A Millennial impact on FMCG Packaging

March 21, 2017 11:11 am
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Millennials are having a growing influence in how organisations do business. With a population of 16.2 million (2016) or approximately 25%, this is now the largest single demographic in the UK. The needs of this demographic vary greatly to those of the baby boomers, and generations X and Y. Yet this impact is not limited to how millennials are accommodated within businesses. Their values transcend across all aspects of life, and FMCG packaging is one area of notable change.

In a typical supermarket, a shopper will pass about 600 items per minute – one item every tenth of a second. Consequently, the competition in this space is intense and packaging has a crucial role to play. Brands need to constantly find creative ways to gain attention and generate interest in their products, and packaging is fast becoming a USP in targeting millennials.

Traditionally, packaging has been used for several core functions:

  • Protection of goods from damage or contamination
  • Marketing
  • Information transfer
  • Convenience of handling and storage
  • Security

However, the role of packaging has evolved over the years, and now the needs of millennials must be considered. Millennials are attributed with several characteristics which drive different consumer behaviours from other demographics. Principally, these include:

  • High expectations
  • Technologically immersed
  • Thought diversity
  • Convenience
  • Socially responsible

When considering how these characteristics influence consumer decision-making, a clear distinction is evident between Millennials and others. As a growing sector, these customers represent the largest market share of any single demographic. Strategically, businesses need to consider whether this sector supports their long-term objectives, and if so, what transitions are required to sustain or grow their reach with the market place. Arguably, packaging will be one of the greatest opportunities.

To appeal to Millennials, aligning packaging to their values is likely to provide a USP which makes the greatest impression. Here are some key characteristics to consider when defining how packaging can attract your target audience:

Experience Seekers

Interactive packaging, which offers more than just the aforementioned traditional benefits, will generate intrigue. Using packaging to create a sense of adventure can be a product/brand differentiator. Examples include Origami Bottle, and smart labels (QR codes)

Social Media Savvy

Millennials spend, on average, more than 25 hours a week online. Digital accessibility on packaging linked to social media can facilitate advertising, promotions or information sharing. Influencer marketing is an effective way to create brand awareness, leveraging off peer-to-peer networks. So ask, “Is this package instagrammable?”

Self-orientated

Individuality, customisation and differentiation are important aspects for Millennials. They demand products which speak to them as a person, and reflect their values. Coca Cola’s ‘share a Coke’ campaign with personalised names on bottles is an example of this approach to packaging.

Open mindedness

Brand loyalty is less of a concern with factors such as uniqueness and technology prioritised. Packaging can be used to appeal to individuals as an extension of marketing campaigns. Reliance on traditional brand loyalty and a one-size-fits-all approach won’t reach the masses of this market. According to Boston Consulting Group (BCG), half of U.S. Millennials aged 18 to 24 and 38% of those aged 25 to 34 agreed that brands “say something about who I am, my values, and where I fit in”.

Socially Responsible

With increased on-the-go purchases and convenience shopping habits, millennials are conscious of their impact on the environment – and this, therefore, extends to their brand selection. Recycled, carbon neutral and biodegradable materials are generally preferred. Yet this extends beyond green living. Per the 2015 “Millennial Impact Report”, 84% of Millennials made a charitable donation in the last year, and 70% had volunteered for a cause. These values are deep-rooted and an extension of the individual.

The core role of packaging may continue to support the traditional requirements, but the impact of millennials is causing many FMCG manufacturers and retailers to consider the wider implications of their approach.

 

Written by Arron Delamare, Coriolis Consulting Pty Ltd

References;

http://www.fastenercomponents.com/news/how-millennials-are-influencing-plastic-packaging/

http://www.packagingdigest.com/packaging-design/the-millennial-factor-how-a-generation-of-consumers-is-transforming-todays-packaging-landscape-2016-04-06

https://www.boundless.com/marketing/textbooks/boundless-marketing-textbook/branding-and-packaging-10/packaging-75/the-purposes-of-packaging-379-4135/

http://www.printmediacentr.com/wp-content/uploads/2014/01/millennial-culture-and-your-printing-company.jpg?9e10ae

http://www.midiassociais.net/wp-content/uploads/2011/06/stat-millennials-shop-mix-062911.jpg

http://www.ausfoodnews.com.au/2017/01/27/how-and-y-millennials-are-changing-packaging.html

Supermarket wars: The ALDI approach

February 28, 2017 10:46 am
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ALDI has been a key point of contention amongst the Australian grocery industry for several years. This is of no surprise, considering ALDI’s Australian market share increased by nearly 7% over the past eight years, with consumer numbers growing five times as quickly as its major competitors. It is estimated that Australian supermarkets give up approximately $6B in sales annually to the discount retailer.

