A structured approach to margin management

William (Bill) SurphlisManaging PartnerGrant Thornton Productivity Improvement

T +1 416 366 0100 ext. 7223E William.Surphlis@ca.gt.com

ProductivityHow do you increase it?

Process

System Management• Volume forecasting• Resource planning• Cycle controls• Operating reports• Production meetings

• Process mapping• Best practices• Activity lists• Observations• Planning guidelines

• Supervisory model• Active supervision• Management style• Coaching approach• Problem solving

Typical observation summaries

Detail summary

Employee "A" and Employee "B"

Code Description Time (min) %

Value-added activities 2910 44%

Non value added 3734 56%

Total 6644 100%

44% 56%

Management operating system example

Supervisor behaviors

Proactive management Proactive improvement

Training Administration

Process work Reactive management

Two performance dimensions

Good execution

Good planning

Operational efficiency

Demand management and scheduling

Executing a good plan

well

Executing a bad plan

poorly

Executing a bad plan

well

Executing a good plan

poorly

4 steps to defending margins

• Our most common client needs:– Desire to improve margins in a sustainable manner– Existence of price/cost pressures across product line– Lack key components of formal margin management activity

• Accurate data based on actual performance• Clear responsibility/accountability• Recurring review structure• Departmental improvement projects that have strategic priority

Q. What is your Gross Margin Threshold that triggers a review?

A. ???

Defending margins starts with sound margin management.

4 steps to defending margins

Step 1: Quick results and data validation• Quick results

– Utilize a workshop or meetings with key staff to identify cost reduction opportunities

• Prioritize those that require low capital and short implementation window

– Increase prices• Utilize minor price increases (<5%) according to product type and

customer strategy • Larger increases suitable for non-strategic customers

4 steps to defending margins

Step 1: Quick results and data validation• Data validation

– Decide on data to use for decision making• Gross Margin• Contribution• Fixed cost allocation

– Review accuracy/relevance of all data used to calculate SKU/customer metric

• Integration of actual data essential• Consideration for frequency of updating costs

4 steps to defending margins

Step 2: Margin management structure• Establish threshold that will trigger review

– Gross Margin <25% or under total firm value• Design meeting structure

– Monthly review of SKU based data– Quarterly review of customer based data– Departmental updates on high priority projects

• Assign responsibility– Initially resides with President/CEO and potential transfer a year following

implementation• Begin communication and set context

– Clarify context and reasons for establishing program– Communicate to staff team

4 steps to defending margins

Step 3: Data analysis• Deliver data set for review by management team• Feedback and "gut test" iterative process• Client example:

– High value SKUs: 80% of Gross Margin $ generated from 54(17%) SKUs– Low value SKUs: 255(82%) generated only 20% of Gross Margin $, some

at a significant loss– How many SKUs account for 80% of your overall GM$?

4 steps to defending margins

Step 4: Taking action• Begin review meetings• Identify action plans for all products below threshold

– Increase price– Recipe/BOM modification

• Focus on most expensive ingredients– Reduce amount or cost of packaging– Quantity reduction

• Maintain price– Reduce material waste in process– Reduce labour cost in process– Increase production using current labour and equipment– Capital investment for core and strategic products

• Assign actions and track progress

Margin managementKey industry themes

• Need to understand your costs to manage margins– Data analysis and repositories that reflect activities performed

• Need processes and tools to make thoughtful decisions– Dynamic and flexible management systems

• Most organizations lack a good understanding of where they make and/or lose money– Focus on what makes you money

• Understand your market position and competitive forces– How can you best compete

Margin managementKey industry themes

• Pricing and portfolio management– Develop a responsive, portfolio-based pricing model that considers internal

and external perspectives and ensure controls exist at the execution level• Sales management and effectiveness

– Productivity of your sales organization and market initiatives– Develop a system that maximizes active selling and prospecting and directs

and tracks sales activity in line with the company objectives– Implement forecasting procedures and accuracy measures

• Organizational structure– Redefinition of the organization structure to maximize company and

functional performance through motivating the right people in the chosen direction

Margin management assessment"Focus on what makes you money"

• Types of analysis include:1. Productivity assessment

2. Market, category and channel assessment

3. Portfolio segmentation and rationalization (by sales, customer, geography, distribution, brand, product, SKU, etc.)

4. Activity based costing

5. Overhead allocations (by cost centre, sq ft, function, department, etc.)

6. Porter's 5 Competitive Forces

7. Growth Share Matrix

8. 80/20 rules

9. Glenday Analysis

10.Pricing strategies

11. Seasonality

Sample data analysis and management toolsContribution margin analysis-airline co.

