【正文】 Why Bain Uses PLP Senior managers can use PLP analysis to make important decisions about product lines. ?For which products should we increase prices? ?Where should we focus our cost reduction efforts? ?Which product lines should we drop? ?Which products should we focus RD efforts on? ?Where should we provide sales incentives? 6 CU7020998JZA bc BOS Product Line Profitability Typical Accounting System Versus Bain PLP Unlike typical accounting systems, PLP involves driving below gross margin and allocating costs to get to an operating margin for each product line. Typical accounting system Bain PLP Cost collection: ?By function (. RD, advertising) ?By product line Cost assigned to products: ?Cost of goods sold – direct labor – direct materials ?All costs, including all indirect costs – overhead – advertising – distribution Key product profitability measure: ?Gross margin (revenue cost of goods sold) ?Operating margin Cost allocation method: ?Accounting standards ?Activitybased cost drivers Disadvantage: ?Often does not reflect true mitment of resources and the returns for their use ?Difficult to capture all activities that drive costs 7 CU7020998JZA bc BOS Product Line Profitability Direct and Indirect Costs Traditional accounting systems often allocate only direct costs, not indirect costs, to products. And, in some cases, the direct costs are allocated inappropriately. RDGAS e l li n gD istri b u tio nA d v e rti sin gOv e rh e a dD ir e ct la b o rP a cka g i n gIn g re d ie n tsC o ff e e pr o d u ct i o n c o sts0%20%40%60%80%100%Percent of TotalIndirect costs Direct costs Definition Typical accounting allocation PLP allocation ? Costs generally incurred by the firm outside of the production process. These cannot easily be identified with or assigned to a particular product ? Costs incurred directly in the production of the product or service. These costs can easily be identified with a particular product ? Not allocated or allocated based on percent of sales ? Allocated based on actual cost drivers ? Tracked using accounting standards ? Variances sometimes not tracked by product ? All direct costs, including variances, are tracked by product 8 CU7020998JZA bc BOS Product Line Profitability Inappropriate Direct Cost Allocation Some accounting systems allocate direct costs to products based on original expectations about production results. These assumptions cannot account for changes in raw materials use and labor time. Accounting standard Actual for last quarter Difference Revenue per widget: $ $ Raw materials: $ $ ? Standard excludes loss ? Increased loss due to change in supplier quality Production floor labor: hours x $ hours x $ ? Standard excludes switch over from main produce ? Increased labor due to rework from lost Gross margin: ( + ) = ( + ) = Gross margin percent: 31% 8% 9 CU7020998JZA bc BOS Product Line Profitability Gross Margin Versus Operating Margin RDS a le s a n d ma r keti n gDistributionOverhe adCo st o f g o o d s so ldT54 K9 3 J8 8$5 35$4 80$3 45$0$2 00$4 00$6 00Cost per UnitIf accounting systems do not allocate all indirect costs to products, managers may misjudge products’ relative contribution to profits. Indirect costs Price: $750 $600 $450 Gross margin: 40% 33% 44% Operating margin: 29% 20% 23% On a gross margin basis, J88s are the most profitable。s Jellies Process Flow Typically management interviews and plant tours help delineate the key activities that drive costs. Preserving Storing Selling Delivery Corporate Functions 23 CU7020998JZA bc BOS Product Line Profitability PLP Steps Understand client’s current PLs and cost collection systems Determine the major activities performed Identify costs and cost drivers for each activity Allocate costs to each product Analyze profitability by product or group of products Make remendations Key Success Factors ?Tie costs to operations, not accounting categories ?Focus on the largest cost elements 24 CU7020998JZA bc BOS Product Line Profitability After key activities are determined, all costs should be assigned to activities. Next, the cost driver will determine how costs should be allocated. Activity Costs Allocation/cost driver Rationale Preserving Maintenance labor Maintenance supplies Utilities kitchen Equipment depreciation $5,955 $5,955 $3,375 $26,206 $41,491 Ounces Both products use the same jelly, so ounces is the best proxy for relative use of equipment and facilities Boxes of jars and buckets can be stacked on top of each other Storing Warehouse labor Utilities warehouse Warehouse depreciation $6,590 $12,706 $7,624 $26,920 Cubic feet Kelly’s Cost Drivers 25 CU7020998JZA bc BOS Product Line Profitability Activity Costs Allocation/cost driver Rationale Commissions are directly assignable. Most expenses directly assignable to a channel (and therefore to a product type) Selling Sales mission Selling expenses $56,880 $79,413 $136,293 Actual costs。 100163。 200163。s Cost Driver Collection Next, the key cost driver measures for each product must be collected to determine how to allocate costs among the products. Ounces produced and sold: 8oz jars One gallon buckets Total Data source 1,248,000 1,075,200 2,323,200 VP, sales Labor hours required to deliver 1MM oz of jelly: 24 hours 10 hours Delivery supervisor track schedules Average warehouse storage requirements: 3,100 cubic feet 1,900 cubic feet 5,000