Global Industrial Products Manufacturer
We engaged at a fully integrated global commodity manufacturer that was struggling with declining margins, increasing operating expenses and the lowest return on capital in its peer group. A new business unit President had recently been appointed to turnaround the business. Accunomics assisted in growing the businesses’ profitability by over $300 Million, and increasing return on capital from 3% to 30% in just 18 months.
Accunomics’ initial financial analysis revealed that 80% of the business’ revenue was coming from just 3% of its customers and 6% of its products. The large number of small customers and products was driving significant complexity in the business, and requiring high levels of operating expense to support. The company executives committed to the imperative that every customer must be profitable, providing the mandate to rationalize the portfolio.
Customer Segment Optimization
Accunomics began with a strategic review of the company’s global operations – a portfolio of businesses that spanned over 60 countries, 25 languages and 15 operational ERP systems. The initial profitability modeling effort revealed that 25% of the portfolio markets were unprofitable, and the next 50% of the markets contributed just 10% of the earnings. In conjunction with the client’s internal strategy group, Accunomics helped determine if each market would be grown, harvested, restructured or exited.
Product Portfolio Optimization
We collaborated closely with the client’s product development organization to reduce the number of SKUs. Many products were legacies of a prior merger, while others were the result of the company’s complex operating footprint. A substitution matrix was developed to assist sales people in migrating customers to a smaller set of products, and in many cases higher margin products that offered the same specifications were identified. Our work resulted in a 38% reduction in SKUs, and a 43% reduction in supporting labor.
Price and Discount Optimization
Simultaneously, we began identifying opportunities in improve average selling prices. To assess the potential volume impacts of both product and pricing changes, Accunomics developed scenario models at the market and customer level. Increases were piloted in smaller markets or with smaller customers. The successive tests helped determine the elasticity of demand for the company’s products, and revealed substantial additional value for which customers were willing to pay. As a result and subsequent market trends, the company was able to boost average selling prices by 30%, and increase gross profits by 73%.
The company was organized by region, with each market area requiring multiple functional specialists. We identified opportunities to matrix functional expertise across regions. This streamlined global organization model, along with dramatic productivity gains in sales and marketing, resulted in a 36% reduction in required staffing.
Management Operating System
Prior to launching the transformation effort, the company operated with functional financial statements and management objectives. Account managers and market leaders were incented by volume and gross margin, rather than profitability. Further, with over 15 different operating systems, the company lacked a consistent view of their operating results.
We consolidated the results of its profitability models into a single, global management operating system (MOS). From the President of the company through the front line sales person, everyone had the same ‘single version of the truth’ delivered through a web-based interface. Sales persons were able to easily evaluate customer profitability, and were required to review key metrics and corrective actions with management are regular intervals. Sales people were trained on the key levers to use to manage customer level profitability, such as adjusting discounts and service levels, and provided with talking points to use in communicating changes to customers.