A structured approach to margin management

1. A structured approach to margin management William (Bill) Surphlis Managing Partner Grant Thornton Productivity Improvement T +1 416 366 0100 ext. 7223 E William.Surphlis@ca.gt.com

2. ProductivityHow do you increase it? Process • Process mapping • Best practices • Activity lists • Observations • Planning guidelines System Management • Volume forecasting • Resource planning • Cycle controls • Operating reports • Production meetings • Supervisory model • Active supervision • Management style • Coaching approach • Problem solving

3. Typical observation summaries Detail summary Employee "A" and Employee "B" 44% 56%

4. Management operating system example

5. Supervisor behaviors Proactive management Proactive improvement Training Administration Process work Reactive management

6. Two performance dimensions Good execution Executing a bad plan well Executing a good plan well Operational efficiency Executing a bad plan poorly Executing a good plan poorly Goodplanning Demand management and scheduling

7. 4 steps to defending margins • Our most common client needs: • Desire to improve margins in a sustainable manner • Existence of price/cost pressures across product line • Lack key components of formal margin management activity • Accurate data based on actual performance • Clear responsibility/accountability • Recurring review structure • Departmental improvement projects that have strategic priority Q. What is your Gross Margin Threshold that triggers a review? A. ??? Defending margins starts with sound margin management.

8. 4 steps to defending margins Step 1: Quick results and data validation • Quick results • Utilize a workshop or meetings with key staff to identify cost reduction opportunities • Prioritize those that require low capital and short implementation window • Increase prices • Utilize minor price increases (<5%) according to product type and customer strategy • Larger increases suitable for non-strategic customers

9. 4 steps to defending margins Step 1: Quick results and data validation • Data validation • Decide on data to use for decision making • Gross Margin • Contribution • Fixed cost allocation • Review accuracy/relevance of all data used to calculate SKU/customer metric • Integration of actual data essential • Consideration for frequency of updating costs

10. 4 steps to defending margins Step 2: Margin management structure • Establish threshold that will trigger review • Gross Margin <25% or under total firm value • Design meeting structure • Monthly review of SKU based data • Quarterly review of customer based data • Departmental updates on high priority projects • Assign responsibility • Initially resides with President/CEO and potential transfer a year following implementation • Begin communication and set context • Clarify context and reasons for establishing program • Communicate to staff team

11. 4 steps to defending margins Step 3: Data analysis • Deliver data set for review by management team • Feedback and "gut test" iterative process • Client example: • High value SKUs: 80% of Gross Margin $ generated from 54(17%) SKUs • Low value SKUs: 255(82%) generated only 20% of Gross Margin $, some at a significant loss • How many SKUs account for 80% of your overall GM$?

12. 4 steps to defending margins Step 4: Taking action • Begin review meetings • Identify action plans for all products below threshold • Increase price • Recipe/BOM modification • Focus on most expensive ingredients • Reduce amount or cost of packaging • Quantity reduction • Maintain price • Reduce material waste in process • Reduce labour cost in process • Increase production using current labour and equipment • Capital investment for core and strategic products • Assign actions and track progress

13. Margin managementKey industry themes • Need to understand your costs to manage margins • Data analysis and repositories that reflect activities performed • Need processes and tools to make thoughtful decisions • Dynamic and flexible management systems • Most organizations lack a good understanding of where they make and/or lose money • Focus on what makes you money • Understand your market position and competitive forces • How can you best compete

14. Margin managementKey industry themes • Pricing and portfolio management • Develop a responsive, portfolio-based pricing model that considers internal and external perspectives and ensure controls exist at the execution level • Sales management and effectiveness • Productivity of your sales organization and market initiatives • Develop a system that maximizes active selling and prospecting and directs and tracks sales activity in line with the company objectives • Implement forecasting procedures and accuracy measures • Organizational structure • Redefinition of the organization structure to maximize company and functional performance through motivating the right people in the chosen direction

15. Margin management assessment"Focus on what makes you money" • Types of analysis include: • Productivity assessment • Market, category and channel assessment • Portfolio segmentation and rationalization (by sales, customer, geography, distribution, brand, product, SKU, etc.) • Activity based costing • Overhead allocations (by cost centre, sq ft, function, department, etc.) • Porter's 5 Competitive Forces • Growth Share Matrix • 80/20 rules • Glenday Analysis • Pricing strategies • Seasonality

16. Sample data analysis and management tools Contribution margin analysis-airline co. 8 aircraft generate $1.8M in contribution STARS 15 aircraft generate -$1.437M in contribution DOGS *Total contribution calculated to be $368,000 for all 23 aircraft

17. Sample data analysis and management tools Growth share matrix-airline co. 9 routes generate 50% of annual GM$ 37 routes have positive GM% but low GM$ STARS ? QUESTION MARKS 18 routes generate another 45% of annual GM$ 34 routes have negative GM% and GM$ totaling -$1,653,525 CASH COWS DOGS

