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Profitiviti - Case Study
- 1. CASE STUDY ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. Improving Profitability & Performance 1
- 2. BACKGROUND $53 Million Product & Distribution Company The Client Located in Southern California, the client is one of the premier retail brands in their space, continuously competing for market share with a Johnson & Johnson company. They have been in business for over 21 years, have a strong presence in the top 10 retail chains within the US and currently sell products in over 50 countries around the world. The Situation The client has sustained moderate year-over-year sales growth, however the senior management team desired faster results They wanted to double their top-line sales and increase their profitability by results. top line 5% in the next 3-years. With a firm commitment to transform their company, the senior team was willing to take a hard look at themselves and draw on best practices in other industries to achieve their goal. The senior leaders, like most executive teams, were way too busy focused on solving current business issues and managing the day-to-day operations. They wanted to improve and develop a forward- looking growth strategy, but lacked the time, resources, skills and tools internally. The client’s Chief Operating Officer turned to Profitiviti to help provide an external perspective and to help drive change. ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 2
- 3. BACKGROUND The Approach STEP 1 – Analyze the Current Business Situation STEP 2 – Define the Future Outcomes Desired STEP 3 – Develop a Plan to Move From the Current to Future State STEP 4 – Build the Team & Accountability to Execute for Results STEP 5 – Monitor Progress, Mitigate Risks & Re-Plan As Necessary The Project Profitiviti was engaged to lead STEP 1, using their Rapid Operational Assessment framework. STEPS 2-5 were led by the client’s internal resources, with guidance by Profitiviti. The critical deliverable of STEP 1 was a robust analysis of the client’s current state with suggestions f i b l i f h li ’ ih i for improvement. P fi i i i Profitiviti analyzed: – Revenue streams – g Product margins – Cost structure – Resource talent – Profitability ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 3
- 4. ANALYZE PRODUCTS Know Which Products Sell & Which Ones Don’t SALES TO PRODUCTS RATIO – 50% of Sales from 16 Products (9.5%) – 80% of Sales from 29 Products (17%) – Last 5% of Sales from 97 Products (57%) PRODUCT LINE PERFORMANCE – 5 Highest Performing Product Lines – 80% of Sales – 35% of the Products – 5 Lowest Performing Product Lines – 20% of Sales – 65% of the Products NOTE: Product Line names have been changed for confidentiality purposes – High Inventory Tying-up Working Capital and Warehouse Space GO-FORWARD ANALYSIS – Eliminate Low Performing Products with Poor Contribution Margins – E h Enhance P d t P Product Promotions (e.g., Discount Low ti ( Di tL Performing Products with High Margins) ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 4
- 5. ANALYZE MARGINS Improving a Few Product Margins Will Increase Your Profitability SALES CHANNELS – Products Sold via 3 Channels – Online Direct to Consumer – Direct to Retail Chains – Through Brokers to Private Stores LEGACY ANALYSIS – Reviewed Product Costs & Margins in Aggregate, Not By Channel or Location – Contribution Margin Calculation was Incorrect Incorrect, Therefore Misleading GO-FORWARD ANALYSIS – Defined True Fixed & Variable Costs – Define Contribution Margins per Product for Each Sales Channel & Location – Updated Sales & Product Pricing Strategies – Focused on Improving Margins for 3 Main Product Lines ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 5
- 6. ANALYZE COSTS Indentify Improvements by Understanding Your True Cost Model OVERALL PROCESS INVESTMENT – 38% of S f Spending i G di in Growth B i th Business P Processes – Managing Customer Relationships – Promotions – Advertising – Product & Company Branding – Very Little Investment in Infrastructure & Systems in the Enabler Areas has Led to Poor Data and has Impacted Executive Decision-Making Information BIG QUESTION… QUESTION – Significant Year-Over-Year Spending in Growth Areas, However Revenue is Only Increasing at a Moderate Rate – Why? – Is Marketing Spend Becoming Less Effective Over Time? – Is Advertising Targeted to Wrong Demographic? – Is There a Poor Alignment of Sales Incentives? NOTE: Each bubble is a defined business process rated on its Strategic Value to the company and its Contribution to Growth The relative size of the bubble depends on its Growth. – Are There Issues with Sales Channels? fully loaded costs (e.g., larger bubbles have significantly higher total cost than smaller – Are There Issues with Acquiring/Retaining bubbles; large bubbles present the biggest opportunities for cost improvement). Customers? ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 6
