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1、Author: Laird ReedCost PositionRelativeMarch 19981Relative Cost PositionAgenda The relative cost position (RCP) conceptApplicationsRCP StepsClient exampleChallengesKey takeaways2Relative Cost PositionContext Relative Cost PositionExperience CurveCost Sharing AnalysisBest Demonstrated PracticeValue C
2、hain AnalysisProfit HuntProduct Line Profitability / Cost Allocation / Activity Based CostingOverhead AnalysisFixed/Variable AnalysisDirect/Indirect AnalysisCostsCustomersCompetitorsCapabilitiesRelative cost position (RCP) is a key analytical tool used for cost analysis.3Relative Cost PositionFull P
3、otential Bain uses RCP to determine a companys practical full potential cost position based on a comparison of its unit costs with those of its competitors and an understanding of the clients business.Lowest costPractical cost4Relative Cost PositionQuestions RCP Can Help Answer RCP analysis helps an
4、swer both strategic and tactical questions.Strategic questionsTactical questionsIn what areas do our competitors have the biggest cost advantage?What is driving competitors profitability?How much flexibility would our competitors have in a price war?What is the clients market position?What are the s
5、trategic implications of the full potential cost position?Where should we focus our cost reduction efforts? (e.g., wage rates, amounts of raw material inputs)Which cost elements would decrease significantly with an increase in scale?Which cost elements might benefit from different business practices
6、?5Relative Cost PositionAgenda The relative cost position (RCP) conceptApplicationsRCP StepsClient exampleChallengesKey takeaways6Relative Cost PositionApplications Bain identified $29MM in annual savings for a chewing gum manufacturer. An RCP analysis led to a decrease in raw materials usage, bette
7、r raw materials purchasing, process improvements, and more efficient inventory management.Bain helped a client in the diaper business take back market share it had lost; its share increased by 10%the client had a scale-driven cost advantage, but was maintaining a significant price umbrellaBain used
8、an RCP to identify a price above the clients breakeven but below the competitors breakeventhis strategy had a substantial positive impact on the clients sales and profitsBain prevented a client from making a poor acquisition decision in the bakery products market. The RCP showed that one competitor
9、of the target had a 30% cost advantage and that the target would not be able to close that gap.Bain has used RCP effectively for many clients. Examples of Bain work include:7Relative Cost PositionAgenda The relative cost position (RCP) conceptApplicationsRCP StepsClient exampleChallengesKey takeaway
10、s8Relative Cost PositionApproaches There are two ways to approach an RCP: detailed bottom-up analysis or top-down analysis.Detailed bottom-up analysisTop-down analysisBuild up each major cost element for key competitors based on primary dataTriangulate using cost data from multiple sourcesLess accur
11、ate, less time intensiveCompare competitors cost structures to clients cost structure at macro leveldefine key process/business practice differences for major cost elementsmake assumptions about the cost impact of differencesTest assumptions vs. overall financial dataMore accurate, more time intensi
12、veOftentimes we use a combination of these two approaches9Relative Cost PositionRCP Steps Map the business value chainIdentify cost elements and driversScour information sources for cost data on clients and competitorsBuild, compare, and reality check cost barsCalculate practical full potential cost
13、 position and savingsDraw strategic implicationsProcess StepsKey Success FactorsMap value chain from end to end (e.g., raw materials to finished product or delivery) Tie costs to operations not accounting categoriesBuild up cost bars category by categoryReality check results against similar companie
14、sFocus on areas with the greatest potential for cost savingsAdjust for clients situation (e.g., different strategy (high quality vs. low quality), different equipment, different plant locations)Determine how to take advantage of the improved cost positionBe persistent and creative, but ethicalDoing
15、an RCP involves several steps:10Relative Cost PositionAgenda The relative cost position (RCP) conceptApplicationsRCP StepsClient exampleChallengesKey takeaways11Relative Cost PositionYummy Gum* - Background * Disguised client caseYummy gum has a solid hitchhiker position in the premium gum category.
