Product Profit Management: The Key Lever of Operational Effectiveness Improvement

Transcription

1 Product Profit Management: The Key Lever of Operational Effectiveness Improvement

2 Introduction Why should we talk about product profit? It is due to the headwind against manufacturing industry causes a decline in profits in China. Some companies have gained profits in general; however, they are uncertain about profit contribution from each product line. Moreover, some products are suffering a loss without noticing by the companies. When economy grew rapidly in the past, the increasing of sales and the expansion of product lines are the key factors that companies cared more about rather than product profit. Nowadays, with a more moderate growth rate than before under the new normal economy, company executives start to consider how to manage specific product profits and to improve operation quality. This is not only a shift in concept, but also a turning point in operational management. Thus, focusing on product profit management is inevitable under new normal economy. 2

3 Product Examination from a financial perspective In general, the life cycle of a product primarily contains: Setting a 3~5 years product portfolio plan, developing an annual product development plan(including positioning and fundamental function), proposing product charter, through concepts, planning, design and verification, products launching, and then entering its life cycle management. At the same time, companies could monitor the products market performance to further decide whether they would upgrade the products or let the products out of the market etc. Meanwhile, a product will experience certain conditions, which include development, growth, maturity and decline these stages during the product life cycle. Product Planning Management & Monitoring Concept plan Desige & Verify Market Entrance Lifecycle Budget Comfirmation Budget Implementation Profit Earning From a financial perspective, the life cycle of a product can be divided into three parts: 3

4 Budget Setup: From a product strategy planning to its approval, the product budgets follow the process of rough estimation, budgets refinement, and budgets optimization and verification. This is also a procedure of continuous exploration, modification of products investment outlook, and continuous analysis of ROI. The technique to control budgets could be different regarding among different industries and companies. For example, in the automotive industry, the final budget of a project should be verified after long lead time tooling releasing since most of the expenses are coming after that. Budget Implementation: Once the project has been established, the actual expenses will occur. These expenses include direct expense and indirect expense: Direct expenses are the expenses that are directly related to the projects. Such expenses include direct materials, direct labours, training, business trips, and procurement etc. Indirect expenses are the expenses shared by different projects. Such expenses are office facilities, management expenses, and sales costs etc. Profit Earning: Profit is earned right after the products enter the market. The more and the faster the products are sold, the faster the profits are earned. Therefore, from a product life cycle, finance model can be defined as following: 1200 Time To Market Product Profit Model M RMB Time To Market Revenue General Profit Dev Expense Sales & Service Cost Profit 4

5 Here are two significant indicators: TTM(Time To Market): is the time period from project setup to project entry into market. It represents a product development cycle. It should be used to compare with competitors in order to analyse developing efficiency. TTP(Time To Profit): is the time period from project setup to product achieve the first breakeven point. It is from an investment perspective to show the cycle of fund recovery, which reflects the effectiveness of product development investments. One thing needs to be noticed is that not all the products have TTP, because some of the products never earn the profit during their life cycle or some of the products were eliminated at the end of their life cycle (were out of the market) when they finally start to gain profit. Therefore, after products enter into market (note: some companies refer them as commodity), the performance of the products in the market will be continuously monitored and analysed. Based on these, relevant actions will be created. This is also important for companies to achieve its product earning targets, for example, companies can identify which products are profitable and which are not. For those un-profitable ones, companies could try to seek on the space for improvement; If there is no space for improvement; companies need to consider the further steps for development, etc. For instance, according to news report, Volkswagen Phaeton suffered more than 2 billion Euro loss from 2002 to 2013 accumulatively. Phaeton s sales were far behind its expectations. At the same time, Volkswagen decided to cut off 5 billion Euro budgets before Facing this situation, how could Volkswagen deal with product like Phaeton? Different companies may have different approaches to solve this problem. What Volkswagen executives did was introducing a new series of Phaeton luxury cars within the next two to three years. They tended to deliver a premium image to Phaeton s consumers to improve its brand image. In other words, they keep spending money on this product. Therefore, emphasizing product profit management do not directly indicate what and how to do specifically. However, it can visualize the profit earning of each product in order to provide executives some business insights for its decision making process. 5

6 The Framework of Product Profit Management Based on industrial practices and our consulting experiences, product profit management can refer to the following framework: Decision Implementation Frequently report portfolio updates Measure Indicators Finance Revenue Profit Margin Cost Strategy & Market Scale Market Share & Growth Rate Competition Consumer Satisfaction Penetration Portfolio Management, Control and Decision Product Profit Management Behaviour Trigger Mechanism Timing Periodic Gate Review Quarterly Business Review Finance Revenue Threshold Strategy Market Scale & Share Threshold Competitor Movement Consumer Satisfaction Threshold Penetration Threshold Make decisions Management Technique Adjust QCD Eliminate Development Price Reset Lower Cost Market Exit Downgrade Manufacture/Service Communication Market Perception Function Enhancement Quality Control & Defects Correction Market Promotion Partner Change Team Setup: Conducting the product profit management requires the teams from two levels. One is from decision-making level, and the other one is from implementation level. During the development period, product development project team is responsible for relevant product project information collection and analysis. Product portfolio management team is responsible for decision-making (or product operation management committee, different companies have different operating models); after the products enter into market, company marketing department would collect relevant information of products on sale regularly. After analysis, regularly submit to product portfolio management team for decision-making (or product operation management committee); 6

