Ranzal & AssociatesRanzal & AssociatesDriving Shareholder Value with Driving Shareholder Value with Customer Profitability Analysis from HyperionCustomer Profitability Analysis from Hyperion
January 21January 21stst, 2009, 2009
Gerry Villamil, Managing Director, WestGerry Villamil, Managing Director, West
About Ranzal The Need For Customer Profitability Establishing an Analytical Platform for Customer
Profitability Case Study: Customer Profitability Example The Next Generation: Packaged Profitability Apps Q&A
Agenda
Session: Driving Shareholder Value with Customer Profitability
About Ranzal
Regarded in the industry as one of the "BEST” at leveraging OLAP technology to develop EPM Applications
Regarded in the industry as one of the "BEST” at leveraging OLAP technology to develop EPM Applications
Founded in 1996, Ranzal has implemented Hyperion solutions for 350+ companies (600+ projects since the acquisition)
Oracle / Hyperion Certified Advantage Partner - Highest Status
Hyperion “Americas Reseller Partner of the Year” › 1999, 2005 & 2007
Certified EPM Consultants & Instructors
Vertical Expertise with High-Profile Clients from Coast to Coast› East Coast & West Coast Presence
Sound Project Methodology Insures Project Success› Support Business Applications from start to finish
One of the Largest Hyperion Practices in the U.S.
“Best Planning & Essbase Practices with Best HFM Practice”› Hyperion Development utilizes Ranzal for Planning, Essbase and HFM product direction
Applications & Industries
Our team has been involved in 500+ successful EPM Implementations› Financial Consolidation & Management Reporting› Budgeting & Planning › Profitability Management Solutions› Business Intelligence and Data Warehousing › Infrastructure Planning and Performance Tuning › Business Process and Project Management
Strong client portfolio across leading Industry Sectors including
Certified consultants and instructors› Hyperion Essbase, Hyperion Planning, Hyperion Financial Management, Hyperion Enterprise,
Hyperion Strategic Finance, Hyperion BI+ (Web Analysis, Financial Reports, Interactive Reporting, Production Reporting), Hyperion Data Relationship Management, Hyperion Financial Data Quality Management, Data Services (including ETL, Warehousing
› Financial Services › Insurance› Retail / Consumer Packaged Goods› Manufacturing› Pharmaceutical & Hospital› Hospitality / Travel / Entertainment
› High Technology / E-business › Energy / Utilities› Distribution › Government› Other
Session: Driving Shareholder Value with Customer Profitability
The Need for Customer Profitability
Session: Driving Shareholder Value with Customer Profitability
Angel Customers & Demon Customers (Selden & Colvin)
FutureHistory
Profits
Non-Growth Component
LY Profits / Cost of Capital
?Market Value
Growth Component
Everything Else
Cost of Capital - rate of return that a firm would receive if they invested their money someplace else with similar risk
Market Value: $253b
Example: Company A
Non-Growth: $111b
LY Profits $9.9b /
Cost of Capital 8.9%
142bMarket
expects profit to
grow yr after yr
$
Creating Profitable Growth
Session: Driving Shareholder Value with Customer Profitability
Angel Customers & Demon Customers (Selden & Colvin)
$A. 10k report B. Product
$
C. Customer
Where is the Growth Coming From?
Where is the Money?
