This presentation looks at customer and product profitability analysis, activity-based costing and the RapidBusinessModeling solution for corporate performance improvement.

1. RapidBusinessModeling
Cost model your business to improve profitability
1

2. Questions
• Which customers are the most profitable?
• Which customers are we losing money with?
• Which products are the most/least profitable?
• How much potential profits are we giving up?
• How will pricing impact our profitability?
2

3. Challenges
• Traditional accounting - Individual profitability?
3

4. Challenges
• Traditional accounting - Individual profitability?
Revenue Gross Margin Cost To Net Profit
Feature
$‘000 $‘000 % Serve $‘000 %
Customer A 590 88 15% 115 -27 -5% Best Revenue
Customer B 429 78 18% 59 19 4% Best Profit
Customer C 377 93 25% 127 -34 -9% Best Margin
3

5. Challenges
• Traditional accounting - Individual profitability?
Revenue Gross Margin Cost To Net Profit
Feature
$‘000 $‘000 % Serve $‘000 %
Customer A 590 88 15% 115 -27 -5% Best Revenue
Customer B 429 78 18% 59 19 4% Best Profit
Customer C 377 93 25% 127 -34 -9% Best Margin
3

6. Challenges
• Traditional accounting - Individual profitability?
Revenue Gross Margin Cost To Net Profit
Feature
$‘000 $‘000 % Serve $‘000 %
Customer A 590 88 15% 115 -27 -5% Best Revenue
Customer B 429 78 18% 59 19 4% Best Profit
Customer C 377 93 25% 127 -34 -9% Best Margin
3

7. Challenges
• Traditional accounting - Individual profitability?
Revenue Gross Margin Cost To Net Profit
Feature
$‘000 $‘000 % Serve $‘000 %
Customer A 590 88 15% 115 -27 -5% Best Revenue
Customer B 429 78 18% 59 19 4% Best Profit
Customer C 377 93 25% 127 -34 -9% Best Margin
3

8. Challenges
• Traditional accounting - Individual profitability?
Revenue Gross Margin Cost To Net Profit
Feature
$‘000 $‘000 % Serve $‘000 %
Customer A 590 88 15% 115 -27 -5% Best Revenue
Customer B 429 78 18% 59 19 4% Best Profit
Customer C 377 93 25% 127 -34 -9% Best Margin
• Key Element: Cost To Serve (CTS)
3

9. CTS = f ( customer )
4

10. CTS = f ( customer )
• ‘Cost to Serve’ depends on
customer characteristics and
behavior.
4

11. CTS = f ( customer )
High Low
Products ordered custom standard
• ‘Cost to Serve’ depends on
customer characteristics and Order Quantities small large
behavior. Order Arrivals unpredictable predictable
Packaging customized standard
Delivery customized standard
Delivery Location far near
Del. Requirements changes no changes
Pre-Sales Support high low
Post-Sales Support high low
Payments slow on-time
4

12. CTS = f ( customer )
High Low
Products ordered custom standard
• ‘Cost to Serve’ depends on
customer characteristics and Order Quantities small large
behavior. Order Arrivals unpredictable predictable
Packaging customized standard
• Cost to Serve can be measured Delivery customized standard
through the activities consumed
Delivery Location far near
by the above factors.
Del. Requirements changes no changes
Pre-Sales Support high low
Post-Sales Support high low
Payments slow on-time
4

13. CTS = f ( customer )
High Low
Products ordered custom standard
• ‘Cost to Serve’ depends on
customer characteristics and Order Quantities small large
behavior. Order Arrivals unpredictable predictable
Packaging customized standard
• Cost to Serve can be measured Delivery customized standard
through the activities consumed
Delivery Location far near
by the above factors.
Del. Requirements changes no changes
• Customer Profitability Analysis Pre-Sales Support high low
uses ‘Activity-Based Costs’ to Post-Sales Support high low
establish the Cost to Serve.
Payments slow on-time
4

14. Traditional Costing
Resources Processes Outputs
(products or services)
Organizational View
5

15. Traditional Costing
consumed Outputs
Resources in Processes (products or services)
Organizational View
5

16. Traditional Costing
consumed to Outputs
Resources in Processes produce (products or services)
Organizational View
5

17. Traditional Costing
Accounting View
Costs Cost Objects
(direct or indirect)
consumed to Outputs
Resources in Processes produce (products or services)
Organizational View
5

18. Traditional Costing
Accounting View
Costs Cost Objects
(direct or indirect)
calculated
by
consumed to Outputs
Resources in Processes produce (products or services)
Organizational View
5

19. Traditional Costing
Accounting View
Costs Cost Objects
(direct or indirect)
calculated represent
by
consumed to Outputs
Resources in Processes produce (products or services)
Organizational View
5

