + 2.40) = 1.856.00 - (1.93 + 3.60) = 0.47Gross margin percent:31%8%9CU7020998JZAbcBOS Product Line ProfitabilityGross Margin Versus
13、Operating Margin If accounting systems do not allocate all indirect costs to products, managers may misjudge products relative contribution to profits.Indirect costsPrice:$750$600$450Gross margin:40%33%44%Operating margin:29%20%23%On a gross margin basis, J-88s are the most profitable; however, T-54
14、s are most profitable when all indirect costs are allocated10CU7020998JZAbcBOS Product Line ProfitabilityPotential for Mismanagement Failure to tie direct and indirect costs to individual product lines can cause firms to mismanage their businesses.Sales and marketingDistributionProduct developmentSp
15、end advertising dollars on wrong productsSet up compensation and incentives to encourage sales of unprofitable productsPrioritize delivery schedules inappropriatelyEstablish wrong truck load ratiosFund unprofitable productsKill profitable products11CU7020998JZAbcBOS Product Line ProfitabilityPaths t
16、o 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 appropriatelyHigh gross margin (potentially low net profit) products are
17、 given investment capitalLow gross margin (potentially high net profit) products are starved of investment capitalNew product line extensions are introducedAdditional complexity from growing number of SKUs increases direct costsProduct line extensions are ignored and profitable products growth slows
18、Poor profitability continues, driving high prices and poor positioning versus competitors12CU7020998JZAbcBOS PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeawaysProduct Line ProfitabilityAgenda 13CU7020998JZAbcBOS Product Line ProfitabilityApplications Bain has used PLP extensively
19、. Some examples of our work include:Air transportationCommunicationsSituation: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 profitableAfter suffering four consecutive years of
20、 negative net income, a voice processing service company was interested in understanding the economics and market positioning of their product linesResult:Bain identified unprofitable businesses, routes, and customers which in some cases were subsequently cut or pricing was altered to improve profit
21、ability. An analysis of costs indicated that profitability was much worse than thought, leading to a mandate for company-wide cost reduction and revenue enhancementBain assessed the profitability of three major product lines and identified savings of $20-$25MM on a cost base $110MM14CU7020998JZAbcBO
22、S PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeawaysProduct Line ProfitabilityAgenda 15CU7020998JZAbcBOS Product Line ProfitabilityPLP Steps PLP analysis involves six major steps.Understand clients current P&Ls and cost collection systemsDetermine the major activities performedId
23、entify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsIdentify all people and systems that report financial dataUnderstand linkages among and differences between the various sources of
24、dataTie costs to operations, not accounting categoriesFocus on the largest cost elementsQuantify drivers for each productPressure test assumptions with clientsCalculate over several years or periods to eliminate any seasonal or one-time effectsMake sure absolute profit of product lines can be reconc
25、iled with the total business profitsConsider strategic and operational alternativesMap the clients value chain from beginning to end16CU7020998JZAbcBOS Product Line ProfitabilityKellys Gourmet Jellies - Background PLP could be used to help Kellys Gourmet Jellies understand the profitability of its j
26、ar versus bucket business.Situation:Kellys Gourmet Jellies is a regional producer of high-quality, premium priced fruit jellies. Kellys has two major product lines:8-oz jars to grocery stores for retail sale and 1 gallon buckets to universities, hotels, restaurants, and country clubsComplication:Ind
27、irect costs are not allocated to productsQuestion:Are 8-oz jars more profitable than gallon buckets?17CU7020998JZAbcBOS Product Line ProfitabilityPLP Steps Understand clients current P&Ls and cost collection systemsDetermine the major activities performedIdentify costs and cost drivers for each acti