18. Sample data analysis and management tools Product matrix analysis-food processor Margin analysis by product (period 5 actual) Company COGNOS Summary: Revenue $9,561,062 Net GM $465,151 4.9% Net GM (Samples and TS) $(9,393) Net GM (COGNOS) $455,758 4.8%

19. Sample data analysis and management tools Glenday SKU analysis-food processor • 33% of SKU's (267) represent 95% of sales • 67% of SKU's (541) represent 5% of sales

20. Sample data analysis and management tools Margin improvement plan and operating report- food processor

21. Sample Case Studies • Pinty's Delicious Foods (chicken processing) • ROI from 3.5 to 1 • Swish Maintenance Ltd. (cleaning products) • ROI from 4.0 to 1 • Sanofi Pasteur (vaccines) • ROI 5.7 to 1 • Ganong (chocolate) • ROI 2 to 1

22. Case Study APinty's Delicious Foods • Approach • Rationalized product and customer portfolios • Installed a system to improve pricing capabilities • Installing a sales management system • Management of distribution and logistics costs • Focus on trade spend investments that generate maximum return

23. Case Study A (cont'd) • Project results • 3.5:1 Project Return on Investment in 9 months • Profit margin increased by 5.1% • Increased sales by 6% • 4% increase in order fill ratio • Accounts receivable reduced by $2M • Outstanding trade claim backlog reduced by 69%

24. Case Study B Swish Maintenance Ltd. • Approach • Analyzed existing sales performance and efficiency data • Implemented new procedures and policies for sales call planning, target setting, customer segmentation and sales call reporting • Delivered customized applied management training to sales managers • Increased accountability of sales force by setting and measuring clearly defined targets and performance expectation

25. Case Study B (cont'd) • Project results • 4:1 project return on investment • 18% increase in margins • 11% increase in revenues • Increased new account acquisition volumes • Increased existing account penetration Productivity Improvement Profit Improvement 33% 27% 37% 18% Selling time Customer calls # Quotes

26. Case Study CSanofi Pasteur • Situation • Allocations were based on budgeted numbers, not actual results • Quality, industrial project management, profit sharing unabsorbed • 25% of total cost of goods sold unabsorbed • Approach • Develop an Activity Based Costing model to help achieve the following: • Strategic pricing, capacity planning, transfer pricing • Actual production cost and accurate variance reporting • Budgeting on activities

27. Case Study C (cont'd) • Project results • 5.7:1 Project Return on Investment • Cost base moved from 64% to 9% unexplainable • System successfully implement and installed globally

28. Case Study DGanong • Situation • 700+ SKU's, with over 300 active in the last year • Cost data available is based on initial budgets for each product • All departments cited a lack of trust in costs as reason for inaction • Approach • Install costing system to deliver actuals for labour, materials, and overhead • Initiative lead at CEO level to establish priority and formalize a process

29. Case Study DGanong • Project results • Actual cost and margin data updated for review by sales, operations and executive team • Currently in decision making stage of SKUs to eliminate or raise prices • Education of sales team is a high priority as 95% of GM$ is driven by 20% of SKUs

30. Structured approach

31. Productivity assessment"How you can best compete" • Types of analysis include: • Interviews with key personnel • Conduct studies to determine the level of opportunity in the operation • Conduct several detailed studies in your organization • Analyze the management systems and data to determine whether gaps exist that hamper the flow of information for appropriate and timely decision making • Create a summary of opportunities for each of the operations • Understand the capacity and capability constraints of current processes • Estimate value of opportunities if implemented • Create preliminary schedule for implementation with ROI calculations • Estimate a project "cash flow" that can be monitored for schedule attainment during an implementation

32. Market assessment"How can you sell more of the right product" • Types of analysis include: • Review existing sales and marketing plans and market studies • Review and discuss the target markets domestically and internationally • Review your plans for sales growth and estimate the additional capacity or capability required to serve market channels • Determine, recommend, and prioritize alternatives for new markets • Conduct an overview of your product portfolio, sales and distribution channels to determine improvement opportunities • Conduct a SWOT analysis • Conduct preliminary market research • Assess market attractiveness and potential of a product • Select the best alternative and define the rational by estimating the project cost, timelines and payback

33. Questions? Thankyou!

34. An analysis technique that allows practitioners to prioritize and target improvement efforts on a few high-volume procedures, processes, units or activities (PPUAs). As seen in the table below, GS maintains that in most cases about 6 percent of PPUAs account for about 50 percent of volume. Additionally, GS classifies and color-codes all PPUAs into four different volume groups. For example, if a manufacturer makes 200 different parts, GS maintains that approximately 12 parts account for 50 percent of sales; these 12 parts would be in the green group and would ideally be the focus of any initial improvement activities, as they would yield the greatest benefit.