Aircraft Contribution $

HS748LTC $598,000

HS748FFS $295,000

HS748MAA $295,000

HS748TTW $295,000

BEECHWAU $123,000

BEECHZVJ $99,000

BEECHSWA $52,000

BEECHWZK $48,000

BEECHQWA $(16,000)

C GR CVNKDL $(38,000)

C GR CVNWAW $(38,000)

C GR CVNKAD $(38,000)

BEECHWAX $(63,000)

PC – 12WAV $(100,000)

C GR CVNPCC $(101,000)

DASH 8 – 100DND $(108,000)

PC -12GWA $(114,000)

PC -12YZS $(115,000)

PC -12KRB $(117,000)

PC -12KPI $(124,000)

PC -12BXW $(154,000)

PC -12PAI $(154,000)

PC -12PCL $(157,000)

DOGS

STARS

15 aircraft generate -$1.437M in contribution

8 aircraft generate $1.8M in contribution

*Total contribution calculated to be $368,000 for all 23 aircraft

Sample data analysis and management toolsGrowth share matrix-airline co.

?QUESTIONMARKS

CASHCOWS

DOGS

STARS

Gross Margin

50% $2,382,554.77 9 routes STARS (8.4%)

95% $4,560,745.23 27 routes CASH COWS (25.2%)

100% $4,784,243.12 107 routes 100.0%

34 routes show negative Gross Margin of $(1,653,525) DOGS

37 routes show positive Gross Margin, but low contribution QUESTION MARKS

18 routes generate another 45% of annual GM$

9 routes generate 50% of annual GM$

37 routes have positive GM% but low GM$

34 routes have negative GM% and GM$ totaling -$1,653,525

Sample data analysis and management toolsProduct matrix analysis-food processor

Gross MarginSales Revenue

Low Medium High Total

Yellow # of ProductsRevenue ($M)Net GM ($M)

2$5,664$1,993

1%0%0%

12$57,567$13,453

6%1%3%

94$6,503,955$574,028

45%68%123%

108$6,567,186$589,473

52%69%127%

Green # of ProductsRevenue ($M)Net GM ($M)

3$5,498$1,318

1%0%0%

12$56,131$6,471

6%1%1%

7$125,321$4,226

3%1%1%

22$186,949$12,015

11%2%3%

Red # of ProductsRevenue ($M)Net GM ($M)

25$28,707$(577)

12%0%0%

11$47,394$(8,519)

5%0%-2%

41$2,730,825$(127,241)

20%29%-27%

77$2,806,926$(136,337)

37%29%-29%

Total # of ProductsRevenue ($M)Net GM ($M)

30$39,869$2,734

14%0%1%

35$161,092$11,404

17%2%2%

142$9,360,101$451,013

69%98%97%

207$9,561,062$465,151

100%100%100%

Margin analysis by product (period 5 actual)

Company COGNOS Summary:Revenue $9,561,062Net GM $465,151 4.9%Net GM (Samples and TS) $(9,393)Net GM (COGNOS) $455,758 4.8%

Sample data analysis and management toolsGlenday SKU analysis-food processor

3% of SKUs 23 SKUs represent 50% of sales 50%30% of SKUs 244 SKUs represent the next 45% of sales 95%20% of SKUs 165 SKUs represent 4% of sales 99%46% of SKUs 376 SKUs represent 1% of sales 100%

• 33% of SKU's (267) represent 95% of sales• 67% of SKU's (541) represent 5% of sales

Plant # of SKUs Sale units Total cost % of Total

1 141 7,250,646 $85,169,865 10%

2 19 290,465 $7,113,557 1%

3 104 20,005,641 $452,550,853 54%

4 572 840,445 $38,359,136 5%

5 148 5,815,618 $144,578,416 17%

6 19 5,933,473 $114,419,670 14%

Total Costs 1,003 40,136,288 $842,191,497 100%

Sample data analysis and management toolsMargin improvement plan and operating report-food processor

Sample Case Studies

• Pinty's Delicious Foods (chicken processing)– ROI from 3.5 to 1

• Swish Maintenance Ltd. (cleaning products)– ROI from 4.0 to 1

• Sanofi Pasteur (vaccines)– ROI 5.7 to 1

• Ganong (chocolate)– ROI 2 to 1

Case Study APinty's Delicious Foods

• Approach– Rationalized product and customer portfolios– Installed a system to improve pricing capabilities– Installing a sales management system– Management of distribution and logistics costs– Focus on trade spend investments that generate maximum return

Case Study A (cont'd)

• Project results– 3.5:1 Project Return on

Investment in 9 months– Profit margin increased by

5.1%– Increased sales by 6%– 4% increase in order fill ratio– Accounts receivable reduced

by $2M– Outstanding trade claim

backlog reduced by 69%

-200,0000

200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,0001,800,000

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Plan Actual

Case Study BSwish Maintenance Ltd.