28、vityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsIdentify all people and systems that report financial dataUnderstand linkages among and differences between the various sources of data18CU7020998JZAbcBOS Product Line Profit
29、abilityKellys - Sources of Cost Information An important first step in PLP analysis is understanding the clients financial reporting system.Order databaseContentsReport TimingResponsibilityQuantities of jars ordered by customerQuantities of buckets ordered by customerPrice per orderWeeklyMarketing/s
30、ales analystMonthly manufacturing summaryOunce productionby flavorEmployee time reportsMonthlyKitchen supervisorExpense report/vendor payments systemStorage inventoryIngredient invoicesUtility paymentsMonthlyAccounting analyst19CU7020998JZAbcBOS Product Line ProfitabilityKellys - Current Profit Repo
31、rting Kellys current accounting system shows that on a gross margin basis, 8-oz jars are more profitable than one gallon buckets. Overall, Kellys earns a 9.4% EBIT margin.Sales:$468,000$252,000Gross margin:$243,360$105,840Kellys Gourmet Jellies Profit and Loss Jan-Dec 1996SalesCost of goods soldGros
32、s margin$720,000($370,800)$349,200Operating expenses($281,334)EBIT$67,866EBIT margin9.4%20CU7020998JZAbcBOS Product Line ProfitabilityKellys - Operating Expenses Over $280K of operating expenses are not allocated to jars or buckets.LaborKitchen maintenanceAdministrativeWarehouseDeliverySales commiss
33、ionMaintenance supplies - kitchenMaintenance supplies - trucksUtilities - kitchenUtilities - warehouseDepreciationKitchen equipmentWarehouseOffice equipmentDelivery equipmentSelling expensesOther G&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$28
34、1,33421CU7020998JZAbcBOS Product Line ProfitabilityPLP Steps Understand clients current P&Ls and cost collection systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake rec
35、ommendationsKey Success FactorsMap the clients value chain from beginning to end22CU7020998JZAbcBOS Product Line ProfitabilityKellys Jellies - Process Flow Typically management interviews and plant tours help delineate the key activities that drive costs.PreservingStoringSellingDeliveryCorporate Fun
36、ctions23CU7020998JZAbcBOS Product Line ProfitabilityPLP Steps Understand clients current P&Ls and cost collection systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake re
37、commendationsKey Success FactorsTie costs to operations, not accounting categoriesFocus on the largest cost elements24CU7020998JZAbcBOS Product Line Profitability After key activities are determined, all costs should be assigned to activities. Next, the cost driver will determine how costs should be
38、 allocated.ActivityCostsAllocation/cost driverRationalePreservingMaintenance laborMaintenance suppliesUtilities - kitchenEquipment depreciation$5,955$5,955$3,375$26,206$41,491OuncesBoth products use the same jelly, so ounces is the best proxy for relative use of equipment and facilitiesBoxes of jars
39、 and buckets can be stacked on top of each otherStoringWarehouse laborUtilities - warehouseWarehouse depreciation$6,590$12,706$7,624$26,920Cubic feetKellys - Cost Drivers 25CU7020998JZAbcBOS Product Line Profitability ActivityCostsAllocation/cost driverRationaleCommissions are directly assignable. M
40、ost expenses directly assignable to a channel (and therefore to a product type)SellingSales commissionSelling expenses$56,880$79,413$136,293Actual costs; ouncesLabor is the key item and manhours drive labor cost. Possibly depreciation could be more accurately allocated using cubic feet shipped$15,88
41、0$1,985$11,117$28,982DeliveringDelivery laborMaintenance supplies - trucksTruck depreciationManhoursProbably the simplest unit for allocationCorporate functionsAdministrative laborOffice equipment depreciationOther G&A$6,590$12,706$7,624$26,920OuncesTotal operating expenses:$281,334Kellys - Cost Dri
42、vers 26CU7020998JZAbcBOS Product Line ProfitabilityPLP Steps Understand clients current P&Ls and cost collection systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake rec
43、ommendationsKey Success FactorsQuantify drivers for each product27CU7020998JZAbcBOS Product Line ProfitabilityKellys - Cost Driver Collection Next, the key cost driver measures for each product must be collected to determine how to allocate costs among the products.Ounces produced and sold:8-oz jars