16、 However, Yummys 1997 returns are well below expectationsYummy has tried to compete by introducing new and costly SKUs and increasing advertising. Its main competitor has focused on cost reductionHow can Yummy improve profits in a premium market that requires innovation and strong brand equity?Situa
17、tion:Complication:Question:Bain used RCP to help its client Yummy Gum improve its profitability.12Relative Cost PositionRCP Steps Map the business value chainIdentify cost elements and driversScour information sources for cost data on clients and competitorsBuild, compare, and reality check cost bar
18、sCalculate practical full potential cost position and savingsDraw strategic implicationsProcess StepsKey Success FactorsMap value chain from end to end (e.g., raw materials to finished product or delivery)13Relative Cost PositionYummy Gum - Value ChainThere are six major steps in Yummys value chain:
19、Raw materials purchasingBase makingMixingRollingCuringPackagingUnderstanding the value chain facilitates an understanding of the cost elements14Relative Cost PositionRCP Steps Map the business value chainIdentify cost elements and driversScour information sources for cost data on clients and competi
20、torsBuild, compare, and reality check cost barsCalculate practical full potential cost position and savingsDraw strategic implicationsProcess StepsKey Success FactorsTie costs to operations not accounting categories15Relative Cost PositionYummy Gum - Costs (1 of 7) Raw materials are 25% of total cos
21、ts. Cost drivers and data sources are noted.Quality of ingredientsMix of ingredientsVolume of ingredientsAmount of wasteCost of ingredientsReverse engineeringSuppliersPurchasing managersIndustry reportsCost driversData sources16Relative Cost PositionYummy Gum - Costs (2 of 7) Packaging is 7% of tota
22、l costs. Cost drivers and data sources are noted.Types of packaging usedPackaging materialPackage sizeCost per packageReverse engineeringSuppliers10K/annual reportOperations managerCost driversData sources17Relative Cost PositionYummy Gum - Costs (3 of 7) Direct labor is 17% of total costs. Cost dri
23、vers and data sources are noted.Number of workersNumber of hours workedHourly wages/benefitsMix of overtime vs. regular pay10K/annual reportJob postingsPlant tourUnion contractsOperations managerCompetitor phone bookFormer employees of competitorHuman resource managerDepartment of LaborCost driversD
24、ata sourcesManufacturing processLine speed/throughputPlant tourMachinery suppliers18Relative Cost PositionYummy Gum - Costs (4 of 7) Indirect overhead is 8% of total costs. Cost drivers and data sources are noted.Non direct laborWages and benefitsUtilitiesNumber of machinesCost of machinesAge of mac
25、hinesMaintenance costsJob postingsPlant tourOperations managersCompetitor phone bookFormer employees of competitorHuman resource managerBlueprintsUtility companyEnvironmental Protection AgencySuppliersSupplier product support departmentWorkshop managerCost driversData sources19Relative Cost Position
26、Yummy Gum - Costs (5 of 7) Advertising is 15% of total costs. Cost drivers and data sources are noted.Advertising cost10K/annual reportAdvertising Age (periodical)Leading National Advertisers Ad Dollar SummaryCost driversData sources20Relative Cost PositionYummy Gum - Costs (6 of 7) Sales and market
27、ing is 20% of total costs. Cost drivers and data sources are noted.Trade promotionsConsumer promotionsNumber of sales peopleWages and benefits10K/annual reportHuman resource managerMarketing directorInvestor/public relationsSales peopleSales managerJob postingsCost driversData sources21Relative Cost
28、 PositionYummy Gum - Costs (7 of 7) General and administrative expenses are 8% of total costs. Cost drivers and data sources are noted.HeadcountWages and benefits10K/annual reportDun & BradstreetCorporate phone booksHuman resource managerJob postingsCost driversData sources22Relative Cost PositionRC
29、P Steps Map the business value chainIdentify cost elements and driversScour information sources for cost data on clients and competitorsBuild, compare, and reality check cost barsCalculate practical full potential cost position and savingsDraw strategic implicationsProcess StepsKey Success FactorsBe
30、 persistent and creative, but ethical23Relative Cost PositionData Sources Cost informationFormer employeesUtility companiesFinancial analysisClient sales and marketingIndustry expertsMarket research reportsPlant/site toursIndustry conventionsReverse engineering reportsProduct brochuresGovernment fil