• Approach– Analyzed existing sales performance and efficiency data– Implemented new procedures and policies for sales call planning,

target setting, customer segmentation and sales call reporting– Delivered customized applied management training to sales

managers– Increased accountability of sales force by setting and measuring

clearly defined targets and performance expectation

Case Study B (cont'd)

• Project results– 4:1 project return on

investment– 18% increase in margins– 11% increase in revenues– Increased new account

acquisition volumes– Increased existing account

penetration

Productivity Improvement

33% 27% 37% 18%

ProfitImprovement

Selling time

Customer calls

# Quotes

Case Study CSanofi Pasteur

• Situation– Allocations were based on budgeted numbers, not actual results– Quality, industrial project management, profit sharing unabsorbed– 25% of total cost of goods sold unabsorbed

• Approach– Develop an Activity Based Costing model to help achieve the

following:• Strategic pricing, capacity planning, transfer pricing• Actual production cost and accurate variance reporting• Budgeting on activities

Case Study C (cont'd)

• Project results– 5.7:1 Project Return on Investment– Cost base moved from 64% to 9% unexplainable– System successfully implement and installed globally

64%

9%

13%

60%

23% 31%

0%

20%

40%

60%

80%

100%

120%

Before After

Support costs

ManageraccountabilityNo manageraccountability

Case Study DGanong

• Situation– 700+ SKU's, with over 300 active in the last year– Cost data available is based on initial budgets for each product– All departments cited a lack of trust in costs as reason for inaction

• Approach– Install costing system to deliver actuals for labour, materials, and

overhead– Initiative lead at CEO level to establish priority and formalize a

process

Case Study DGanong

• Project results– Actual cost and margin data updated for review by sales, operations

and executive team– Currently in decision making stage of SKUs to eliminate or raise

prices– Education of sales team is a high priority as 95% of GM$ is driven

by 20% of SKUs

Summary of data for active products with GM% of 20 or less

Revenue % of Total Margin $ % of Total # of SKUs % of Total Avg. GM%

F09 $14,573,589 33.2% $1,302,147 11.7% 235 42.0% 8.9

F10 $11,950,478 26.5% $998,232 7.8% 225 44.1% 8.4

F11 $8,101,614 33.2% $944,700 13.5% 184 41.8% 11.7

Structured approach

Productivity assessment"How you can best compete"

• Types of analysis include:1. Interviews with key personnel

2. Conduct studies to determine the level of opportunity in the operation

3. Conduct several detailed studies in your organization

4. Analyze the management systems and data to determine whether gaps exist that hamper the flow of information for appropriate and timely decision making

5. Create a summary of opportunities for each of the operations

6. Understand the capacity and capability constraints of current processes

7. Estimate value of opportunities if implemented

8. Create preliminary schedule for implementation with ROI calculations

9. Estimate a project "cash flow" that can be monitored for schedule attainment during an implementation

Market assessment"How can you sell more of the right product"

• Types of analysis include:1. Review existing sales and marketing plans and market studies

2. Review and discuss the target markets domestically and internationally

3. Review your plans for sales growth and estimate the additional capacity or capability required to serve market channels

4. Determine, recommend, and prioritize alternatives for new markets

5. Conduct an overview of your product portfolio, sales and distribution channels to determine improvement opportunities

6. Conduct a SWOT analysis

7. Conduct preliminary market research

8. Assess market attractiveness and potential of a product

9. Select the best alternative and define the rational by estimating the project cost, timelines and payback

Questions?

Thank you!

• An analysis technique that allows practitioners to prioritize and target improvement efforts on a few high-volume procedures, processes, units or activities (PPUAs). As seen in the table below, GS maintains that in most cases about 6 percent of PPUAs account for about 50 percent of volume. Additionally, GS classifies and color-codes all PPUAs into four different volume groups. For example, if a manufacturer makes 200 different parts, GS maintains that approximately 12 parts account for 50 percent of sales; these 12 parts would be in the green group and would ideally be the focus of any initial improvement activities, as they would yield the greatest benefit.

Cumulative % of Volume

Cumulative % of PPUAs

Color Code

50 percent 6 percent Green

95 percent 50 percent Yellow

99 percent 70 percent Blue

Last 1 percent 30 percent Red