44、One gallonbucketsTotalData source1,248,0001,075,2002,323,200VP, salesLabor hours required to deliver 1MM oz of jelly:24 hours10 hoursDelivery supervisor track schedulesAverage warehousestorage requirements:3,100 cubic feet1,900 cubic feet5,000 cubic feet Stock supervisorSales commissions:8.1% sales4
45、% salesVP, salesSelling/promotional expenses: to retail (jars only) to institutions (buckets only) to public (jars and buckets)73,7951,638VP, sales3,98028CU7020998JZAbcBOS Product Line ProfitabilityKellys - Cost Allocation (P.1)*Total costs for activity minus the costs allocated to jarsOnce cost dri
46、ver measures are collected for each product, it is relatively straightforward to allocate costs.Sales:COGS:Gross margin:8-oz jarsOne gallon buckets468,000224,640243,360252,000146,160105,840Preserving costs:1,248MM oz/2,323MM ozx 41,491=22,29041,491 - 22,290=19,201*Storing costs:3,100 cu ft/5,000 cu
47、ftx 26,920=16,69026,920 - 16,690=10,23029CU7020998JZAbcBOS Product Line ProfitabilityKellys - Cost Allocation (P.2) 8-oz jarsOne gallon bucketsDelivery costs:1,248MM x 24hrs/MM oz / (1.248 x 24) + (1.0752 x 10) x 28,982 = 21,32728,982 - 21,327=7,655Selling: commission promotions468,000 x 10%=46,8002
48、52,000 x 4%=10,08073,795 + (1.248/2.323) x 3980 - 75,9331,638 + (3,980 - 2,138)=3,480 Corporate overhead:1.248/2.323 x 47,648=25,59847,648 - 25,5978=22,050Total operating expenses: EBIT208,63834,72272,69633,14430CU7020998JZAbcBOS Product Line ProfitabilityPLP Steps Understand clients current P&Ls an
49、d cost collection systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsPressure test assumptions with clientsCalculate over several yea
50、rs or periods to eliminate any seasonal or one-time effectsMake sure total absolute profit can be reconciled with clients calculations31CU7020998JZAbcBOS Product Line ProfitabilityKellys Jellies - PLP Results PLP results revealed that one gallon buckets are more profitable than jars.Current Accounti
51、ng SystemPLPBuckets have:Lower warehousing costsLower promotional costsLower selling commissionsLower labor costs in stocking and delivery32CU7020998JZAbcBOS Product Line ProfitabilityPLP Steps Understand clients current P&Ls and cost collection systemsDetermine the major activities performedIdentif
52、y costs and cost drivers for each activityAllocate costs to each productAnalyze profitability by product or group of productsMake recommendationsKey Success FactorsConsider strategic and operational alternatives33CU7020998JZAbcBOS Product Line ProfitabilityOptions for Underperforming Products If a p
53、roduct line is unprofitable or profitable but underperforming, there are five alternatives to consider.Can we reduce costs?Can we increase price?Can we increase volume?Should we keep product as a loss leader?Should we drop the product?What is our relative cost position?Where is our relative disadvan
54、tage?How price sensitive are customers?How will competitors respond?Will a price increase encourage the entry of new competitors?Have we fully penetrated existing accounts?Have we aggressively targeted new accounts?Is the product an effective loss leader?What will be the cost impact on other product
55、s?How will competitors react?How will customers react?34CU7020998JZAbcBOS Product Line ProfitabilityKellys - Recommendations PLP analysis can provide operational improvement tactics for Kellys Jellies.8-oz jarsGallon bucketsRe-negotiate promotion programs with key accountsLower sales commissionsSet
56、higher product priceRe-route delivery schedulesIncrease sales commissionsGrow customer base - encourage new accounts35CU7020998JZAbcBOS Product Line ProfitabilityAgenda PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeaways36CU7020998JZAbcBOS Product Line ProfitabilityVulcan* - Backg
57、round*Disguised client exampleBain used PLP analysis to help a $300MM aluminum manufacturer understand where it made money and where it needed to focus its growth initiatives.Coated sheetFoilUses:RVs, campers, buses,vans, roofing, siding, garage doors, manufactured homesConsumer durables, disposable
