Saturday, October 23, 2010

Profitability and Cost Management in a Planning blog? Does it fit in?


Yes, because we know that the integration of profitability management and planning will add value to your organization in more than one way:

Business cases created based on TD ABC parameters are more reliable;

Time Driven Activity Based Costing allows deriving parameters for specific combinations of products, channels and customers out of a huge amount of transactional data. These fact based parameters can be re-used in business cases and scenarios. This fact based approach adds enormous value now this information is available in comprehensible format.

Delivers a higher predictive value of the cost and revenue in the future: facts versus assumptions and politics;

Ask (almost) any call center manager how many employees are needed for next year and there is a good chance that the answer will be the same: “more!”. Imagine they are experiencing busy times with people being sick or close to a burn-out and their answer is understandable. But what would happen if their estimation would be based on sales volumes from the sales team and facts on how many calls they receive per product group/per channel? Integration of this information would deliver a better insight in the expected workload and lead to better decisions.

Makes the budget more meaningful, it focuses on operational information that is better understood than financial data by most of the planners;

Compare the situation in which the purchasing manager is asked to fill the P&L for his cost center with the situation in which the purchasing manager is asked for his expertise: “What price can you make if you have to purchase 2 million kg of hop for the following breweries in the coming year”? This sort of question really triggers his expertise and his answer will add more value to the planning process

Transparency triggers better tactical and strategic discussions;

Using cost management the correct way reveals products or clients that are bearing relatively more cost. Based on this information products and processes can be improved instead of talking about an incorrect allocation. To make sure that the discussions are relevant it should be possible to compare the profitability management with a glass of water. If it is clear people will not question if it is safe to drink. Even if the pollution is hardly visible, people will question the content. So be aware, only ‘crystal clear’ cost allocation will work!

Our next post will reveal 5 reasons why profitability programs don’t deliver the expected value yet. And in the last three posts on profitability management we will zoom in on three cases in different industries, revealing the strength of the combination of profitability management and planning.

In next blogs we will also introduce compound based planning and its combination with profitability and cost management.

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