20. Traditional Costing
Accounting View
direct cost
assigned to
Costs Cost Objects
(direct or indirect)
calculated represent
by
consumed to Outputs
Resources in Processes produce (products or services)
Organizational View
5

21. Traditional Costing
Accounting View
direct cost
assigned to
indirect cost
Costs Cost Objects
(direct or indirect) arbitrarily assigned to
calculated represent
by
consumed to Outputs
Resources in Processes produce (products or services)
Organizational View
5

22. Activity Based Costing
Accounting View
direct cost
assigned to
Costs Cost Objects
(direct or indirect)
calculated represent
by
consumed consumed Outputs
Resources by Processes
Activities by (products or services)
Organizational View
6

23. Activity Based Costing
Accounting View
direct cost
assigned to
Costs Cost Objects
(direct or indirect)
calculated represent
by
consumed consumed Outputs
Resources by Activities by (products or services)
Organizational View
6

24. Activity Based Costing
Accounting View
direct cost
assigned to
Costs Cost Objects
(direct or indirect)
Activity Cost
calculated represent
Pools
by
gathered
in
consumed consumed Outputs
Resources by Activities by (products or services)
Organizational View
6

25. Activity Based Costing
Accounting View
direct cost
assigned to
Costs Cost Drivers Cost Objects
(direct or indirect)
grouped
by
Activity Cost
calculated represent
Pools
by
gathered
in
consumed consumed Outputs
Resources by Activities by (products or services)
Organizational View
6

26. Activity Based Costing
Accounting View
direct cost
assigned to
assigned assign
Costs Cost Drivers Cost Objects
(direct or indirect) by to
grouped
by
Activity Cost
calculated represent
Pools
by
gathered
in
consumed consumed Outputs
Resources by Activities by (products or services)
Organizational View
6

27. Cumulative Profit
products
customers
7

28. Cumulative Profit
products
customers
Sort all customer by individual profit
7

29. Cumulative Profit
products
customers
Sort all customer by individual profit
Cumulative profit yields ‘Whale Curve’
7

30. Whale Curve Analysis
profit
customers / products
8

31. Whale Curve Analysis
profit
big
customers / products
best 20% yield 130% of result - ‘profit-makers’
8

32. Whale Curve Analysis
small
profit
big
customers / products
best 20% yield 130% of result - ‘profit-makers’
middle 60% yield small result - ‘break-even’
8

33. Whale Curve Analysis
small
profit loss
big
customers / products
best 20% yield 130% of result - ‘profit-makers’
middle 60% yield small result - ‘break-even’
worst 20% diminish result - ‘profit-takers’
8

34. Potential Analysis
profit
customers / products
9

35. Potential Analysis
profit
customers / products
best 20% yield 80% of higher result -> lift curve
9

36. Potential Analysis
profit
customers / products
best 20% yield 80% of higher result -> lift curve
middle 70% yield solid result -> flatten to right
9

37. Potential Analysis
potential
profit
customers / products
best 20% yield 80% of higher result -> lift curve
middle 70% yield solid result -> flatten to right
worst 10% cost only minor profit -> avoid slope
9

38. t
4-Box Action Plan
Target
Strategy
Non-Target
Profitable Loss-making
Profit
10

39. t
4-Box Action Plan
Target
Retain
Strategy
Non-Target
Profitable Loss-making
Profit
10

40. t
4-Box Action Plan
Target
Retain Transform
Strategy
Non-Target
Profitable Loss-making
Profit
10

41. t
4-Box Action Plan
Target
Retain Transform
Strategy
Monitor
Non-Target
Profitable Loss-making
Profit
10

42. t
4-Box Action Plan
Target
Retain Transform
Strategy
Monitor Replace
Non-Target
Profitable Loss-making
Profit
10

43. t
CTS Segmentation
Low CTS
CTS (50%)
High CTS
green blue red
Whale Curve Regime
11

44. t
CTS Segmentation
Low CTS
Retain Increase Transform
CTS (50%)
Monitor Reduce Replace
High CTS
green blue red
Whale Curve Regime
11

45. t
CTS Segmentation
Low CTS
Retain Increase Transform
CTS (50%)
Monitor Reduce Replace
High CTS
green blue red
Whale Curve Regime
11

46. Approach - Summary
12

47. Approach - Summary
• Reflect ‘cost to serve’ via activities to outputs (ABC)
12

48. Approach - Summary
• Reflect ‘cost to serve’ via activities to outputs (ABC)
• Determine customer profitability ‘whale curve’ (CPA)
12

49. Approach - Summary
• Reflect ‘cost to serve’ via activities to outputs (ABC)
• Determine customer profitability ‘whale curve’ (CPA)
• Identify potential by customer segment (curve-change)
12

50. Approach - Summary
• Reflect ‘cost to serve’ via activities to outputs (ABC)
• Determine customer profitability ‘whale curve’ (CPA)
• Identify potential by customer segment (curve-change)
• Use RapidBusinessModeling tool to model and analyze
12