58、 cookware and food containers, pharmaceutical packagingClient situation:Becoming more of a commodity business with tough pricing pressureConsidered more profitable than coated sheet product line37CU7020998JZAbcBOS Product Line ProfitabilityVulcan - SalesSource: 1991-1997 Income StatementsSales decli
59、ned sharply from a 1994 high, although 1997 shows some signs of improvement.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)%38CU7020998JZAbcBOS Product Line ProfitabilityVulcan - EBITSource: 1991-1997 Income StatementsE
60、BIT was projected to increase in 1997, but to remain far below 1994-95 levels.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)%39CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Process FlowThe Bain team visited a key plant and interviewed manufacturing employees to u
61、nderstand the key activities and process flow. Coated sheet and foil products went through a similar process up to the rolling phase.MeltingCastingCoilingFoil rollingShipCoatingShipIngotsRolling40CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Total Petersburg CostsSource: 1996 Income Statement
62、; PLP ModelThe Bain teams first step was to understand Vulcans total costs and their relative importance. The team studied a representative facility, Petersburg.41CU7020998JZAbcBOS Product Line ProfitabilityVulcan - PLP Methodology (P.1) Revenue:Actual revenue by order itemThe team went through each
63、 cost component and developed a methodology 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 comparisoncapture actual operating hours for eac
64、h piece of equipment using revised equipment time sheetsdetermine how accurately standards capture actual hoursunderstand drivers of difference between standard and actualcalculate adjustment factor to apply to full year 1996 by each piece of equipmentPaint:Actual paint cost by part-number and metho
65、d-numberMetal:Use daily bookings data to assign actual primary metal price by customer sales orderUse actual price/lb for alloys and hardenersAdd melt and dross loss by alloy type42CU7020998JZAbcBOS Product Line ProfitabilityVulcan - PLP Methodology (P.2) Freight:Actual freight costs by order itemWo
66、rking capital:Actual accounts receivable by general product category (foil vs. coated sheet) and finished goods by part-number method-numberSelling:Allocated by actual salespersons time spent by marketG&A:Allocated as a percentage of sales dollars43CU7020998JZAbcBOS Product Line ProfitabilityVulcan
67、- Petersburg Material CostsSource: Petersburg Metal ReceiptsThe Bain team began by examining the largest cost area, direct materials.44CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Matching Data Since metal price was not captured in the shipments database, it had to be matched with the bookin
68、gs database to get an accurate metal price.1996 Daily Sales Bookings Data1996 Order Items Shipped DataOrder datePromised dateCustomer nameOrdered lbsUnit sales priceFixed/float metal priceOrder dateOriginal promise dateCustomer nameOrdered lbsUnit sales price45CU7020998JZAbcBOS Product Line Profitab
69、ilityVulcan - Total Metal Costs *Dross is the non-usable scum that rises to the top when aluminum is meltedFrom manufacturing interviews, the team learned that the total actual metal cost would be affected by the melt and dross* loss associated with foil and coated sheet.Primary metalMelt and dross*
70、 lossActual metal cost+Actual alloys and hardener costUse industry standard mix+46CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Conversion Cost Methodology *Method-number distinguished among the various routings a product could take through the mills equipmentConversion costs were driven by p
71、roduction and support function activities.Actual conversion costFixedVariableFixedVariableProductionSupporte.g., hot millCold mill 3Chester millsHenrico millse.g., MISAccountingBuilding and groundsSchedulingDirectly assigned to equipmentAllocated to part number by fixed cost drivers47CU7020998JZAbcB
72、OS Product Line ProfitabilityVulcan - Conversion Cost Sources*Method-number distinguished among the various routings a product could take through the mills equipmentThe team used several Vulcan sources to build conversion costs from the bottom up.Actual conversion cost by production and support cost