Woolworths and Coles are responding to this changing retail landscape by taking a page from ALDI’s playbook. Prices are being slashed and promotional activity is increasing, cited in numerous ‘price war’ news; private-label ranges are expanding and re-branding with an emphasis on increased quality. Investment in store upgrades to improve the customer experience are also ongoing. Additionally, both major grocers are employing British trained retail executives who can draw upon the Australian and UK supermarket industry parallels, including ALDI’s impact, as recently seen with Woolworth’s hiring of ex-Tesco COO Claire Peters.

Despite competitor efforts, ALDI will continue to aggressively fight in the Australian supermarket war. The discount retailer has plans to grow to 15% market share in the next four years, a $700M program to expand to over 500 stores including major developments in Western Australia and South Australia, and an aim to compete with its rivals in fresh food offerings.

What are the key drivers behind ALDI’s success?

ALDI’s mission is simple, to provide the customer with incredibly high quality at impossibly low prices. In some instances, ALDI’s products are 50% cheaper than those offered by its competitors. A deep dive through ALDI’s supply chain provides an understanding of how the discount retailer can maintain its competitive price advantage:

  • The Products: ALDI exclusive brands account for 90% of their shelf space, driving supply prices down. These exclusive brands often mimic nationally branded products that shoppers know and trust, but retail at a much lower price. They maintain a low number of stock-keeping units (SKUs) carrying 1,350 in a typical store, whist other competitors carry upwards of 20,000 SKUs. This low number of SKUs results in reduced handling costs, increased purchasing power for negotiation on economies of scale, and agility when overhauling product quality, prices, or ranges. This also means that stores can be smaller, requiring less initial investment in footprint of land, building materials, rent, and every day reduced utility usage.
  • The Suppliers: ALDI does not charge suppliers for shelf space or marketing fees. They also maintain that they keep their terms and conditions very simple. Emphasis is placed on maintaining good supplier relationships; in 2016, ALDI announced expansion plans to its suppliers rather than the media. They asked for feedback on how they could manage the inherent production challenges with the expansion. The lack of brands and promotions the store offers also removes the common power struggle between the retailer and supplier.
  • The Operating Model: ALDI maintains a simplified supply chain, with local decentralised operations acting as independent business units. This allows decisions to be made quickly and solutions to be developed and implemented immediately, increasing efficiency. The distribution network is also highly streamlined. Delivery routes are kept short by ensuring each region has its own full service logistics centre and vehicle fleet. This allows them to supply up to 100 stores daily, avoiding stock-outs.
  • The Stores: None of ALDI’s stores are open 24-hours, reducing staffing costs and utility usage. Staffing is simplified; there are no butchers or bakers, and employees are trained to perform all store tasks. Product is packaged so that it can move from the production facility to the truck to the supermarket floor without being unpacked. This reduces shelf stock time. For example, milk is delivered on wheeled units that are pushed in from the rear, ensuring a ‘First In, First Out’ policy.
  • The Checkout Process: Customers are required to bring their own carrier bags, eliminating the cost that other major supermarkets absorb. ALDI also makes money off any forgotten bags, charging customers between $0.15 and $2.49 for re-useable, branded bags. The check-out lines have long belts, capable of holding a large amount of product and thus minimising the number of tills and employees required. Packaging has a barcode on more than one surface, increasing efficiency at the checkout. Customers are also required to pack their goods away from the till point, further speeding up the overall process.

ALDI has built its business through mastering the art of a lean supply chain and has successfully grown its market share around the world by passing on discounts to its consumers. This tactic is what enables the retailer to penetrate and grow in high-margin grocery markets with a few major competitors.

Will ALDI achieve its aggressive Australian growth target?