51. Approach - Summary
• Reflect ‘cost to serve’ via activities to outputs (ABC)
• Determine customer profitability ‘whale curve’ (CPA)
• Identify potential by customer segment (curve-change)
• Use RapidBusinessModeling tool to model and analyze
• Decide actions by customer segment (4-Box, 6-Pack)
12

52. Example
13

53. Example
Expenses
Expenses
Expenses
13

54. Example
Expenses
Expenses
Expenses
Products
Products
13

55. Example
Expenses
Expenses
Expenses
Products
Products
Customers
Customers
Customers
Customers
13

56. Example
Expenses Expenses Expenses
Products Products
Customers Customers Customers Customers
13

57. Example
Expenses Expenses Expenses
Products Products
ok
Customers Customers Customers Customers
13

58. Example
Expenses Expenses Expenses
?
Products Products
ok
Customers Customers Customers Customers
13

59. 14

60. Expense 1 Expense 2 Expense 3
?
Product I Product II
ok
Customer a Customer b Customer c Customer d
14

61. Expense 1 Expense 2 Expense 3
Product I Product II
ok
Customer a Customer b Customer c Customer d
14

62. Expense 1 Expense 2 Expense 3
Activity A Activity B Activity C
Product I Product II
ok
Customer a Customer b Customer c Customer d
14

63. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
Product I Product II
ok
Customer a Customer b Customer c Customer d
14

64. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
Product I Product II
ok
Customer a Customer b Customer c Customer d
14

65. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
Product I Product II
ok
Customer a Customer b Customer c Customer d
14

66. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
ok
Product I Product II
ok
Customer a Customer b Customer c Customer d
14

67. Expense 1 Expense 2 Expense 3
Cost
ok
Activity A Activity B Activity C
ok
Product I Product II
ok
Customer a Customer b Customer c Customer d
15

68. Expense 1 Expense 2 Expense 3
Cost
ok
Activity A Activity B Activity C
ok
Revenue
Product I Product II
ok
Customer a Customer b Customer c Customer d
15

69. Expense 1 Expense 2 Expense 3
Cost
ok
Activity A Activity B Activity C
Profit
ok
Revenue
Product I Product II
ok
Customer a Customer b Customer c Customer d
15

70. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
ok
Product I Product II
ok
Customer a Customer b Customer c Customer d
16

71. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
ok
Product I Product II
ok
Customer a Customer b Customer c Customer d
16

72. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
ok
Product I Product II
ok
Customer a Customer b Customer c Customer d
16

73. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
ok
Product I Product II
ok
Customer a Customer b Customer c Customer d
16

74. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
ok
Product I Product II
ok
Customer a Customer b Customer c Customer d
16

75. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
ok
Product I Product II
ok
Customer a Customer b Customer c Customer d
16

76. Expense 1 Expense 2 Expense 3
ok
Activity A Activity B Activity C
ok
Product I Product II
ok
Customer a Customer b Customer c Customer d
16

77. Expense 1 Expense 2 Expense 3
Cost
ok
Activity A Activity B Activity C
Profit
ok
Revenue
Product I Product II
ok
Customer a Customer b Customer c Customer d
17

78. Expense 1 Expense 2 Expense 3
Cost
Cost
ok
Activity A Activity B Activity C
Profit
ok
Revenue
Product I Product II
ok
Customer a Customer b Customer c Customer d
17

79. Expense 1 Expense 2 Expense 3
Cost
Cost
ok
Activity A Activity B Activity C
Profit
ok
Revenue
Product I Product II
ok
Customer a Customer b Customer c Customer d
17

80. Expense 1 Expense 2 Expense 3
Cost
Cost
ok
Activity A Activity B Activity C
Profit
ok
Revenue
Product I Product II
ok
Customer a Customer b Customer c Customer d
17

81. Cost
Profit
Revenue
18

82. Cost
Profit
Revenue
18

83. Cost
Profit
Revenue
18

84. Cost
Profit
Revenue
18

85. Cost
Profit
Revenue
18

86. Cost
Profit
Revenue
18

87. Typical Engagement
• Overview of Approach
• Gathering of Data
• Creation of Model
• Running the Numbers
• Visual Analysis of Results
19

88. RapidBusinessModeling – Improving Profitability
Hans-Gerlach Woudboer
Owner and Founder of RapidBusinessModeling
10 years experience as profitability consultant
27 years ExxonMobil
Master degree Aachen University of Technology
Dr. Thomas Laussermair
President of Visualign Consulting
20 years experience in software engineering, business analysis
Siemens, Microsoft, Citrix Systems
Ph.D. Technical University Munich
RapidBusinessModeling.de Visualign.net
Hans-Gerlach Woudboer Thomas Laussermair
+49 160 530 1809 20 +1 954 802 7577 1