Ranzal & Associates Driving Shareholder Value with Customer Profitability Analysis from Hyperion...

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


The Need for 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



$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)



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


Customer Profitability Example




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




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




• 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




• 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



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


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*


A Best in Class OLAP Server


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


Ranzal Case Study

Custom Analytics – Profitability Management

Unilever Food SolutionsLisle, IL


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


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


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.


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


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!!!


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


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


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


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.


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


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


• 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


Next Generation Customer Profitability – Packaged Apps


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


Key Differentiator from Stand Alone Essbase – Traceability Map


Key Differentiator from Stand Alone Essbase – Model Validation Reporting


Closing


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



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

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