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Context and Actionability
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Context and Actionability
Author:
Steve Anderson
5/4/2009
The state of profitability and cost analysis in most complex businesses is rather alarming, given the amount of data that exists in most companies these days. You would think it easy to accurately calculate customer and product profitability for thousands, tens of thousands, and even millions of customers. But it’s not. So complex companies, regardless of size, had to come up with what does work for them. Unfortunately, it’s pretty limiting. Many of our clients’ cost analysis includes scores of models (50+ in some cases) just to handle the complexity and scale of their business. One customer had over 500,000 products. The solution they purchased could only give them profitability for their top 1000 products. (Based on what? Revenue.) The other products were placed into product categories with hundreds of products each. We analyzed their least profitable category at the individual product level, and found fewer than 5 unprofitable products out of over 500. Here is just a sampling of the separate analyses that companies commonly perform: analysis for departments, functions (supply chain, HR, IT), cost type, operational dimensions (customer, product, channel, and segment).
With this ‘insular’ type of approach, the users that need information are limited in what they can discover about their business, what drives profitability, what drives cost, who are the value creators, who are the value destroyers. Most importantly, WHY (root cause), WHAT (actions to take) and WHAT-IF are difficult to deliver with confidence.
With a single, ‘holistic’ model whose foundation is the transactions that make up that business, root cause, actionability and simulation are simply a different view of information that is validated operationally and financially. The benefits of this approach are obvious:
1. The user has the ability to drill down to the lowest level of information, the transaction, and drill across to any other dimension that could answer a question about root cause, action or impact.
2. The model is driven by transactions, where the variability of most businesses is captured. (Buyer beware, this is different from transactional analysis where you are simply treating the transactions as another object and assigning cost based on a top-down allocation methodology.)
3. Because it’s a validated model, organizational buy-in is a derivative and much more action is taken with the insight provided.
4. Having context allows for highly effective decisions, versus decisions made in a departmental model that may impact other parts of the organization and have a non-intended negative consequence. Put another way, the only way to understand the impact of your action is to be able to model all cascading effects.
5. These models are more complex, but they actually take less time to implement than a comparable traditional approach AND they are significantly less expensive to maintain.
Fortunately, a critical mass of companies in each industry have implemented these more advanced, holistic costing and profitability solutions. The bar has been permanently raised. There are many solutions that can support them in the endeavor. Companies are waking up to the inadequacies of ‘insular’ approaches and now expect that they should be able to analyze all customers, all vendors, all products, and even all transactions.
Tags:
profitability and cost analysis, customer profitability, product profitability
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