- 7. ANALYZE PEOPLE Know What Your Highest & Lowest Performers Are Impacting HIGHEST-PERFORMERS – 15.5% of Resources (19 People) are Rated as High- Performers (e.g., Review Rating = “Exceeds”), with an Annual Cost of Labor & Benefits of Over $1.6 Million Strategic Value – Only 11% of the Total Resources Are Focused on Growing Y G i Your CCompany – Therefore, 11% of Your People are Responsible for Managing 38% of Your Spending in Growth LOWEST-PERFORMERS LOWEST PERFORMERS Contribution to Growth – 11% of Resources (14 People) are Rated as Low- Performers (e.g., Review Rating = “Not Meet”), with an Annual Cost of Labor & Benefits of Over $2 Million (19.1% of Labor & Benefits Spend) – 18% of the R f th Resources i the Growth in th G th Functions are Low-Performers – 2.31 People Cost the Company $540,000 in Labor & Benefits – 12% of the Resources in the Back Office or Enabler Functions are L E bl F ti Low-Performers P f – 7.09 People Cost the Company $700,000 in Labor & Benefits ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 7
- 8. ANALYZE BUSINESS RISKS Identify Areas of Concern Then Take Proactive Actions to Improve MITIGATION ANALYSIS – Correlating Business Process Costs with Resource Talent Substantiates Current Business Issues While Helping to Mitigate Future Problems PRIMARY FOCUS AREA – Which Business Processes are Impacted by Your Lowest Performing Resources? – Examples of Key Business Processes Impacted 14 Low-Performers Are Impacting 52 Business Processes – Products – M Manage P d Product D Development l – Manage Consumer Testing – Call Centers – Manage Order Entry – Corporate Strategy – Manage Strategy Development – Manage Strategic Projects NOTE: Resource names have been hidden for confidentiality purposes – Finance – Perform Asset Accounting – Manage Investor Relations – Manage Tax Strategy ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 8
- 9. OVERALL PROFITABILITY ANALYSIS Understanding Your Profitability Improves Strategic Decision-Making EXAMPLE – PRODUCT XYZ (per unit analysis) (p y ) Direct Process Indirect Product Cost Process Cost Channel Sales Price Landed Cost Allocation Allocation Profit Online $6.50 $6 50 $2.80 $2 80 $.70 $ 70 $1.40 $1 40 $1.60 $1 60 Direct to Retail $6.50 $2.90 $1.15 $1.40 $1.05 Private Stores via Broker $6.50 $3.95 $.65 $1.40 $.50 – Online Sales Deliver 24.6% to EBITDA – Direct to Retail Sales Deliver 16.2% to EBITDA – Private Stores via Broker Sales Deliver 8% to EBITDA Strategically, Strategically the Company Must Participate in All 3 Channels ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 9
- 10. GO-FORWARD PLAN Develop a Plan, Prioritize Efforts & Execute for Results Suggested Improvement Projects gg p j – Define, Then Improve Customer Acquisition & Retention Cost Structures – Hire High-Performing Resources in Critical Business Areas – Increase Gross Margins on High Sales Products – Develop Marketing & Promotions Strategies to Maximize Profitability by Sales Channel and to Eliminate Slow Moving Inventory – Negotiate Long-Term Supplier & Sales Channel Partner Contracts for Cost Control – Obtain 2-3 Turnkey Contract Manufacturing Engagements to Utilize Excess Capacity – Modify Private Broker Contracts to Scale Total Expenses by Revenue Generated – Gross Sales from $0-$5 Million = 60% Total Cost Structure – Gross Sales from $5-$8 Million = 57% Total Cost Structure – Gross Sales from $8+ Million = 54% Total Cost Structure *** Profitiviti was engaged by the client’s Chief Operating Officer to deliver a trusted and accurate current state analysis of the business. The client has made significant improvements to their cost structure, product mix and resource talent. They are well on their way to achieving their ambitious goal of doubling their top-line sales and increasing their profitability by 5% in the next 3-years. Since the baseline operational analysis, P fi i i i h signed a 3 b li i l l i Profitiviti has i d 3-year strategic partnership agreement with the client to help monitor improvement i hi i h h li h l i i project return on investment, train internal resources on analysis techniques and provide best practice consulting services. ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 10
- 11. CONTACT INFORMATION Profitiviti 5000 Birch Street West Tower Suite 3000 Tower, Newport Beach, CA USA 92660 949-260-2029 www.profitiviti.com p Steve Raack 310-259-1248 310 259 1248 mobile [email protected] Profitiviti Provides a Trusted & Accurate External Perspective ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 11
- 12. PROFITIVITI Our Difference Profitiviti is a trusted partner for many C-Suite executives, Private Equity investors, Business Turnaround experts and O t d Operational Excellence specialists across several i d t i b ti lE ll i li t l industries because we deliver results. d li lt Our decades of business improvement experience coupled with our industry leading tools, allow us to deliver critical business insight faster, cheaper and more accurately than our competition. Our Competition O C titi Profitiviti P fiti iti Conducting Rapid Potentially a service in a suite of offerings This is our core focus and expertise Operational Assessments Time Typical engagements last a couple months Average engagement is completed in 4-weeks or less (Many companies charge you to build Microsoft Excel and Access models from scratch. These (Our technology is proven, ready to go, completely models are rarely left behind for your review or transparent and available for your internal use, if ongoing usage.) desired) Cost $$$ to $$$$$ $$ Deliverable Typically a PowerPoint presentation with A PowerPoint deck, of course, plus, a live recommendations for next steps and a analysis of where the improvement Statement of Work to help you implement opportunities exist along with training for your Phase 2 internal resources on how to conduct your own improvement analysis going forward ©2010 Profitiviti. All Rights Reserved. This document is for informational purposes only. 12