31、ings and patent filingsSupplier interviewsLiterature searchesLocal newspapersEquipment vendorsCustomer interviewsCurrent employeesLabor unionsThe next step is to scour myriad sources for cost information.Multiple data sources should be used whenever possible24Relative Cost PositionU.S. Government So
32、urces FederalStateLocalSecurity filingsU.S. Environmental Protection AgencyU.S. Department of LaborEqual Employment Opportunities Commission (EEOC)Patents and TrademarksNational Labor Relations Board (NLRB)Consumer Products Safety CommissionU.S. Department of CommerceSolid Waste GroupAir Quality Bur
33、eauOccupational Safety and Health Association (OSHA)State Insurance DivisionEmergency Response Commissionannual inventory filingschemical release formsEmployment Security DepartmentDepartment of Energy ResourcesDepartment of Environmental ProtectionWater BureauTown HallTax AssessorFire MarshallChamb
34、er of CommercePlanning CommissionTown landfill/dumpWaste Water CollectionBuilding InspectorsIndustrial Development BoardCompany debt offeringsCompany 10KOther company filings The following are some U.S. Government sources:25Relative Cost PositionConducting a Plant Tour Raw materialswaste, spills, ov
35、eruse, scrapProcess and methodsquality, yield, alternativesLaborstaffing, supervision, work rules, machine utilizationmaintenance, changeover, downtime, bottlenecks, speedsMaterial handlingflow, number of transactions, number of peopleInventoryamount, damaged, amount of handling, storage efficiency,
36、 work in processSchedulinghow organized, flexibility, lead timesPurchasingnumber and variety of sources, standardsYou may want to note the following when conducting a plant tour:26Relative Cost PositionRCP Steps Map the business value chainIdentify cost elements and driversScour information sources
37、for cost data on clients and competitorsBuild, compare, and reality check cost barsCalculate practical full potential cost position and savingsDraw strategic implicationsProcess StepsKey Success FactorsBuild up cost bars category by categoryReality check results against similar companies27Relative C
38、ost PositionYummy Gum - Raw MaterialsRaw materials costs are built up by multiplying ingredient costs by the amount of ingredients used for each type of gum. SugarSugar freeBubbleIngredient cost/mgsweetenerbaseflavor color0.10.32.20.90.20.32.90.70.10.31.81.1X mg used per 100 stickssweetenerbaseflavo
39、rcolor192mg107mg3mg6mg76mg204mg6mg3mg120mg125mg3mg6mgX 100 sticks produced 199710,202,79361,291,52215,845,631 Total raw material cost: $6.5MM$58.8MM$9.7MM $75.0MM+28Relative Cost PositionYummy Gum - PackagingTotal packaging costs are built up by multiplying the cost per inner wrap by the number of s
40、ticks in a package and the cost per outer wrap by the number of packages for each type of package. Five stickBig packMultipackNumber of sticks per pack52010Number of packs (1996)x cost per outer wrapping310,286,6500.8908$2.8MM574,604,8891.0268 Total cost (outer wrapping)71,825,6131.3849$1.0MM$5.9MMN
41、umber of sticksx cost per foil wrapping1,551,433,2510.13$2.0MM5,746,048,8900.13Total cost (foil wrapping)1,436,512,2600.13$1.9MM$7.5MMTotal packaging cost$4.8MM$2.9MM$13.4MM$21.1MM+29Relative Cost PositionYummy Gum - Direct Labor (1 of 2)*The wage rate should be adjusted for overtime hours. In this
42、example, no overtime hours were required.Direct labor costs are calculated for each step of the value chain. For the mixing step, costs are driven by the number of hours the machines are running, the number of machines, the staff per machine, and the wage rate. SugarSugar freeBubbleNumber of mixing
43、machinesX 100 sticks/machine/hourTotal 100 sticks/hour69935,9581996 100 sticks/total sticks/hour1996 operating hours15,845,6312,660X Number of machinesX Staffing per machineX Wage rate*$27.082.636Total direct labor cost (mixing)$1.1MM$8.1MM29421,88410,202,7935,41524.7$27.08$1.4MM1,88491,33912,05161,
44、291,5225,08694.5$27.08$5.6MM12,0515,958+MixingRollingBase makingCuringPackagingRaw material purchasing 100 sticks/machine/hour30Relative Cost PositionYummy Gum - Direct Labor (2 of 2) The direct labor costs for each step are then aggregated across the direct labor value chain to give a total direct
45、labor cost of $51MM. Raw material purchasingBase makingMixingRolling/curingPackaging$2.1MM$4.3MM$8.1MM$11.1MM$25.4MMTotal direct labor$51.0MM1996 Direct labor31Relative Cost PositionYummy Gum - Indirect Overhead Overhead costDriversCostSupervisory laborDepreciationOverhead laborUtilitiesRepair and m
46、aintenanceNumber of supervisors by departmentX Wage rates of supervisorAsset register/P,P, & EX Depreciation scheduleNon-direct plant laborersX Wage roles and benefitsWater and electricity cost/unitX Amount used of eachAverage annual cost/machineX Number of machines$8.2MM$6.2MM$4.4MM$3.0MM$2.1MM$23.
