3/10/2016. Sales Metrics Are your measurements driving the right behavior? Joel Galassini

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1 Sales Metrics Are your measurements driving the right behavior? Joel Galassini 1

2 The Goal of Business Key assumption for this presentation: The number one goal for our operations is to maximize profit. Or is it? What about cash? Profit Expense Aggregate Financials In order to understand how to maximize our financial results, we must first understand how the aggregate financial statements work. For most operations, there are actually two separate companies being run for each operation. Production Sales Cost of Goods Production Margin Sales Margin Expense Cost of Goods Sold 2

3 Inventory 3/10/2016 Inventory In order to simplify the financials, it is often easier to think of operations selling material to inventory and then sales purchasing material from inventory. Production Margin Inventory values are preestablished to represent the cost of operations. In theory, the value of the inventory produced in a defined period should equal the cost of operations for the same period. Drilling & Blasting Production Margin Product 1 Load & Haul Product 2 Primary Crushing Cost of Goods Product 3 Secondary Crushing Product 4 Shop Expense Product 5 3

4 Example Let s assume that we have a sample aggregate operation that produces four basic products and operates at 500 tph. Product Percent of Total Tons per Hour Base Material 30% 150 TPH ASTM #57 30% 150 TPH ASTM #8 10% 50 TPH ASTM C33 Sand 20% 100 TPH Waste 10% 50 TPH Production for 1 Month In this example, our fictitious plant runs for four weeks, five days per week, eight hours per day. It was also up 100% of the time and processed 80,000 tons of raw material. What should the inventory costs be? 4 Weeks 5 Days per Week * 8 Hours per Day 160 Hours * 500 TPH 80,000 Tons Processed Department Actual Cost Per Raw Ton Drilling and Blasting $1.00 Pit and Haul $1.00 Primary Crushing $160,000 $2.00 Secondary Crushing $1.00 Shop Expense $1.00 Total Expense $6.00 4

5 Production: Products Over that same month period, the following products were produced: Product Tons At $6.00 per Ton Base Material 24,000 $144,000 ASTM #57 24,000 $144,000 ASTM #8 8,000 $48,000 ASTM C33 Sand 16,000 $96,000 Total Sellable Tons 72,000 $432,000 Waste 8,000 $0 Total Tons 80,000 $432,000 Why $0? Example: Production Margin By using a $6.00 per ton inventory cost, we end up generating a negative production margin. The goal is for the production margin to equal $0. How do we fix it? What happens if we don t? Where does that <$48,000> go? Drilling & Blasting Load & Haul Production Margin <$48,000> Base Material $144,000 ASTM #57 $144,000 Primary Crushing $160,000 Inventory Value $432,000 ASTM #8 $48,000 Secondary Crushing ASTM C33 Sand $96,000 Shop Expense Waste $0 5

6 Production for 1 Month Even though we processed 80,000 tons, we only ended up with 72,000 sellable tons. Department Cost Per Raw Ton Per Sellable Ton Drilling and Blasting $1.00 $1.11 Pit and Haul $1.00 $1.11 Primary Crushing $160,000 $2.00 $2.22 Secondary Crushing $1.00 $1.11 Shop Expense $1.00 $1.11 Total Expense $6.00 $ ,000 Production: Products By using the $6.67 per ton value, all operational expenses where absorbed into inventory. Product Tons At $6.00 per Ton At $6.67 per Ton Base Material 24,000 $144,000 $160,000 ASTM #57 24,000 $144,000 $160,000 ASTM #8 8,000 $48,000 $53,333 ASTM C33 Sand 16,000 $96,000 $106,667 Total 72,000 $432,000 Waste 8,000 $0 $0 Operational Cost 80,000 Over / <Under> Absorption <$48,000> $0 6

7 Example: Production Margin With the production margin set at $0, we can now focus our analysis on the sales margin. Drilling & Blasting Load & Haul Production Margin $0 Base Material $160,000 ASTM #57 $160,000 Primary Crushing $160,000 Secondary Crushing Shop Expense Inventory Value ASTM #8 $53,333 ASTM C33 Sand $106,667 Waste $0 Sales Margin Sales margin is generated by offsetting the revenue collected for a specific product against it s inventory cost and any cost associated with selling or loading the material. Sales Margin Cost of Goods Sold Product 1 Product 2 Product 3 Load Out Product 4 Product 5 7

8 Key Metrics A variety of sales metrics can be used to examine the effectiveness of the sales organization. Generally, the goal is to increase each of these measures to achieve an increase in overall profit. Average Sales Price Volume Margin % Gross Margin Margin % Gross Margin Sales Cost of Goods Sold Price (ASP) Volume Load Out Financial Measurements In addition to profit, other key financial measures are cash flow and return on investment. Balance Sheet Income Statement Margin % Load Out Sales Margin Inventory Cost of Goods Sold Profit Cost of Goods Production Margin Plant / Investment ROI 8