Example from “Angel Customers & Demon Customers” (Selden & Colvin)
Session: Driving Shareholder Value with Customer Profitability
Angel Customers & Demon Customers (Selden & Colvin)
Customers
Total Custo
mers C
ustomerA
Custo
merB
CustomerC
Product 1 Product 2 Product 3Sales 100 200 300All Costs 60 100 260 Profit 40 100 40
COMPANY X SELLSProduct 1 – Belts, Product 2 – Shoes, Product 3 – Dresses, Product 4,5,6, etc.TOCustomer A, Customer B, and Customer C
Example from “Angel Customers & Demon Customers” (Selden & Colvin)
Customer Profitability Example
Example from “Angel Customers & Demon Customers” (Selden & Colvin)
Session: Driving Shareholder Value with Customer Profitability
Angel Customers & Demon Customers (Selden & Colvin)
CUSTOMER C - Demands an enormous amount of sales person’s time - Made lots of returns –unhappy with alterations (rework) - Pays house charge account promptly (not a good thing)
Customer A Customer B Customer CSales 100 100 100All Costs 50 70 140 Profit 50 30 -40
Product 3 ACTION PLAN - Discourage returns - Offer a broader selection of sizes - Offer highly profitable products that go with the dresses (shoes, handbags, belts, etc)
PRODUCT MANAGER - Reposition on Sales Floor - Motivate Sales People / Alterations - Advertising / Direct mailers
Customer Profitability Example
NO VISIBILITY
Example from “Angel Customers & Demon Customers” (Selden & Colvin)
Session: Driving Shareholder Value with Customer Profitability
Angel Customers & Demon Customers (Selden & Colvin)
Tot Prods Tot Prod4 Tot Prod5 Tot Prod6Sales 600 300 100 200All Costs 420 150 150 120 Profit 180 150 -50 80
Total Customers
CUSTOMER DPURCHASES Product Bundle
Product 4 – High margin - BeltsProduct 5 – Unprofitable - SunglassesProduct 6 – High margin - Private Label Jeans
Product Bundles
Example from “Angel Customers & Demon Customers” (Selden & Colvin)
Session: Driving Shareholder Value with Customer Profitability
Angel Customers & Demon Customers (Selden & Colvin)
• The Western Region had a great quarter.
• The Beverage Division is down.
• Marketing hit it out of the park this year.
Do These Sound Familiar?
Resources
Products & Services
Money
CUSTOMERS
The growth will come from
“Portfolio of Customers”Geoffrey Colvin
Example from “Angel Customers & Demon Customers” (Selden & Colvin)
Session: Driving Shareholder Value with Customer Profitability
Angel Customers & Demon Customers (Selden & Colvin)
• Do you have any unprofitable customers?
• Who are your best and worst customers — that is, your most profitable and least profitable?
• Why are they profitable or unprofitable?
Three revealing questions:
Financial
Product
Customer
Example from “Angel Customers & Demon Customers” (Selden & Colvin)
Session: Driving Shareholder Value with Customer Profitability
TAIL CHART10 CUSTOMERS OR MILLION CUSTOMERS IN DECILES
-$2,000
-$1,500
-$1,000
-$500
$0
$500
$1,000
$1,500
$2,000
$2,500
1 2 3 4 5 6 7 8 9 10
CUSTOMER SEGMENTS
EC
ON
OM
IC P
RO
FIT
AVERAGE ECONOMIC PROFIT PER CUSTOMER = $250
CUSTOMERS = $2,500
Typical Customer Profitability Distribution
Understanding the Platform
Session: Driving Shareholder Value with Customer Profitability
Business Intelligence Foundation
* Slide courtesy of Oracle* Slide courtesy of Oracle
BUSINESS INTELLIGENCE FOUNDATION
Essbase BI Server Real Time DecisionsCommon Enterprise Information Model
EPM Workspace
OLTP & ODSSystems
Data WarehouseData Mart
SAP, Oracle, Siebel,PeopleSoft, Custom
BusinessProcess
OLAP
Fusion Middleware
BI ApplicationsPerformance ManagementApplications
EPM Workspace
ExcelXML
Why Essbase*
* Slide courtesy of Oracle* Slide courtesy of Oracle
A Best in Class OLAP Server
* Slide courtesy of Oracle* Slide courtesy of Oracle
Examples of Essbase Analytical Applications
Profitability Management – Customer & Product Margin Analysis
Price Volume Mix – variance driver analysis and explanation
Price Optimization – “Goal Seeking” algorithms to maximize profits
Customer Segmentation – establishing customer tiers for managing service levels
What If Scenario Modeling – analyst driven modeling calculations
Essbase Storage Models for Application Types
Small
write-back
HyperionEssbase
Block Storage Option
AppsFin ConsolidationsProduct Profitability
HyperionEssbase
Block StorageOption
AppsPlanning Sales Forecast
Appscustomer analysisprocurement analysis
HyperionEssbase (ASO)
calculation
simple
complex HyperionEssbase
Block Storage Option
Customer Profitability
HyperionEssbase(ASO)
VolumesLarge
A Phased Approach in Evolving the Analytical Platform
Operations HR Legacy OtherGL
Analytical Platform
2 Customer Gross Profit ->
Step 2
1 Financial Profitability ->
Step 1
3 Profit Before Overheads ->
Step 3Step 4
4 Customer Profitability
Session: Driving Shareholder Value with Customer Profitability
Ranzal Case Study
Custom Analytics – Profitability Management
Unilever Food SolutionsLisle, IL
Session: Driving Shareholder Value with Customer Profitability
Company Profile: Unilever Food Solutions, NA
North American Div HQ in Lisle, IL
Since 2002
- Unilever Foodservice USA
- Unilever Foodservice Canada
- International Foodservices
Customers
Products
› Operator Customers - Quick Service (e.g., TacoBell, etc) - Casual Dining (e.g., Applebees, etc)› Distributor Customers - Sysco, USFS, etc.