Whilst ALDI has undoubtedly changed the Australian supermarket scene with their lean tactics, there is debate about whether this strategy is solid enough to maintain their growth trajectory. Several key risks exist that threaten to hinder ALDI’s growth in Australia:

  1. The Australian consumer landscape is shifting, with Millennials and Ethnic Australians projected to comprise the majority of retail spend by 2021. These consumers predominately want healthy, fresh, good quality, and free-from options with on-the-go convenience (eg. online shopping). They are well-informed, globally connected, and willing to pay more for brands that they feel will make a positive impact on society, with a strong preference for sustainable and local production (eg. Thank you company).
  1. Lidl, another discount supermarket chain which operates more stores than ALDI worldwide, has plans to open in Australia. The discounter has applied for Australian trademarks covering thousands of items found in a supermarket. Lidl has the same advantages as ALDI in terms of global buying power, expertise, and experience, but offers even lower prices to consumers.
  1. The Australian grocery industry has a ready-made road map to battle ALDI, taken from its European counterparts. French retailers are cited as the only supermarkets to have successfully fought back and decreased ALDI’s market share, forcing them to close dozens of stores in 2013. They did this by expanding their budget product lines, offering fewer complex promotions, simplifying own brand ranges, working with suppliers to cut the cost of branded items, rolling out convenience stores, and increasing their presence online. And it’s paid off; they’ve managed to come in 13% cheaper on own brand goods than ALDI and only 5% more expensive on branded products. The UK has followed suit, with Tesco matching ALDI on 200 of its core own-label products, a key factor in the slump of ALDI’s UK sales growth in 2016.

In addition to these risks, traditional retailers offer unique selling points such as hypermarkets, online shopping and delivery, as well as fresher product selection which ALDI stores have traditionally avoided. Woolworths and Coles are taking steps in the right direction to battle the discount retailer, and are doing so at a faster pace than ALDI’s European competition. If ALDI wants to reach its aggressive market share goal, it will need to build a strategic plan that relies less heavily on rampant store-opening across the country. The supermarket war is far from over.

Written by Karen Starr, Coriolis Consulting Pty Ltd

References:

http://www.ausfoodnews.com.au/2016/11/02/aldi-aims-to-increase-market-share.html

https://insidefmcg.com.au/2016/11/09/dick-smith-blames-aldi-for-spc-dumping/#daily

https://insidefmcg.com.au/2016/11/04/aldi-charts-expansion-plans/#daily

http://thenewdaily.com.au/money/finance-news/2015/05/24/secret-aldis-super-low-prices/

http://www.smh.com.au/business/retail/aldi-urged-to-come-clean-on-accounts-20160925-gro1lv.html

http://www.nytimes.com/2011/03/30/business/30aldi.html

http://www.ibisworld.com.au/industry/default.aspx?indid=1834

https://www.theguardian.com/global/2016/apr/02/aldi-cranks-up-pressure-big-four-supermarkets

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11127811/Five-numbers-that-show-how-Aldi-has-revolutionised-grocery-shopping.html

http://www.euromonitor.com/grocery-retailers-in-australia/report

https://www.aldisuppliers.com.au/PDF/ALDI-Corporate-Brochure.pdf

http://businesscasestudies.co.uk/aldi/competitive-advantage-through-efficiency/lean-production.html#axzz4OvSlq1pB

http://www.spiegel.de/international/business/a-secretive-family-s-success-what-makes-the-aldi-discount-empire-tick-a-709937-2.html

http://www.euromonitor.com/grocery-retailers-in-australia/report

http://www.roymorgan.com/findings/6762-supermarket-sweep-aldis-share-of-aussie-market-still-rising-201604142258

https://insidefmcg.com.au/2017/01/23/why-australian-supermarkets-continue-to-look-to-the-uk-for-leadership/#daily

https://insidefmcg.com.au/2017/01/23/why-australian-supermarkets-continue-to-look-to-the-uk-for-leadership/#daily

http://www.theaustralian.com.au/life/weekend-australian-magazine/how-aldi-supermarkets-created-converts-in-australia/news-story/c9a22fdae3419fba96471adc61ae374e

http://www.economist.com/news/business/21646224-german-discounters-successful-business-model-only-stretches-so-far-tomorrow-not-quite

http://www.dailymail.co.uk/news/article-3807122/German-discount-supermarket-giant-Lidl-set-open-Australia.html

http://www.mirror.co.uk/money/personal-finance/how-french-stopped-aldi-lidl-4474233

http://www.ausfoodnews.com.au/2017/01/23/loyalty-programs-win-australian-shoppers-nielsen.html

Clive Black joins the Coriolis Advisory Board

January 23, 2017 11:24 am
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As a global provider of expertise and experience in the delivery of business transformation to the FMCG sector, we are pleased to announce that one of the UK’s top Consumer Analysts Clive Black has joined our Advisory Board. Operating globally from our offices in Nottingham, UK and Sydney, Australia, we have made the appointment with the aim of reinforcing our understanding of the rapidly moving FMCG marketplace.

