This Article Deals with the Product and Customer Profitability of Companies Based upon a Small Bakery
You can always create detailed business model, starting from a general ledger. This goes together with other product or sales related data.
The purpose of the exercise is based, among other things, on the consideration that decisions made every day in every company. The impact of this, for example, price for a product decision must also be understood in terms of profit in every individual transaction.
However, this requires a detailed business model.
That means creating a detailed business model that also shows the profit and loss account (P&L) for each dimension. This must be based on the cause-and-effect-based drivers. (Causality principle as applied in ActivityBasedCosting).
The company must therefore take appropriate operational measures to ensure that“stay profitable on each transaction”rules are applied. Then unprofitable transactions can not occur.
In a company with suitable profit and cost tools, plus, the knowledge which goes along with the software, a situation like the one shown in the picture below should not happen.
Nevertheless, it is not uncommon – and largely misunderstood – that approx. 40% of all customers are unprofitable!
In addition to the daily small decisions, which in total can have a huge impact on the company’s profits- see also the picture above – as an entrepreneur you are required to work on your company and less in your company.
And this is more about strategic and tactical, often far-reaching decisions that point to the future of the company, which it is right to make.
Therefore, the maxim we recommend applies:
“Good Decisions Require Good Models”
Has dedicated itself precisely to this task and helps you to achieve this goal.
In the following case, the product and customer profitability is examined in more detail using the example of a German bakery.
The background is the following story:2 people were meeting, a passionate baker and a passionate specialist for profit improvement by means of business modeling.
Baker: I would like to bring a bread onto the market according to the motto:
“As before “. After an in-depth discussion of the topic, the vision of a new and interesting business developed at the business modeler mind. Images in his mind, such as Europe or worldwide productions, showed up. Everything conceptually with the appropriate know-how to ensure quality and the associated logistics. And all this on the premise of a highly profitable and sustainable business.
Even if bread is produced by more than 10,000 companies – mostly in the SME arena. About 50 years ago there were some 55,000 bakeries, but soon the dying of the bakery began – one of the reasons certainly lies in the application of the wrong cost model. Or maybe even worse, having no cost model at all.
If you look at the huge products range of a typical German bakery, the customer can draw on the full. The question naturally arises: is this sustainable? Does this mean that the bakery is making a sustainable profit? This is so important because this is the basis, the only way to ensure the future of the bakery.
In fact, of course, we keep reading about the bakery dying in Germany. In an autopsy of such a company, you will find most likely cause number 1:
There is no cost model that follows the cause and effect principles. Or the wrong cost model is often used. That is, there is a typical allocation with completely wrong allocation keys …
As a result, costs that are too low determined for products with small production quantities and costs that are too high are calculated for products with large quantities.
Here we can already see the issue: the large number of products offered, typically leads to small quantities and therefore mathematically too much at low prices based on the wrong costs.
You can create a graphic in which the profit of the product is sorted and cumulated. It is often the case that 40% of the products are unprofitable. You can also find typical profit distributions in which 20% of the products already generate 80% of the total profit.
Back to our Bakery story: so the 2 guys came to grips and started their partnership business on making bread as it used to be! All of the premise “We just do it better“.
A series of trials and test sales followed, and the ideas took shape. Even better: one can bite into it!
And you’re blown away! It just doesn’t exist anywhere else! The question now is how best to develop this further. On the one hand there is the production and the related issue of product quality and consistency!
You don’t believe how many variables there are with three components. That means: flour, water, sea-salt. Since it is sourdough based and this is a preliminary stage consisting of flour and water, there are enormous amount of influencing factors and possibilities in this pre- process, which under certain circumstances (temperature, weather, air humidity, as the baker is on the day, …) not always lead to the desired result.
Of course, a baker feels this. On the other hand, the business modeler (BMer), with its extensive experience in the production of products and compliance with product quality using statistical quality control (SPC), sees this quite differently, of course, but he is not the producer!
However, there is the typical attitude of the BMer: once he hangs himself in, stay on the ball.
As part of the project, a detailed cost and sales analysis of the existing bakery, in which the LikeInOldTimesBread was quickly created.
Now you are probably saying why model the whole bakery if I just want to make one bread! Experience shows that it is necessary, at least if you want to get it right.
The implementation of the bakery model is based on the real data base, but only for part of the year. In addition to many details such as: actual costs, drivers used, among other things also the profitability representation of the products shows up. The representation of the profitability of over 150 products gives the following picture:
The green-blue-red line shows the accumulated profitability.
In the present case, it looks like this:
This would almost triple the result. Also it would include a lot of discussion about the changed, mostly non-value-adding activities.
RBM basically makes the conservative statement: +30 % profit, or better are possible, provided you management do the necessary change management!
But here comes the much better approach: focusing on the most profitable products.
And then you get a completely different picture and the way to get there is also much easier.
The model behind it calculates the actual costs with corresponding assignments about the activities carried out with drivers that are responsible for the cause.
And this for each dimension: product, order, customer,etc, including a profit and loss for each dimension. On the basis of these generally applicable business model calculations, RBM also has a so called: TwoStepProfitIncrease methodology.
In essence, an internal benchmarking (Gap Analysis)and a monopoly analysis for three customer segments create an improved profit model. Through multidimensional simulation of the main influencing factors, i.e. profit levers, this can be used to improve the result essentially.
This means that the focus on the essential products would certainly have helped to prevent or reduce the dying of bakeries in Germany. Of course there are other complex reasons, but I don’t want to go into this here.
Back to our story of: LikeInOldTimesBread. The sale on Amazon was then started relatively quickly and one was able to sell Europe-wide. Among other things, this also means that extensive sales data are now available, from which a multi-dimensional profit cost & revenue model can then be created.
An update only takes a few minutes and you have the appropriate data and graphics available to be able to better evaluate your business in order to take appropriate improvement actions.
See also the following screenshots
Overview Flowbuilder
Profit order number-Id as WhaleCurve
Left axis Profit against bars, right axis cumulative Profit against green-blue-red line
The bakery model roughly described here also represents new start-ups in the enterprise area. Startups of this kind, particularly taking advantage of the so-called business model canvas, benefit in particular. Especially if operational data is already available.
Our Rapid Prototyping Business Model Approach in combination with existing data leads very quickly to convincing and desired business advantages desired by potential investors.