73、 centersFixed/variable splits from management interviewsProduction data by production cost centerStandard operating hours and poundsBy part-number and method-number*Revised equipment time sheets by production cost centerActual operating hours by output work order itemNovember 1996February-March 1997
74、48CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Production and Support Costs Vulcan finance managers agreed to the methodology of assigning production and support dollars.Production dollarsDirectly assignedSupport dollars(e.g., MIS, accounting)+Allocated within each piece of equipment by actu
75、al hoursAllocated by fixed cost driversStep 1 -Equipment cost center:Step 2 -Part-number/ method-number:Actual conversion cost49CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Actual Hours Methodology Another methodology was required to adjust standard hours to the actual hours spent converting
76、 the ingots to foil or coated sheet.Actual production dataPlant personnel experienceModel accuracy of standardsDetermine cost driversAdjust standard hours based on cost driversActual hours by part-number and method-number50CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Fixed Cost Drivers Alloc
77、ation MethodBy poundsBy poundsBy sales dollarsBy poundsMISTrafficPurchasingBy poundsweighted 1.5x for foilweighted 1.3x for coated sheetThe team developed an allocation method for fixed costs, too.51CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Total Conversion CostsSource: 1996 Plant Cost Su
78、mmary ReportThe team allocated conversion costs to foil and coated sheet.CoatedFoilMISAccounting52CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Product Line ProfitabilitySource: Bain Product Line Profitability ModelFoil contributes most of the total gross margin dollars.53CU7020998JZAbcBOS Pr
79、oduct Line ProfitabilityVulcan - Profit Before Tax Source: Bain Product Line Profit AnalysisFoil contributed all of Vulcans profits. Coated sheet lost over $15.9MM.54CU7020998JZAbcBOS Product Line ProfitabilityVulcan - Recommendations The team used the PLP results to make specific recommendations fo
80、r Vulcans products.Coated sheet FoilGive second priority to coated sheet product on bottleneck equipmentIdentify opportunities for cost reductionGrow the foil businesslook for new segmentsInvest in foil capacity55CU7020998JZAbcBOS Product Line ProfitabilityAgenda PLP overviewApplicationsPLP stepsCli
81、ent exampleChallengesKey takeaways56CU7020998JZAbcBOS Product Line ProfitabilityChallenges There are a few key strategies to keep in mind when dealing with PLP-related data and client issues.Data issuesClient (people) issuesDo not draw conclusions based on a single year or period of data; instead an
82、alyze more than one year or period to eliminate one-time effects or seasonal effectsWhen making projections based on PLP analysis, remember different products will have different E-curves and different Bain slopes (their costs will decline at different rates)Spend time on every cost component, but f
83、ocus on areas that affect the answer; PLP analysis takes time, so prioritizeGet buy-in of finance managers early in the process; they are often needed to supply most of the dataBe sensitive - PLP analysis often implies that clients have been misinterpreting their financial results for years57CU70209
84、98JZAbcBOS Product Line ProfitabilityAgenda PLP overviewApplicationsPLP stepsClient exampleChallengesKey takeaways58CU7020998JZAbcBOS Product Line ProfitabilityKey Takeaways (P.1) The Basic PrincipleWhy Bain Uses PLP AnalysisProduct line profitability (PLP) is a diagnostic tool which determines the
85、true profitability of each product within a multi-product portfolioPLP is a process of allocating all costs to products based on the activities that drive those costsPLP addresses some of the shortcomings of traditional accounting - derived profitability measuresTraditional accounting systems often
86、only allocate direct costs to products. These systems only provide gross margin by productOften gross margins are based on pre-set standards, not actual cost drivers, in traditional accounting systemsManagers may misjudge products relative contribution to profits when only gross margin and not opera
