Engagement Situation:
The client was a regional electronic appliances brand, with roughly 25% own manufacturing and 75% sourced products. Annual revenue was at 185m EUR.
Management had requested a holistic Actionable Insights Review to discover improvement potentials throughout the organisation.
Actionable Insights:
The analysis conducted showed the value of a holistic approach. It showed, among other insights, developments management had been aware of but not considered related, which proved to form together the preventable root-cause of a negative margin trend the company had experienced.
Developments the management had been aware of:
a.) Overall sales margin had declined by 1.8% over the last 3 years, reducing net profit over the 3 year period by 5.6m EUR. The most significant margin decline of 0.9% in the year prior to our engagement.
b.) Sales data showed both major margin impacts, reductions in agreed unit prices and changes in mix towards lower margin products with the unit prices contributing 0.5% and the mix effect 1.3% to the overall decline.
c.) Overall sales forecast was within 5% of actual revenue, but significantly diverged on product mix.
Data insights the management had not been aware of:
d.) Order cancellations were at 12.2m or 7.2% of revenue. 84% of cancellations in the year before last could be attributed to unavailability of ordered products, with the ratio reducing to 56% in the last year.
e.) 91% of over-forecasted products correlated with the products in the order cancellation.
f.) 72% of products in the order cancellations had a 10% higher product margin than alternative products in the portfolio.
g.) Of the 50 customers with the most significant margin decline, 43 were part of the 50 customers with the highest value of order cancellations.
h.) Purchase parameter for 83% of wholesale products diverged more than 50% from a modelling based on forecast and supplier lead times. The team could not describe a standard approach to the setting and regular updating of purchase parameter.
i.) Sample testing of purchase orders for the 25 products with the highest order cancellation volume showed divergence of over 250% compared to a purchase scheme based on purchase parameters modelled according to forecast and supplier lead times and actual sales adjusted with the order cancellations.
Actionable Insights Impact:
Combining these insights it became apparent that the ultimate root-cause for the margin decline was in fact inadequate inventory management.
Lack of proper standards for setting and updating purchase parameter as well as inadequate manual purchase decisions by one category buyer kept causing stock-outs of high margin products.
Both, the customers and the sales force, reacted to the situation by shifting towards alternative lower margin products, which often came out of the client's own production and had higher availability.
Not only did this cause margin decline due to mix issues, but there was also a clear correlation between customers with the highest decrease in negotiated list prices and customers affected by the stock-outs, explaining the pressure from the market sales people had reported.
As a consequence of our Actionable Insights, the client developed during the project clear standards for maintaining purchase parameter. A follow up project is targeting the development of a sales strategy to reverse the product mix and price developments, supported by a pro-active communication of their new availability commitment.
The client is confident to at least reverse the product mix effect, which will improve profitability by 4m EUR in the next 18 months.
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