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What You Can Do with a Holistic Model
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What You Can Do with a Holistic Model
Author:
Steve Anderson
5/10/2009
Our last blog discussed the merits of a holistic ABC model for analyzing your business. A holistic model provides more context, more actionability, it’s easier to build, and easier to maintain. Given that most companies we’ve seen have traditional ABC models at best (many still use spreadsheets), it’s important to note some of the additional capabilities of a holistic TDABC model and make some observations on what is possible.
Capacity View of Your Operations– In a TDABC model, process capacity/resource utilization becomes an explicit dimension and capability. This is HUGE! You get what every ABC model can provide and you will also have an estimate of the capacity utilization of ALL functional departments. Some uses we have seen:
1. Identify constrained and excess capacity for properly balancing companies without over-cutting in a particular area. This is extremely valuable when a company is looking for ways to cut capacity/resources.
2. Implement real-time planning rather than the once a year company-wide rectal exams known as the budget process. Rather than waiting 6 months to determine where to add people, this visibility greatly reduces the politics that are played annually in the budget processes. We call this what-if scenarios. A shining example is applying a TDABC model to a prospective acquisition. One private equity firm did this for a target company. In just seven days, they ran its data using a TDABC template model to identify ways to increase profitability by 3x.
3. Capacity information can also help validate the TDABC model. For example, if a department has 4 employees, one the theoretical capacity for one month would be approximately 38,400 minutes (40 hrs/wk x 4 wks/month x 60 min/hr x 4 employees). If the model calculates an amount substantially different, the team may need to modify the time equation.
Transaction View for Customer/Product Profitability –TDABC models depend upon detailed transaction data to populate the time equations. Why? Because most processes are focused on orders/transactions. The data required to model the process is not sitting in a customer or product file, but rather an order / invoice file. This is critical for accuracy and granularity. In a TDABC model, you will not only have visibility into which customers make and lose you money (also called customer report card), you will have a better understanding of what actions to take. You will have the ability to
1. Drill down to the specific products for that client or segment, drill across to other dimensions like facility, sales rep, or route that may impact profitability.
2. Drill down to the individual transactions for that customer and determine their transaction mix, which transactions are profitable and why.
3. Look at the P&L by customer and/or product and determine what process anomalies might be causing your profit or loss.
All of this insight is easily accessible in seconds. Questions that our customers answer with this information include:
• Are all of my most profitable customers buying all of my most profitable products? (Huge impact potential)
• Are my least profitable customers unprofitable because of something that I am doing or letting them do to me?
• What should the new segments (customers and products) be for my company?
• What type of segmented pricing should I be implementing, what type of changes in my pricing strategy and execution should I make? (Huge impact potential)
Tags:
capacity utilization, resource utilization
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