› Beverages - (e.g., Lipton Teas, etc) › Savory - (e.g., Knorr Soups, Lawry’s Seasonings, etc) › Dressings - (e.g., Hellman’s Mayonnaise & Dressings, etc) Spreads - (e.g., Country Crock Margarines, etc)
Foodsolutions
Session: Driving Shareholder Value with Customer Profitability
Unilever: Customer Profitability Business Issues
Demand for Customer / Product Analysis
› Slow decision-making process on future customer investment
› Need to improve understanding of current customer/product mix to enhance future margins
› Difficulty understanding supply chain costs & identifying issues on a timely basis
› Need for ability to model profitability using What-if scenarios
Session: Driving Shareholder Value with Customer Profitability
Customer Profitability Methodology
INCREASED
VALUE
Sourced throughGL
Determine Financial & High-Level Product Profitability
1.
Billing, AR, Order MgmtCustomer Segmentation
Segment Customers and Determine Direct Customer/Product Profitability
2.
Consumer Promo, Marketing Costs
Allocate Product Specific Costs to Customers
3.
DepartmentalSG&A Costs
Determine Allocation Model for Remaining Indirect Costs
4.
Allocated usingdrivers & rates
Allocate Indirect Costs to Customers & Products
5.
Session: Driving Shareholder Value with Customer Profitability
Step 1: Determine Financial Profitability
??? ?
??
?
?
› Web-based
?
› Executive› Analyst› Partner
GL HR LegacyOperations Other
FinancialProfitability
› Data pull directly from GL› High-level product profitability
(Product, Region, Channel)› Process that occurs in a matter
of weeks, not months› One Version of the Truth› One stop-shop for easy access
to reports and analysis
Session: Driving Shareholder Value with Customer Profitability
Financial P&L Components & Their Sources
Financial Cube
› Accounts
› Legal Entity / Company
› Cost Center / Department
› Product Line / Profit Center
› Other Chart Fields› Sub Accounts / Functional Area› Projects› Line of Business
› While some of the elements of product profitability & customer profitability may be present, they are typically at a much higher level (e.g., many SKUs rolling up to a Product Line, or many Customers rolling up to a channel)
› Need to get more detailed information!!!
Session: Driving Shareholder Value with Customer Profitability
Step 2: Customer Gross or Direct Profitability
› Segment customer base:› Define customer hierarchies
› Customers By Market (e.g., Northeast Region)› Customers by Global Customer (e.g., US
Walmart)› Identify “top” customers
UNILEVER
Tier 1Large National Accounts(i.e., Quick Service - Wendy’s)
Tier 2Regional Customers(sales group focus)(i.e., Madison Square Garden)
› Define product hierarchy:› Categories, Brands, Families, SKUs
› Identify source systems:› Order Management – Open Orders› AR Sub Ledger – Invoices and Credit Memos› Trade Spending – Discounts, Promotions &
Allowances
› Bring in all relevant subledger data that feeds the GL and contains DIRECT customer and product information
Session: Driving Shareholder Value with Customer Profitability
SHIPPED TO SOLD TO TERMS: FROM INVOICE DATEXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
2% 15 daysNet 16, USD
DIRECT INQUIRIES TO:1 (800) 999-9999
INVOICE SHIP DATE 11/01/2004INVOICE DATE 11/01/2004
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
PURCHASE ORDER NO.