9 Plant Margin: Base Case Assuming that load out expense is $1.00 per ton, inventory is valued at $6.67 per ton, and the plant costs $5M, financial measures for our fictitious plant are presented below. Balance Sheet $855,000 Income Statement Margin % 50.04% Load Out $57,000 Sales Margin $417,810 $318,000 Inventory $99,810 COGS $380,190 COGP Production Margin $0 Profit $417,810 Plant / Investment $5,000,000 ROI 8.19% Sales Portfolio Now, let s assume that the sales team is presented with three different scenarios. Which one should the pick? Possible Scenarios: Sell 5,000 more tons of ASTM #8 at $30.00 per ton Product Sell Sales 20,000 Price more Tons tons Sold of ASTM #57 at $13.00 Tons per ton Excess Base Material Sell $ ,000 more tons 15,000 of Base Material $150,000at $ ,000 per ton 9,000 ASTM #57 $ ,000 $300,000 24,000 4,000 ASTM #8 $ ,000 $160,000 8,000 0 ASTM C33 Sand $ ,000 $245,000 16,000 2,000 TOTAL $ ,000 $855,000 72,000 15,000 9

10 Scenario 1 Under scenario 1, the plant would need to run 100 more hours tons of additional ASTM #8 sales / 50 tons per hour = 100 hours Product Sales Price Tons Sold Original Tons New Tons Excess Base Material $ ,000 $150,000 24,000 15,000 24,000 ASTM #57 $ ,000 $300,000 24,000 15,000 19,000 ASTM #8 $ ,000 $160,000 8, ASTM C33 Sand $ ,000 $245,000 16,000 10,000 12,000 ASTM #8 NEW $ ,000 $150, ,000 0 TOTAL $ ,000 $1,005,000 72,000 55,000 55,000 CHANGE 8.06% 8.77% 17.54% 76.39% % Plant Margin: Scenario 1 Under this scenario, the plant profit increase by 26.7% while cash flow decreases by 48.7%. Balance Sheet $1,005,000 Income Statement Margin % 52.68% Load Out $62,000 Sales Margin $529,460 $163,000 Inventory $366,460 COGS $413,540 COGP $780,000 Production Margin $0 Profit $529,460 Plant / Investment $5,000,000 $780,000 ROI 9.87% 10

11 Scenario 2 Under scenario 2, the plant would need to run an additional hours. (20,000 new sales 4,000 existing inventory) = 16,000 New tons Tons needed / 150 tons per hour = hours Product Sales Price Tons Sold Original Tons Excess Base Material $ ,000 $150,000 24,000 16,000 25,000 ASTM #57 $ ,000 $300,000 24, ASTM #8 $ ,000 $160,000 8,000 5,333 5,333 ASTM C33 Sand $ ,000 $245,000 16,000 10,667 12,667 ASTM #57 NEW $ ,000 $260, ,000 0 TOTAL $ ,000 $1,115,000 72,000 48,000 43,000 CHANGE 3.46% 35.09% 30.41% 66.67% % Plant Margin: Scenario 2 Under this scenario, the plant profit increase by 25.5% while cash flow decreases by 25.2%. Balance Sheet $1,155,000 Income Statement Margin % 47.03% Load Out $77,000 Sales Margin $524,410 $238,000 Inventory $286,410 COGS $513,590 COGP $800,000 Production Margin $0 Profit $524,410 Plant / Investment $5,000,000 $800,000 ROI 9.92% 11

12 Scenario 3 Under scenario 3, the plant does not need to run any additional time tons of base material sold 9000 tons in existing inventory = no additional hours Product Sales Price Tons Sold Original Tons New Tons Excess Base Material $ ,000 $150,000 24, ,000 ASTM #57 $ ,000 $300,000 24, ,000 ASTM #8 $ ,000 $160,000 8, ASTM C33 Sand $ ,000 $245,000 16, ,000 Base Material NEW $8.00 8,000 $64, TOTAL $ ,000 $919,000 72, ,000 CHANGE 5.74% 14.04% 7.49% 0% 53.33% Plant Margin: Scenario 3 Under this scenario, the plant profit increase by 0.6% while cash flow increases by 17.6%. Balance Sheet $919,000 Income Statement Margin % 45.75% Load Out $65,000 Sales Margin $420,450 $374,000 Inventory $46,450 COGS $433,550 COGP Production Margin $0 Profit $420,450 Plant / Investment $5,000,000 ROI 8.33% 12

13 Summary Scenario 1 maximized profit, scenario 2 maximized volume and revenue, and scenario 3 maximizes cash flow. Measure Base Case Scenario 1 Scenario 2 Scenario 3 ASP $15.00 $16.21 $14.48 $14.14 Tons Sold 57,000 62,000 77,000 65,000 $855,000 $1,005,000 $1,115,000 $919,000 Profit $417,810 $529,460 $524,410 $420,450 Margin % 48.87% 52.68% 47.03% 45.75% Inventory $99,810 $366,460 $286,410 $46,450 $318,000 $163,000 $238,000 $374,000 ROI 8.19% 9.87% 9.29% 8.33% Other Potential Metrics There are a few nontraditional metrics that might be considered to aid in the analysis of the best scenario to select. Do any of these metrics make you think differently about the scenarios? Scenario Tons Sold Tons % of Pit Ton Sold Average Sales Price Production Adjusted ASP Base Case 57,000 72, % $15.00 $11.88 Scenario 1 62, , % $15.40 $8.16 Scenario 2 77, , % $14.48 $11.15 Scenario 3 65,000 72, % $14.14 $

14 Final Thoughts Measuring sales effectiveness can be more complex than most people think due to the impact that sales can have on operation efficiencies. In order to establish appropriate sales metrics, it is critical that one understands what the priorities of the organization are Profit Volume ASP Short term profitability can lead to low cash flow and low return on investment An organization must balance profitability with cash needs and sales needs to have information to help base their decisions Inventory values Inventory levels Production rates 14