Dr. Clive Black, who is Head of Research for Shore Capital commented; “Coriolis is a tremendously well-respected and renowned advisory business that continues to add recurring value to advanced companies across the world. It is a great privilege to be asked to assist the group’s Board on its development plans and I very much look forward to engaging with Mark and his expert team with the aspiration of contributing to further commercial progress.”

On the appointment, our Chairman Mark Dudley said; “Clive’s knowledge and understanding of our markets and the forces that drive them is second to none. I welcome his appointment and look forward to his valued input on how Coriolis can deliver even greater value to our Clients.”

If you would like to keep up to date with the latest news about Coriolis, follow our company page on LinkedIn here.

Meetings: a practical alternative to work

November 17, 2016 10:08 am
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A calendar reminder surfaces on the screen for the fifth time today; 15 minutes until ‘Generic Meeting #5’ of the day commences; a quick flick of the mouse; snooze and sigh.

Although there are still 15 minutes to go, the disruption of the meeting has already begun. A cynical view, perhaps, yet meetings account for an increasing number of hours in our working day, with most employees considering them a waste of time. So how can we transform a dysfunctional meeting into an effective one?

New research from Epson and the Centre for Economics and Business Research (Cebr) has found workers waste 2 hours and 39 minutes in meetings every week and this is costing businesses an estimated £26 billion a year.

The report found that if these wasted hours had been spent productively this would equate to roughly 13 million more productive hours per week and an annual increase in gross domestic product (GDP) of approximately 1.7 per cent.

According to a survey of U.S. professionals, meetings ranked as the number one office productivity killer.

Try following this simple 5 step plan of meeting effectiveness to reclaim your day and that of your colleagues:

  1. Consider the meeting’s objectives

An effective meeting serves a specific and defined purpose. Before planning for a meeting, the focus must be on the objective. To determine the objective, try completing this sentence;

“At the close of the meeting, I want the group to…”

 A clearly defined outcome can then be supported by suitable content.

One way to support this is to be action focused throughout, using ‘actions’ to strengthen the overarching objective. Take actions for all matters which are not on-track/unsatisfactory and use these to sustain improvement. Actions are a great way of ensuring meetings maintain their value, whilst keeping attendees engaged.

  1. Invite the right people

When establishing a meeting, think about who really needs to be there. If you’re not sure of your own judgement, just ask other people for their opinion also. Remember, more attendees does not equal a better meeting. If attendance is not necessary, follow up with a memo for those who only need to be informed of the meeting outcomes.

Before the meeting, always be sure to brief attendees on the purpose of the meeting and why their attendance is important. If you can’t justify their attendance, then cancel the invite.

  1. Develop an agenda

An agenda is pivotal to running an effective meeting. It provides structure, timeliness, and roles for participants of the meeting. Use it as an opportunity to get immediate engagement; who will chair? who will scribe actions?

The agenda needs to support the outcomes identified for the meeting. It should capture the activities needed to realise the outcomes successfully, doing so in a pragmatic flow. Utilise this structure to further engage all participants by involving them early on with something to do. Develop an agenda that promotes the meeting you want to happen.

  1. Establish ground rules

A Code of Conduct creates a reference point for behavioural expectations. Introduce a code of conduct which encourages;

  • Participation
  • Following the agenda
  • One person speaks at a time
  • Action focus
  • Banning all technology
  • Start on time/end on time

And remember – take no hostages. There is always the possibility for one person to hijack a meeting by talking more than their fair share. Should this happen, call them out by saying, “We appreciate your contribution, but let’s now consider the opinion of others…”. Don’t be shy about it. Setting early ground rules gives clarity to the behaviours expected.

  1. Evaluate & close out

Once all is said and done, how successful was the meeting? Before releasing participants back into the wild, be sure to use some form of appraisal. This will allow you to continue to make subtle changes to ensure the meeting strives to be effective. Some suggestions would be;

  • Meeting close out form – appraise against specific criteria
  • ‘Round table’ approach – quickly capturing attendees’ feedback in the room
  • Have each participant rank the meeting 1-5

When closing out, always end on time. Ensure you leave 5-10 minutes to capture the above feedback before time is up. Confirm how minutes or actions will be communicated and followed up – just because the meeting is over, doesn’t mean the work is done!

In Summary

Now briefed with some key success factors required to host an effective meeting, try reviewing your current state and see if there may be areas for alteration. If you can create a meeting with a clear structure, defined objectives and good behaviours, you may just become the saviour who bucks the meeting-phobia trend.