SHIP NO.
CUST. NO.
SALES DIST.
PLEASE SHOW THIS INVOICE NUMBERWHEN REMITTING
TEST ORDER #1 S901999 B901999 2377DATE INV’D
11/01/04 2002009999ORDER DATEMM/DD
DELIVERY DATEMM/DD ACCT. AT CUST. CARRIER SALES ORDER
19929988811/01 11/11 1202 Customer pick-up
QUANTITY
UNITS PRODUCT CODE DESCRIPTION UNIT PRICE AMOUNT
700 CA 4100000295 TBAH 24/500 75.35 52,745.00
700 CA 4100000295 Efficiency Allowance 333333 0.05- 35.00-700 CA 4100000295 SpecAllow-OI RateCs 654737 0.50- 350.00-700 CA 4100000295 Freight-Backhaul 1.08- 155.74-700 CA 4100000295 Fuel Allow Percent 6% 9.34-700 CA 4100000295 Unload Allowance 0.04- 28.00-
Data Sources: Order Mgmt, A/R, Billing, Trade Spending apps
Customer - By Customer - Bill To/Sold To - Shipped To - By Market - Mkt (Channel) - Sales ID - Shipped To
Product - Category - Sub-Category - Brand - Sku
Time - Year - Quarter - Month(5-4-4) - Week - Day
Accounts - Net Sales Dollars - Gross Sales Dollars - Less: Cash Disc - 2% 15 days - Efficiency Allow - Spec Allow, etc
AttributesQuantity - SKU A (Case = 12) - SKU B (Case = 1000)
Getting Customer Data
Session: Driving Shareholder Value with Customer Profitability
Step 3: Allocating Product Specific Costs
› Some costs are product line specific but NOT customer specific
› Examples:› Consumer Promotions (Mail in Rebates)› TV and Media Print Advertising
P&L
Mktg
Detail
› Allocate product dollars to customers based on products used in geographies targeted
Session: Driving Shareholder Value with Customer Profitability
What’s Left? Indirect Costs…
Sourced throughGL
Determine Financial & High-Level Product Profitability
Billing, AR, Order MgmtCustomer Segmentation
Segment Customers & Determine Direct Customer /Product Profitability
Consumer Promo, Marketing Costs
Allocate Product Specific Costs to Customers
DepartmentalSG&A Costs
Determine Allocation Model for Remaining Indirect Costs
4.
Allocate usingdrivers & rates
Allocate Indirect Costs to Customers & Products
5.2 Ways• Development of Customized Allocation Rules• Utilization of Activity Based Cost Rates
Allocate remaining costs to customers to tie to Financial P&L.
Session: Driving Shareholder Value with Customer Profitability
Unilever’s Approach to Allocating Indirect Costs
› Group of 20 Allocation Rules Used on any G/L Account
CustomerProfitability
Siebel PeopleSoft SAP OracleData Warehouse
HyperionEssbase
Available Customer Data
Profit Before Overheads Gross Profit Total MDCTotal Overheads Total Mktg Overhead Total Sales Overhead Total General Overhead Total Associated CostsBroker CommissionsJV Income
20 Allocation Rules
Session: Driving Shareholder Value with Customer Profitability
Alternative Approach to Allocating Indirect Costs
Activity based costing:o Rather than looking at departmental
expenses as a collection of costs by functional areas, look at them as a collection of activities.
Functional view:o Total Distribution Costs
- Order Desk Dept
- Warehousing Dept
- Shipping Dept
Activity view:o Total distribution costs:
o Take orders
o Pick items from shelves
o Drive trucks
Specify a department & get cost - e.g., Order Desk - $100
Identify activities – e.g., take phone order, take fax order
Identify % time spent on each activity – e.g., 70%, 30%
Identify Driver for Each Activity – e.g. # of Orders - 50, 110
Calculate activity cost rates
o Divide departmental cost by driver
o Phone order rate = $100*70%/50 = $1.40/phone order
o Fax orderrate = $100*30%/110 = $0.27/fax order
Load in drivers by customer
o Customer A – 10 phone orders = $14.00 total cost
o Customer B – 10 fax orders = $2.70 total cost
Assuming Customer A & B order the same product, which is more profitable?
