Between the Lines -- November 2004
While profitability is the key to the success of any company, it is measured in a variety of ways across different areas. This month, CGT sat down with Herbert Klein, Director of Strategy & Content - Consumer Industries, for PeopleSoft. Herbert draws upon his years of experience, both at PeopleSoft and with Unilever, and offers his perspective on three key areas of profitability: with the consumer, customer and within manufacturing operations.
Why do consumer goods firms need to understand who their most profitable customers are? In recent years, the margins of consumer packaged goods (CPG) manufacturers have been under pressure with manufacturing, logistics and inventory costs all increasing. Meanwhile, real prices for their product have declined. In addition, the customer base for CPG manufacturers is becoming more concentrated with a small number of key customers accounting for the majority of revenue. Therefore, it is vital to understand how profitable that customer is as well as who the most profitable customers are so that market development funds can be spent appropriately.
How can CPG firms incorporate revenue management and cost-based analytics to go beyond traditional CRM practices in measuring profitability?
The key to measuring profitability in CPG is the ability to accurately allocate fixed and overhead costs. The direct product costs for most CPG products make up a small portion of overall price. The allocation of overhead on an activity basis vs. pure standard costing can provide CPG manufacturers with an accurate understanding of an SKU's true profit contribution. Analytics slice and dice profitability information but the crux lies in getting the cost drivers accurately identified and allocated, thereby enabling accurate profitability models to be constructed.
How should consumer goods firms determine the profitability from the high volume of SKUs within their product portfolios?
Product profitability needs to be built from the ground up i.e. built at the SKU level, consolidated to brand and then product group. It is critical to undertake profitability analysis at the SKU level so that portfolio and brand investment decisions can be made for maximum benefit and resources are deployed to grow the most profitable items.
Do you see a trend towards firms cutting back on their SKUs based upon this profitability analysis? The trend for CPG organizations to continually add variants, flavors and pack sizes has slowed down considerably in recent years. This is partly due to retailer resistance and space constraints in store but also because consumer packaged goods manufacturers have realized that SKU profit has diluted marketing spend and increased supply chain complexity and costs. The trend to rationalize product portfolios is thus largely market driven but consumer packaged goods manufacturers are definitely using profitability analysis in determining which SKU's to discontinue.
It is duly important to analyze the profitability of manufacturing operations. What steps should consumer goods firms take to make this happen?
Manufacturing operations are generally measured by cost per unit of measure metrics. In CPG manufacturing, products generally have a standard cost and at regular intervals organizations will compare these expected costs to actual costs, identify and then attempt to rectify under performing cost areas. Where multiple manufacturing lines make the same product but with different equipment or labor crews, these differences are difficult to identify and exploit. It is vital to capture and report manufacturing costs and performance at the individual line or work center level and then consolidate these up to the plant level.