47、9MMIndirect overhead consists of a number of cost categories totaling $23.9MM.32Relative Cost PositionYummy Gum - Cost Comparison The Bain case teams analysis of each cost category for Yummy and its major competitor, Bolt, revealed that Yummys $0.64 cost disadvantage came mostly from raw materials a
48、nd direct labor. Yummysper unit cost disadvantage$0.64$0.01$0.03$0.05$0.04$0.34$0$0.1723%33Relative Cost PositionRCP Steps Map the business value chainIdentify cost elements and driversScour information sources for cost data on clients and competitorsBuild, compare, and reality check cost barsCalcul
49、ate practical full potential cost position and savingsDraw strategic implicationsProcess StepsKey Success FactorsFocus on areas with the greatest potential for cost savingsAdjust for clients situation (e.g., different strategy (high quality vs. low quality), different equipment, different plant loca
50、tions)34Relative Cost PositionYummy Gum - Potential Savings The Bain case team focused on the areas with the largest potential cost savings.Primary drivers:Cost saving levers:Scale purchasingNegotiation with suppliersQuality of ingredientsMix of ingredientsTotal amount used per 100 sticksUnion vs. n
51、on-unionLocationBenefits ratesStaffing/machinecomplexitytechnologyNumber of machinesMachine speedRaw materialsDirect laborPriceAmount usedWage ratesStaffing35Relative Cost PositionYummy Gum - Raw Materials Savings Note: *Bain recommended and the client agreed that the client should reduce its suppli
52、er baseRaw materials savings account for $10.6MM in cost reduction per year. OpportunityQuantification methodologySavings potentialSweetenerrenegotiate mint oil purchasingrenegotiate sweetener contract$1.0MM$3.0MMpurchasing manager estimatescompetitors contractsBase and flavoringless expensive ingre
53、dientsless ingredients per stick (less flavor per stick)off-the shelf ingredients adjust cost/mg in modeladjust amount used of each ingredient in model Othervolume discounts* $10.6MMsupplier data on volume discountsTotal raw material savings:$1.0MM$5.6MM36Relative Cost PositionYummy Gum - Direct Lab
54、or SavingsDirect labor savings, primarily from reducing headcount, are worth $14.0MM per year. OpportunityQuantification methodologySavings potentialCrew reductionseliminate unnecessary stepsconsolidate idle time$6.4MMreduce the staffing/machine in modelLine speed increasereduce changeovers (re-tool
55、ing the machines for a new product)improve technology increase the number of 100 sticks/machine/hour in model Automate some jobscase packingstocking remove or reduce the staffing/machine in model$14.0MM$5.6MMTotal direct labor savings$2.0MM37Relative Cost PositionYummy Gum - Total Cost Savings In to
56、tal, Bain identified and helped implement $29.0MM in cost reduction for Yummy Gum. Improved inventory management Advertising savingsConsumer promotion savings38Relative Cost PositionYummy Gum - Practical Full Potential Cost Position The practical full potential cost position of Yummy Gum is higher t
57、han Bolt Gums current costs due primarily to Bolts larger scale.100 sticks produced:87.3MM126.4MM87.3MMPractical Full Potential Savings$0.16$0.12$0.33$0.05 from various other sources39Relative Cost PositionRCP Steps Map the business value chainIdentify cost elements and driversScour information sour
58、ces for cost data on clients and competitorsBuild, compare, and reality check cost barsCalculate practical full potential cost position and savingsDraw strategic implicationsProcess StepsKey Success FactorsDetermine how to take advantage of the improved cost position40Relative Cost PositionYummy Gum
59、 - Strategic Implications Yummy used its improved cost position to compete more effectively against Bolt. Also, Yummy executives focused on obtaining full advantage of the potential benefits offered in areas in which Yummy was not low cost.Yummys complex, yet flexible, machinery allows for product i
60、nnovations that its main competitor, Bolt, cannot match cost effectively. Yummy planned to pioneer more innovations like the successful “Yummy Blast”.Line speed remains slower than Bolts on account of Yummys decision to produce softer, chewier gum. Some of the $29MM in savings would be used to promo
61、te these qualities and enhance Yummys brand equity.41Relative Cost PositionAgenda The relative cost position (RCP) conceptApplicationsRCP StepsClient exampleChallengesKey takeaways42Relative Cost PositionChallenges What are the competitors inputs?types of inputsamounts of inputscosts of inputsThe ch
62、allenges around doing an RCP typically relate to gathering data on and understanding competitors cost structures and determining the clients practical full potential cost position.What manufacturing processes do competitors employ?types of equipmenttypes of technologyamount of wasteWhat practices do