 

Written by Arron Delamare, Coriolis Consulting Pty Ltd

References:

www.forbes.com

http://managementhelp.org

www.mindtools.com

www.meetingeffectiveness.com

www.economictimes.indiatimes.com

www.techradar.com

www.salary.com

How to: build an SKU Profitability model

November 10, 2016 3:28 pm
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Did this morning’s production run actually make any money?

Do you know which products in your business are actually making money? Do you know what factors could make these products more profitable, or conversely, stop them from being profitable? Many companies rely too heavily on their standard costings and do not have visibility to the true operational margins of their products.

During a recent analysis for a client, we found that over 60% of the company’s SKU’s were not at their target profit margins, and 20% were in fact, unprofitable. With operating environments in a state of constant flux, it is important to invest time and resources to build a tool that can present an understanding of true SKU performance, herein referred to as an SKU profitability model.

An SKU profitability model is one of the most powerful tools for your business. It provides:

  • A leading indication of the margin performance for each SKU and SKU group
  • Ability to cost new products and enable decisions prior to introduction
  • Information as to which products to sell or promote
  • Focus areas for operational improvement projects
  • Visibility to operational performance against costed standards
  • Understanding of which SKU’s should be rationalised in your portfolio

Fortunately, building a SKU profitability model does not have to be a complicated exercise. It does not require investment into sophisticated software. All of the information you need is sitting within your business.

Building the Model

Let’s assume you are in the cheese manufacturing business, Say Cheese Enterprises. One of your key customers, Cheese Master grocer, has suggested you cut the sales price of Camembert cases down by $1.00. You know that your company’s target profit margin for each SKU needs to be at least 20%, and the standard costing currently gives you a margin of 22%. However, a senior operator on the Camembert line retired several months ago, and the line has been running slower than before and producing more waste than usual. There are still eight months to go before your business refreshes costed standards, and your customer wants a response within the next fortnight. You decide to build an SKU profitability model to help you answer the question.

Assuming this model will eventually contain every SKU which is produced at Say Cheese Enterprises, think about how you would like to see the results. Do you want to see the margin by gram, unit, or case? Do you need visibility to profit by customer, brand, and grouping? Do you need to see margin by line and room? Be sure to collect and include as much basic information about each SKU so that you can view profitability in a way that makes sense for your business.

Line 1 currently produces the Camembert SKU in question. This SKU is 100g per pack and is sold as a private label to Cheese Masters grocer in cases which hold 10 packs. The primary information for your model is set up as follows:

Product Code Product Description Line Label Customer Pack Weight (g) Case Weight (g)
CAM1 Camembert Line 1 Private Cheese Masters 100 1,000

 

Now it’s time to add in the costs required to make our Camembert SKU. We will need to look at the following elements to be able to build the model:

  1. Sales Price
  2. Direct Material Costs
  3. Direct Labour Costs
  4. Overhead Costs

Sales Price

Say Cheese Enterprises currently sells cases of Camembert for $50.00 to Cheese Masters grocer, which includes a 5% trade discount. Let’s add this information into the model+:

Product Code Sales Price ($/case) Trade Discount Actual Sales Price ($/case)
CAM1 $50.00 5% $47.50

+all columns except product code truncated from previous table for simplicity

It is important to include any customer discounts in the model, as these ultimately affect your company profit margins.

Direct Material Costs

Direct materials are raw materials that are directly traceable to your product. Remember, we are not building standard costings and must use shop floor data to understand actual operations when constructing this model. Operational data that affects direct material costs includes waste and giveaway.

The total cost of raw materials in our Camembert SKU Bill of Materials (BOM) is costed at $1.65. This includes ingredients, packaging, and a 1% waste allowance. At Say Cheese Enterprises, the operations team measures and records waste and giveaway on a daily basis, which has averaged at 5% and 2% in recent months. Our direct material costs are added to the model+ as follows:

Product Code Standard Material Cost ($/unit) Standard Material Cost ($/case) Waste (%) Waste ($/Case) Giveaway (%) Giveaway ($/Case) Total Direct Material Cost ($/Case)
CAM1 $1.65 $16.5 4% $0.66 2% $0.33 $17.49

+all columns except product code truncated from previous table for simplicity

As the BOM includes a 1% waste allowance at standard costing, the shop floor waste data is stepped down by a percentage. All parameters are converted to $/case to determine a total direct material cost.

