Moving from Single Product Profitability to Market Baskets

Today, companies can analyze the direct profitability of a discrete product and its bottom line contributions through indirect measures. For example, they can view the profit generated through sales of complementary items - market basket profitability. The analysis of market basket profitability is an important aspect of developing an accurate measure of a product’s profitability. It is also part of adopting a holistic, enterprise wide and life cycle view of products. This type of analysis is cutting-edge, and many companies are only beginning to adopt it. Here are the basic steps to take.

Step 1: Calculate Product Profitability

How are individual SKUs contributing to the bottom line? Applying activity-based costing to calculate SKU profitability yields a view that is more aligned with the overall goal of the company to make money. This is new information that is not typically tracked by a company’s enterprise resource planning (ERP) system. Management visibility is usually limited to revenue and gross profit dollars. However, indirect expenses associated with R&D, sales & marketing, storage, and logistics can easily outweigh current margins. Many of these costs are hidden within the organization and are not easily driven to individual SKUs.

The goal of the ABC system is to help define the individual winners and losers, and to provide detail that shows why they performed the way they did. This can help a company make operational decisions about these products. For example, at Clairmont Housewares1 a cross-functional corporate management team reviews product profitability results from their enterprise profit system to assist with SKU rationalization efforts. Exhibits 1a and 1b provide sample information from an enterprise-wide ABC system on SKU profitability and show how it can be used

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