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Learn about Activity Based Costing and how it is applied in the PLMA model. Understand the importance of net profit and its components. Explore the benefits and success factors of using this methodology.
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W. Frank Dell II, CMC DELLMART & Company
AGENDA INTRODUCTION ACTIVITY BASED COSTING PLMA MODEL MODEL APPLICATIONS DELLMART & COMPANY
Objectives • Introduce PLMA Net Profit Model • Explain Activity Based Costing • Explore model applications DELLMART & COMPANY
Current State • Category Management gaining acceptance • Most not true to concept • Result - Super Buyer notmarketer • Brand manufacturers claim leadership • Buying leadership • Private Label losing voice DELLMART & COMPANY
Why Net Profit? • Gross Margin ineffective management tool • Simple relationship - cost Vs retail price • Nota predictor of profit DELLMART & COMPANY
What is Net Profit? Sales - Cost of Goods Sold = Gross Margin + Direct Revenue - ABC Costs = Net Profit DELLMART & COMPANY
AGENDA INTRODUCTION ACTIVITY BASED COSTING PLMA MODEL MODEL APPLICATIONS DELLMART & COMPANY
Definition • ABC is a cost allocation or assignment methodology • Cost assignment based on: • Activities - Tasks within a process • Drivers - Factors creating costs DELLMART & COMPANY
ABC Vs DPP DELLMART & COMPANY
Headquarters Management Merchandising Finance & Accounting Human Resources Warehouse Management Labor Benefits Space Utilities Transportation Labor Equipment Supplies Stores Management Labor Benefits Space Utilities Allocates All Costs DELLMART & COMPANY
Primary Processes DELLMART & COMPANY
Costs Follow Product Flow DELLMART & COMPANY
Greatest Cost is Display Space Display Square Feet DELLMART & COMPANY
Cost and Drivers DELLMART & COMPANY
Cost and Drivers (Cont.) DELLMART & COMPANY
AGENDA INTRODUCTION ACTIVITY BASED COSTING PLMA MODEL MODEL APPLICATIONS DELLMART & COMPANY
Start PLMA Model DELLMART & COMPANY
Enable Macro DELLMART & COMPANY
Navigation Buttons DELLMART & COMPANY
Input Data Screen DELLMART & COMPANY
Input - General • Item Description - Identification • Units Per Week - Average per store • Retail Per Unit - Normal, Promotion or Average DELLMART & COMPANY
Input - Case • Cost - Normal, Promotion or Average • Pack - Units per case • Dimensions - Height, Length, Width (inches) • Weight - Pounds DELLMART & COMPANY
Input - Store • Facings - Unit presentation at shelf level • Shelf Height - Bottom to Top inches DELLMART & COMPANY
Input - Payment Terms • Discount - Percent • Days - Number DELLMART & COMPANY
Input - Per Case • Billback - Dollars per case • Backhaul - Dollars per case (Pick Up) DELLMART & COMPANY
Input - Delivery 1 - Distribution Center 2 - Direct Store Delivery 3 - Drop Ship 4 - Percent mark-up DELLMART & COMPANY
Optional Input Screen DELLMART & COMPANY
Optional Input - Labor • Store direct labor rate and benefits percent • Distribution direct labor rate and benefits percent DELLMART & COMPANY
Optional Input - Customer • Annual interest rate • Number of stores in chain • Distribution mark-up percent DELLMART & COMPANY
Results Screen DELLMART & COMPANY
Results - Dollars • Sales - Revenue per week • Gross Margin per week • Net Profit per week DELLMART & COMPANY
Results - Per Unit and Percent • Net Profit per Unit • Net Profit per Display Square Feet • Gross Margin Percent • Net Profit Percent DELLMART & COMPANY
Results - Activity Based Costs • Direct Revenue per week • Activity Based Costs • Headquarter • Distribution & Transportation • Store DELLMART & COMPANY
Model Tips • Develop, load and save standard data • Collect and load customer data • Copy and paste data set for comparison • Limit analysis to pertinent items • Be reasonable and conservative in assumptions DELLMART & COMPANY
AGENDA INTRODUCTION ACTIVITY BASED COSTING PLMA MODEL MODEL APPLICATIONS DELLMART & COMPANY
Success Factors • Logical presentation • Reasonable assumptions • Demonstrate knowledge of business • Promote benefits • Consumer sales • Customer profits DELLMART & COMPANY
New Products • Life blood for retailers and suppliers • Primary driver of growth • Replacement Vs Cannibalization Strategy New & Improved DELLMART & COMPANY
Approach • Select items for replacement • Low sales • Matching consumer target markets • Collect customer and competitive data • Run model • Present • Current sales and net profit • Projected sales and net profit DELLMART & COMPANY
Retail Space • Most coveted merchandise element • Interacts with pricing • Shelf space is greatest item cost DELLMART & COMPANY
Too Little Consumer can’t find Reduced sales Lost sales Too Much Lower profits Balance Space DELLMART & COMPANY
Diminishing Returns • Excess space does not increase sales • Minimum - Case plus order cycle • Minimizes stocking labor DELLMART & COMPANY
Approach • Determine minimum units and facings • Identify net profit • Test & evaluate alternatives • Increase unit sales • Increase facings • Present • Current sales and net profit • Projected sales and net profit DELLMART & COMPANY
Retail Pricing • Price discussions should not be taboo • Price too high • Lost sales • Price too low • Lost sales • Lost profit DELLMART & COMPANY
Retailer Goals High • Gross Margin • Quality Ratio Low • Price Image DELLMART & COMPANY
Consumers • Recall up to 200 item prices • Frequently purchased items • High consumables • Translates to 500 - 1,000 items creating store’s price image DELLMART & COMPANY
Low Retail Not The Answer DELLMART & COMPANY
Value is King Price Value = Quality DELLMART & COMPANY
Approach • Compare product quality • Load model • Test & evaluate alternatives • Change retail price • Hold constant and change unit sales • Present • Current sales and net profit • Projected sales and net profit DELLMART & COMPANY
Promotions • Most frequently used promotion tool • Advertising • Display • Price reduction • Private Label under-represented • Accrual funds • Lack targeted program DELLMART & COMPANY
Why Promote? • Create merchandising excitement • Attract customer • Foster consumer trial • Load pantry • Reward loyal consumers • Present value proposition DELLMART & COMPANY