Example
Session: Driving Shareholder Value with Customer Profitability
• Allocation Rules exist for all accounts. The intent is to utilize direct cost when possible
• Provides a fully loaded P&L for a customer
• Reports for Senior Managers are fixed reports. Ad-hoc reporting in Excel will be used by Power-Users
• Reporting Capabilities– drill down to SKU
– drill down to customer/market
– Comparative to plan, prior period, percent change
loadLocal CurrencySepTotal US Business
Customer XTotal Product per unit PY rateCY Actual rate comparative
Total Sales Units 18,200.0
Total Sales Value 20,348.31$ 1.12$ 0.002$ Total Sales Discounts 2,603.87$ 0.14$ (0.026)$
Total Invoice Value 17,744.44$ 0.97$ (0.024)$ -$
Total Cost of Material @ Item Standard 11,425.54$ 0.63$ (0.022)$ Primary Ingredients 513.57$ 0.03$ 0.002$ Secondry Ingredients 5,606.87$ 0.31$ (0.016)$ Packaging Material 1,665.87$ 0.09$ (0.004)$ Variable O/H 171.45$ 0.01$ (0.001)$ Direct Labor 540.46$ 0.03$ 0.001$ Production Fixed O/H 1,927.45$ 0.11$ (0.003)$ Co-Packer Cost 829.81$ 0.05$ (0.003)$ Buying & Planning 51.50$ 0.00$ 0.001$ Cost of Materials-Supply & Support cost 118.57$ 0.01$ 0.002$
Total Invoice Value less Standard Costs 6,318.90$ 0.35$ (0.020)$ as a % of Total Invoice Value 35.6%
Sample Customer Report
Net Result – Fully Allocated Customer P&L
Session: Driving Shareholder Value with Customer Profitability
Session: Driving Shareholder Value with Customer Profitability
Next Generation Customer Profitability – Packaged Apps
Session: Driving Shareholder Value with Customer Profitability
New in 11.1.1 – Oracle Hyperion Profitability Cost Management
Functionality Analyst defined Revenue and Cost Allocation Management Traceability Maps to Show source of indirect charges Audit Trails for validation and verification of allocation definitions
Architecture Latest Packaged Application built on Hyperion Essbase platform
Similar architecture to Hyperion Planning Web Based Front End Essbase and RDBMS based back End Managed through EPMA All of Hyperion Reporting Tools (Smartview, Reports, Web Analysis) are
available for consumption of output
Business Benefits Discover Drivers and Costs of Profitability Empower Users with Visbility and Flexibilty Improve Resource Alignment
Session: Driving Shareholder Value with Customer Profitability
Key Differentiator from Stand Alone Essbase – Traceability Map
Session: Driving Shareholder Value with Customer Profitability
Key Differentiator from Stand Alone Essbase – Model Validation Reporting
Session: Driving Shareholder Value with Customer Profitability
Closing
Session: Driving Shareholder Value with Customer Profitability
Understanding Your Customer…
Means understanding your own business….
Margin contribution by product Cost to acquire customers Cost to deliver products by channel and region Cost of different services and support
And applying this to your segmented customer base…
Customer characteristics Products/services purchased Maintenance & support required Needs-based
Session: Driving Shareholder Value with Customer Profitability
Session: Driving Shareholder Value with Customer Profitability
Ranzal & AssociatesRanzal & AssociatesDriving Shareholder Value with Driving Shareholder Value with Customer Profitability Analysis from Customer Profitability Analysis from
HyperionHyperion
Gerry Villamil – Managing Director – Gerry Villamil – Managing Director – [email protected]@ranzal.com
Jill Horn, Business Development Manager – Jill Horn, Business Development Manager – [email protected]@ranzal.com