63、 competitors have in place?number of shiftsamount of overtimesupervisor to non-supervisor ratiodelivery methodWhat processes and practices should the client change/not change?What impact will the changes have? How much of the theoretical savings will the client be able to achieve?Understanding compe
64、titors cost structuresDetermine clients practical full potential cost position43Relative Cost PositionAgenda The relative cost position (RCP) conceptApplicationsRCP StepsClient exampleChallengesKey takeaways44Relative Cost Position Relative cost position (RCP) is a key analytical tool used for cost
65、analysisBain uses RCP to determine a companys practical full potential cost position based on a comparison of its unit costs with those of its competitors and a detailed understanding of the clients businessRCP analysis helps answer both strategic and tactical questionsRCP OverviewKey success factor
66、s include: mapping the value chain from end to end; tying costs to operations, not accounting categories; being persistent and creative (but ethical) in gathering data; reality checking results; and adjusting for the clients situationKey Success FactorsDoing an RCP involves the following steps:map t
67、he business value chainidentify cost elements and driversscour information sources for cost data on clients and competitorsbuild, compare, and reality check cost barscalculate practical full potential cost position and savingsdraw strategic implicationsRCP StepsStrategic Toolkit - Key Takeaways45Rel
68、ative Cost PositionTakeaway Slides (1 of 3)Understanding the value chain facilitates an understanding of the cost elements Raw materials purchasingBase makingMixingRollingCuringPackagingFull PotentialValue ChainCost BarRCP StepsFocus on areas with the greatest potential for cost savingsAdjust for cl
69、ients situation (e.g., different strategy (high quality vs. low quality), different equipment, different plant locations)Map the business value chainIdentify cost elements and driversScour information sources for cost data on clients and competitorsBuild, compare, and reality check cost barsCalculat
70、e practical full potential cost position and savingsDraw strategic implicationsProcess StepsKey Success FactorsMap value chain from end to end (e.g., raw materials to finished product or delivery)Tie costs to operations not accounting categoriesBuild up cost bars category by categoryReality check re
71、sults against similar companiesDetermine how to take advantage of the improved cost positionBe persistent and creative, but ethicalQuality of ingredientsMix of ingredientsVolume of ingredientsAmount of wasteCost of ingredientsReverse engineeringSuppliersPurchasing managersIndustry reportsCost driver
72、sData sources46Relative Cost PositionTakeaway Slides (2 of 3) Savings PotentialCompetitor Cost Variance47Relative Cost PositionTakeaway Slides (3 of 3) Data SourcesConducting a Plant TourU.S. Government SourcesCost informationFormer employeesUtility companiesFinancial analysisClient sales and market
73、ingIndustry expertsMarket research reportsPlant/site toursIndustry conventionsReverse engineering reportsProduct brochuresGovernment filings and patent filingsSupplier interviewsLiterature searchesLocal newspapersEquipment vendorsCustomer interviewsCurrent employeesLabor unionsMultiple data sources
74、should be used whenever possibleRaw materialswaste, spills, overuse, scrapProcess and methodsquality, yield, alternativesLaborstaffing, supervision, work rules, machine utilizationmaintenance, changeover, downtime, bottlenecks, speedsMaterial handlingflow, number of transactions, number of peopleInv
75、entoryamount, damaged, amount of handling, storage efficiency, work in processSchedulinghow organized, flexibility, lead timesPurchasingnumber and variety of sources, standardsCompany debt offeringsCompany 10KOther company filings U.S. Environmental Protection AgencyU.S. Department of LaborEqual Emp
76、loyment Opportunities Commission (EEOC)Patents and TrademarksNational Labor Relations Board (NLRB)Consumer Products Safety CommissionU.S. Department of CommerceFederalStateLocalSecurity filingsSolid Waste GroupAir Quality BureauOccupational Safety and Health Association (OSHA)State Insurance Divisio
77、nEmergency Response Commissionannual inventory filingschemical release formsEmployment Security DepartmentDepartment of Energy ResourcesDepartment of Environmental ProtectionWater BureauTown HallTax AssessorFire MarshallChamber of CommercePlanning CommissionTown landfill/dumpWaste Water CollectionBuilding InspectorsIndustrial Development Board48
