Most companies are flying blindfolded when it comes to controlling profitability. It’s not that they can’t measure profit margins. They know how the business is performing in terms of overall profit. They just don’t have visibility to the drivers that determine profitability.
Profit is an outcome of a number of drivers that are constantly changing. Unless you have visibility to these drivers you don’t have control of profitability. In reality, profit has control over you.
Price, cost, mix and volume are four fundamental drivers that have significant impact on profits. While many companies have a handle on costs (some manufacturers being the exception) many aren’t measuring price, mix and volume. As any one of these drivers change so does profit margin. And, most often, all drivers are changing simultaneously. It’s why many managers blame mix for changes in profit even when they have no visibility to it. At best, they’re left to guess how these drivers impact profit.
Getting visibility to profit drivers isn’t hard if you have the right data and tools. Sales transaction data combined with cost data provides the necessary inputs that allow you to see changes both globally and at the most granular level. Analytical tools designed to show price, cost, mix and volume are readily available and give you the ability to quickly get to the most actionable insights.
Having visibility in reporting is great. But, being able to respond to trends in price, cost, mix and volume puts money to the bottom line. Seeing profit driver performance for customers, product groups, markets, items and even sales people becomes actionable. As one CEO said, “You’ll see things in your business you never imagined.”
In one case, a manufacturer of construction products implemented a price increase earlier this year. Being able to measure increases at the customer level and sales rep level allowed management to identify underperformers and take rapid corrective action.
A wholesale distributor is able to isolate mix and volume from price increases to see which accounts are contributing to improved profitability and which ones are a drag on margins.
And, an industrial equipment company can see which accounts are impacting mix and by exactly how much.
Having access to profit driver metrics puts you in control of profitability. We’ll be expanding on the topic of price and profit management in upcoming newsletters.
If you want to learn more about controlling profitability contact Ralph Zuponcic at 330-958-4036 or firstname.lastname@example.org.