Direct Labour Costs

Direct labour is the amount of time taken by those employees in the production area to produce a SKU. The BOM will have a standard labour rate that outlines the cost for the amount of time it should take to make a certain product. The shop floor will have data about the amount of time it actually takes to make that product. Both of these need to be factored into our profitability mode.

The direct labour cost in our Camembert SKU BOM is $1.12 at a standard speed of 10 cases per hour, which is the fastest the line can operate without significant capital upgrades. The standard crew on Line 1 is 5 employees who all get paid $22.40 an hour. As we know, this line recently lost a senior operator and has not been running as efficiently as before, with shop floor measurements averaging 8 cases per hour. Our direct labour costs are added to the model+ as follows:

Product Code Standard Labour Cost ($/unit) Standard Labour Cost ($/case) Standard Rate (cases / hr) Standard Crew Standard Rate ($/hr) Actual Rate (cases / hr) Total Direct Labour Cost ($/Case)
CAM1 $1.12 $11.20 10 5 $22.40 8 $14.00

+all columns except product code truncated from previous table for simplicity

The total direct labour cost was calculated by determining the standard hourly cost of Line 1 (standard crew x standard rate), and converting this to $/case, based on actual rate as measured by the shop floor. In this example, there is a labour inefficiency cost of $2.80 that is in addition to what is specified in the standard costings.

Overhead Costs

Overhead costs are other costs within the manufacturing facility that are not considered direct material or labour costs. They are broken into fixed and variable: fixed costs are paid regardless of factory output (i.e. rent), whereas variable costs fluctuate depending on the amount of product output (i.e. electricity). Filtering these costs down to an SKU level requires an allocation method that is representative of the overhead in question. This exercise is complex and requires the input of several key departments to ensure its accuracy.

As an example, when building the model at Say Cheese Enterprises, we can allocate the fixed overhead cost of rent to the percentage of floor space the Camembert line occupies within the factory. The variable overhead cost of electricity is assigned to the number of hours the Camembert SKU is run on Line 1.

A similar methodology will need to be completed for all of your business’ overhead costs. For simplicity in our example, we will assume our Camembert SKU has the following total fixed and variable overhead costs+:

Product Code Total Fixed Overhead Costs ($/case) Total Variable Overhead Costs ($/Case)
CAM1 $8.00 $3.00

+all columns except product code truncated from previous table for simplicity

Analysing the Results

Now that we have all of the required inputs, we can determine what the total cost of our Camembert SKU is and thus, its profitability margin+:

Product Code Actual Sales Price ($/case) Total Cost ($/case) Profit ($/case) Profit Margin
CAM1 $47.50 $42.49 $5.01 10.6%

+all columns except product code truncated from previous table for simplicity

The total cost of each case of Camembert was determined by summing the aforementioned total direct material, direct labour, and overhead costs. The profit margin is a percentage from total profit over actual sales price.

By building the SKU profitability model we have found that our Camembert SKU makes significantly less than Say Cheese Enterprises’ target profit margin and the sales price per case should not be reduced by $1.00.

On the back of your findings, you advise the Managing Director of the SKU’s lack of profitability, to which they ask a series of questions such as What happens if run time is improved on Line 1? and What happens if the giveaway of this SKU is reduced? These are all very good questions, and now we have a tool to be able to model these scenarios!

The above example illustrates a brief overview of the steps required to build an SKU profitability model for a single SKU in the perfect circumstances. But in reality, the data which is required can be difficult to find, or is often not in a format which is easy to interpret. Allocating overheads can become a convoluted exercise, shopfloor studies need to be completed and documented, and educated assumptions must be made.

Next Steps

It is imperative that you do not use your SKU profitability model in isolation. The tool should act as an instrument to supplement your company’s overarching SKU management program. After building the model, some immediate next steps will be to:

  • Reconcile collected information with historical data to ensure accuracy in approach when constructing the model
  • Measure key operational parameters on a daily basis (exc. giveaway) if these are not currently measured
  • Define a process for feeding daily operational information into the model
  • Review negative and low margin SKU’s with a multi-disciplinary team consisting of colleagues from divisions such as finance, operations, sales and marketing in order to establish a logical path forward
  • Define SKU rationalisation requirements

Determining the profitability of your SKU’s is essential to ensuring your business remains competitive. Building this model will not only help you assess the margin of every SKU in your business, it will set the foundation for your company SKU management program.

Written by Karen Starr, Coriolis Consulting Pty Ltd

References

Standard Costing Explanation (http://www.accountingcoach.com/standard-costing/explanation/1)