7 Measurable Indicators: From finance, strategy and market, and consumer dimensions to provide decision making ideas, which are related to product profit and profit analysis. However, the focus for each product is distinct when they are in different process. For instance, during the research and development stage, companies mainly focus on the potential revenue, potential profit margin, incurred cost, future budget and dynamic market and strategy information updates etc. After products enter into the market, the main focus switches to actual sales, actual profit, actual costs, and customers etc. Furthermore, the focus for each product is also distinct when they are at different stages of lifecycle. For instance, the focus of a product during the growing period is different from it is under the declining period. Therefore, financial department and other business developments should share the same financialrelated indicators. Moreover, companies should use the same approach to collect information and to input the product profit tools. ADL Lifecycle Matrix Behaviour triggered mechanism: During product development period, companies usually review the financial information of products on its gate review. After the products enter the market, companies can review the profit earning information of all products in the market quarterly. Executives can set up threshold value (or red lines) from finance, strategy and consumer dimensions based on different product lines, product positioning, financial management principles, and product status in lifecycle. When products cannot reach the standard in certain dimensions, companies need to discuss the issues during the meetings. As mentioned above, product earning tools (EXCEL) can be used on these relevant analysis works so that visual charts can be created and be used to help with management level discussion; Management Technique: Based on the vision analysis of product profit status, executives need to take business strategy, product lifecycle and current market environment into account in order to establish different management techniques towards various products. For the products that are in the research and development process, companies could adjust the product positioning (Quality, Cost, and Delivery) or stop further product development to manage the unprofitable products. For the products that have already been in the market, companies could rely on the ADL lifecycle matrix analysis model to take a strategic move for specific products based on their status. For example, companies could set up a new price for the products or update products selling channels, even take the product off the market etc. ; Competitive Position Dominant Strong Preferable Tenable Weak Growth Aging Embryonic Choice Diversity Selective Development Dangerous 7

8 How to Implement Product Profit Management How to introduce product profit management for companies? How to make product profit status visible for executives in order to make effective decisions? Based on our practice, there are four steps for companies to introduce product profit management. The first three steps are focusing on early stages. 1 Assessment 2 Design 3 Application 4 Expansion Estimate product line structure & derived relations among products Estimate status,statistical caliber & management priority of relevant business measure indicators Estimate management rules of business lifecycle Estimate relevant product profit management Implementation Status - Team Structure - Meeting Mechanism - Supportive Tools - Measure Indicators Confirm product profit analysis scenario, establish rules & logics of profit model, make sure the type, channel and body of information is needed Assist to regulate the measurement of statistical caliber Assist to confirm relevant cost allocation Develop product profit technique set(excel) Regulate review mechanism on product profit meeting - Team Structure, Roles & Responsibilities - Operation Mechanism - Management Technique Guidance - Etc. Companies can refer to the following principles: Develop Product Profit Management Training - Concept - Technique Set Capability Choose product line, Assist business with inputting current product information into product profit technique set(excel) Provide coaching guide in product profit review meeting Based on feedbacks, optimize product profit technique set Spread product lines across the company Optimize relevant business rules or application scenario Provide promotion training Gradually obtain new product development into product profit technique set, which involves the whole lifecycle and aim to integrate with other business model - Capital Allocation - Resource Allocation - Etc. Focus on the sales of existed products first, and pay attention to further development later on; Choose selective product line to start a pilot first, and then spread across the companies; Focus on profit visibility and indicator consistency first, and then improve accuracy of each indicator; Introduce popular and simple analysis first, and then take more complex business scenario into account 8

9 Key considerable Factors during Implementation Each company has its own business type and its own business development level based on its industry type. Therefore, some specific business factors need to be considered based on companies own situation during implementation. Product vs Product Family: Some companies use an individual product model to develop its overall products. Others use product family or product series to do so. Therefore, when utilizing product profit management, companies could look at business and managerial differences to decide whether to use a single product or to use product family as a unit. Contacts companies should go with the minimum side that financial resources can be realised as a unit in order to better understand more specific earning status of each product; Expense Allocation: Some of the budgets need to be allocated into different products among the total product budgets. The allocation expenses include management costs, manufacturing equipment expense, examination expense, and platform expense etc. Companies usually have its own allocation policies with these expenses. Basically, companies would establish general and fundamental allocation standards. Further, companies could improve rationality, fairness, and accuracy of the standards during allocation period. Threshold of Business Indicators: When managing the product profit, companies need to set up the different thresholds (or red lines) as its business indicators. For products that are in the research and development process, companies could set the minimum profit margin rate in order to develop these types of products. For the products that have entered into market, companies could set up a minimum sale target. If the sales of products cannot exceed the minimum standard, these products need to be eliminated from the market. During the early periods, these thresholds may not be completed. However, companies could set up a common initial point and optimize this initial point after some operation period. Hanxin Zhang Senior Manager, Consulting Beijing +86 (10) hanxin.zhang@cn.pwc.com Simon D Strom Partner, Consulting Beijing +86 (10) simon.d.strom@cn.pwc.com This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers Management Consulting (Shanghai) Limited. All rights reserved. refers to the China member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details.