87、ting margins are calculated by productWithout understanding products profitability, indirect costs often rise unchecked and firms will introduce more SKUs to cover fixed costs 59CU7020998JZAbcBOS Product Line ProfitabilityKey Takeaways (P.2) PLP StepsPLP analysis involves six major steps:understand
88、clients current P&Ls and cost allocation systemsdetermine the major activities performedidentify costs and cost drivers for each activityallocate costs to each productanalyze profitability by productmake recommendations60CU7020998JZAbcBOS Business DefinitionTakeaway Slides (P.1) PLP DescriptionDirec
89、t and Indirect CostsTypical Accounting System vs. Bain PLPPaths to Low Profitability2.3%5.3%7.0%10.0%Picture FramesTypical accounting systemBain PLPCost collection:By function(e.g. R&D, advertising)By product lineCost assignedto products:Cost of goods solddirect labordirect materialsAll costs, inclu
90、ding all indirect costsoverheadadvertisingdistributionKey product profitability measure:Gross margin (revenue - cost of goods sold)Operating marginCost allocation method:Accounting standardsActivity-based cost driversDisadvantage:Often does not reflect true commitment of resources and the returns fo
91、r their useDifficult to capture all activities that drive costsDirectcostsCosts generally incurred by the firm outside of the production process. These cannot easily be identified with or assigned to a particular productCosts incurred directly in the production of the product or service. These costs
92、 can easily be identified with a particular productNot allocated or allocated based on percent of salesAllocated based on actual cost driversTracked using accounting standardsVariances sometimes not tracked by productAll direct costs, including variances, are tracked by productDefinitionTypical acco
93、untingallocationPLPallocationIndirectcostsIf gross margins are based on inappropriate accounting standards and indirect costs are not allocated appropriatelyHigh gross margin (potentially low net profit) products are given investment capitalLow gross margin (potentially high net profit) products are
94、 starved of investment capitalNew product line extensions are introducedAdditional complexity from growing number of SKUs increases direct costsProduct line extensions are ignored and profitable products growth slowsPoor profitability continues, driving high prices and poor positioning versus compet
95、itorsOperating Margin61CU7020998JZAbcBOS Business DefinitionTakeaway Slides (P.2) PLP StepsChallengesUnderstand clients current P&Ls and cost collection systemsDetermine the major activities performedIdentify costs and cost drivers for each activityAllocate costs to each productAnalyze profitability
96、 by product or group of productsMake recommendationsKey Success FactorsIdentify all people and systems that report financial dataUnderstand linkages among and differences between the various sources of dataTie costs to operations, not accounting categoriesFocus on the largest cost elementsQuantify d
97、rivers for each productPressure test assumptions with clientsCalculate over several years or periods to eliminate any seasonal or one-time effectsMake sure absolute profit of product lines can be reconciled with the total business profitsConsider strategic and operational alternativesMap the clients
98、 value chain from beginning to endData issuesClient (people) issuesDo not draw conclusions based on a single year or period of data; instead analyze more than one year or period to eliminate one-time effects or seasonal effectsWhen making projections based on PLP analysis, remember different product
99、s will have different E-curves and different Bain slopes (their costs will decline at different rates)Spend time on every cost component, but focus on areas that affect the answer; PLP analysis takes time, so prioritizeGet buy-in of finance managers early in the process; they are often needed to supply most of the dataBe sensitive - PLP analysis often implies that clients have been misinterpreting their financial results for years62CU7020998JZAbcBOS 青苹果出品青苹果出品 必属精品必属精品http:/ / 企业管理人力资源全套企业管理人力资源全套 / 品牌策划资料品牌策划资料/行业分析报告分析报告/PPT模板模板等。63CU7020998JZA
