Profitability Cases The Case Lounge by ICON

The Team Today

Ridhima Khurana Anant Singhal Siddharth J P

Intern: Alvarez & Marsal Intern: TAS Intern: Bain

Delhi University North Carolina State University University of Oxford

 Agenda for today

Introduction to Approach for Approach for Practice Case Questions

Profitability the Revenue the Cost for and
Cases Side Side Profitability Answers
Profitability: Eagle-eye view
Revenue
1 These cases typically involve situations where the firm wishes
to increase revenue - either because it has faced a drop or
simply because it is not content with the current profitability
Costs
2 Here, you are asked to figure out why costs are as high as they
are – maybe it has increased suddenly, or simply because
they're higher than benchmarks

Revenue = Core Revenue + Value-added Services Cost = Variable + Fixed / Porter's Value Chain

Important points to cover Important points to cover

Value-added Services 1st Approach – dividing costs into Variable and Fixed
❑ Non-core activities like T-shirts for Marvel/Disney - is decreased revenue ❑ Some find this useful – variable costs depend on volume, whereas fixed
traceable to these, or to core revenue? costs don't
Core Revenue 2nd Approach – Porter's Value Chain (more instinctive)
❑ Decreasing volume? ❑ Procurement
❑ Increased price? ❑ Inbound logistics + Storage
❑ Lack of variety/product mix? ❑ Processing
Volume ❑ Outbound logistics
❑ Lack of demand? Or not enough units made to satisfy demand? ❑ Marketing & Sales
❑ Post-sales service
Revenue: Deep-dive

1st Level
❑ Revenue = Core Revenue + Value-added Service

2nd Level ❑ Core Revenue is a function of Volume * Price * (Product-mix)

❑ If Price is the issue, good idea to suggest decreasing ticket size – smaller quantities for lesser price

❑ Volume is either a capacity issue (enough demand, but not enough produced), or utilization issue
3rd Level (not enough demand)
❑ Capacity: (a) Invest in new systems or (b) Improve current systems
❑ Invest: out-sourcing non-essential work, acquiring resources, acquisition of systems
❑ Improve: People, Process, Technology
❑ Utilization: Draw out Porter's Value Chain
Costs: Deep-dive

1st Level
❑ Costs = Non-core costs + Core costs

❑ Non-core costs refer to costs like firm infrastructure costs (rent, electricity, etc) + HR costs
2nd Level ❑ Core costs are represented by the Value Chain:
❑ Procurement, Inbound logistics, storage, processing, outbound logistics, Marketing + Sales,
Service

3rd Level ❑ Processing

❑ People, Process, Technology
❑ Marketing + Sales
❑ Salesforce effectiveness: Ability, Motivation, Opportunity
 Let’s do a case!
A major producer of juice is in the business of processing and packaging fruit
juice for retail outlets. Traditionally, the producer has packaged the juice in 1 Liter
paper containers. Recently, in response to demand from the market, the
producer purchased a machine that packages the juice in plastic bottles (2 Liter).
Over the next couple of years, sales continued to grow on an average of 20% per
year. Yet, as sales continued to increase, profits steadily decreased. The owner
cannot understand why. He hires you to help.
First Thoughts: Making Sense of the Problem Statement

1 Profits = Revenue - Costs 1 Making Sense of the Problem

Sales have increased 20% → Revenue is not the main 2 Putting Frameworks to Use
2
issue → Costs can be the problem

3 Asking the Right Questions

What else do I know → Packaging of the product has
3 changed in response to demand; A new machine was
purchased 4 Summarizing Key Findings

4 Your Initial Thoughts?

5 Have Patience!
Structuring your Thoughts: Putting Frameworks to Use
Profits

Revenue Cost

(What product in the

Price Volume Product Mix Fixed Variable
portfolio; apply 80/20)

(Can use value chain analysis

(Can use customer for cost reduction too)
Production Distribution Customer
journey for services)

Value Chain
Volume per
# of customers
customer Think about journey of product/ service

Mfg/ Srvc
Loyalty program Place R&D In-bound
delivery

Cross selling Product

Sales & Out-
Bulk discounts Promotion After sales
Mktg bound
(Covering the 4Ps)

1 Making Sense of the Problem 2 Putting Frameworks to Use 3 Asking the Right Questions 4 Summarizing Key Findings
Scoping for Information: Asking the Right Questions
Revenue = Price * Quantity

Thoughts Relevant Questions

Which of the following is meant by sales?
1 Sales have grown → Is this volume or value? 1 → Sales Volume – Quantity
→ Sales Value – Price * Quantity

Revenue = Price * Quantity → What did the price look What was the price charged for 1 Litre pack?
2 2
like before the new machine was introduced? → INR 20 for 1 Litre

What were the new prices for both 1 & 2 Litre?

Change in Prices: What were the prices post the new
3 3 → INR 25 for 1 Litre; INR 40 for 2 Litre (to provide
machine came in?
an incentive to buy the bigger pack)

Out of the total sales volume, what % were 2 L plastic

Sales by Product Mix: What is the share of 1L cartons
4 4 bottles?
and 2L bottles as a percentage of total sales
→ Plastic bottles have comprised 60% of the sales

1 Making Sense of the Problem 2 Putting Frameworks to Use 3 Asking the Right Questions 4 Summarizing Key Findings
Structuring your Thoughts: Putting Frameworks to Use
Profits

Revenue Cost

(What product in the

Price Volume Product Mix Fixed Variable
portfolio; apply 80/20)

(Can use value chain analysis

(Can use customer for cost reduction too)
Production Distribution Customer
journey for services)

Value Chain
Volume per
# of customers
customer Think about journey of product/ service

Mfg/ Srvc
Loyalty program Place R&D In-bound
delivery

Cross selling Product

Sales & Out-
Bulk discounts Promotion After sales
Mktg bound
(Covering the 4Ps)

1 Making Sense of the Problem 2 Putting Frameworks to Use 3 Asking the Right Questions 4 Summarizing Key Findings
Scoping for Information: Asking the Right Questions
Cost = Fixed & Variable
Thoughts Relevant Questions
How were the new machine costs accommodated?
Fixed Costs
a → We increased the price across variants by INR 5, that
• New Machine: There was a new machine
is why price for 1 Litre became INR 25 from INR 20
added → fixed costs were incurred
1
• Overheads: How are these costs being distributed How are the Overhead costs accounted for?
for the two variants – plastic bottles (2L) vs paper- b → All factory costs are added together and divided by
carton(1L)? the total number of units produced

Was there a change in packaging costs?

a → Yes, plastic is more expensive than the paper carton
Variable Costs
that we used traditionally
• Packaging: Is there difference in packaging material
2
for the 2 sizes? Is the cost of materials different?
Was there a change in labour costs?
• Labour: How did the new SKU impact labour costs
b → Bottle machine is more complicated than carton
machine. More experienced and expensive labour hired

1 Making Sense of the Problem 2 Putting Frameworks to Use 3 Asking the Right Questions 4 Summarizing Key Findings
Key Findings and Summary

Problem Identification: It seems that it costs more to package the plastic bottles, yet the price is not higher on a
per Liter basis. Was a proper cost allocation and price determination activity undertaken for the two variants?
→ No, we did not

Price
Revenue Cost
Revenue Volume

Product
Mix
Profit New
Machine
Fixed
Overheads
Cost
Packaging
Variable
Conclusion: The more 2L plastic bottles client sold,
Labor the more profit they lost out on.

1 Making Sense of the Problem 2 Putting Frameworks to Use 3 Asking the Right Questions 4 Summarizing Key Findings
Thank You
Questions?