Marketing Volume & Profitability Controlling - Profitability Analysis Concept Slides

1. Marketing Volume & Profitability Controlling - Profitability Analysis Concept Slides

2. ProcessPositioning and Scope 2

3. Report Positioning (1/2) • Organisational Focus • Senior and Business Line Management • Senior Supervisors • Planning & Economics Analysts • Controllers; primarily Financial Reporting • Cost allocation is about profitability reporting • Monthly Profitability calculation system: • Net Margin (profit after OPEX) by business profitability segments (combination of Customer Group and Product Hierarchy) • Operating Earnings A/T by BusinessLine (BL) • Net Income calculated at Total Affiliate level only • Monthly, on-line after books close • Reconciled to General Ledger • Comparisons to plan version and prior periods 3

4. Reporting Positioning (2/2) Typical Organisational focus MarketingManagementControllers Sales Information System BL Reporting focus BL Reporting focus • Focus: Day-to-day business • Sales vol's / qty • Sales revenues • Key figures down to Contribution • after Handling + Delivery • Most detailed levels of characteristics • Prod. Hierarchy • Material • Sales Employee • Individual customer • Individual plant • Sales document • Territory Profitability Analysis • Focus: Business Line Profitability • Sales vol's / qty • Sales revenues • Actual and ref. costs of goods sold • Full OPEX reconciliation • NOI accounts • Value fields down to • Net Income (Affiliate level) • Operating Earnings (BL • level) • Net Margin (Profitability • segment level) Profit Center Acctg. • Focus: Full reconciliationwith Financials • All accounts • Sales revenues • Actual CoGS • Cost Center OPEX • Other Earnings 4

5. Marketing Reporting Terminology • Controlling Area • Area with joint profitability analysis being available, • Company Code • One code for each legal entity. • Several legal entities will typically be associated with a Division • Business Line (BL) Profitability Segments • Combination of Customer group eg Motorway Service stations, and Product hierarchy. eg Diesel. . • Allocation cycles • Criteria for allocating OPEX down to business profitability segments • Market • Defines Local Market Sales vs. Export Sales vs. Affiliate Sales 5

6. Reporting Structure TOTAL AFFILIATE - All BL’s REFINING/SUPPLY BL Fuels Marketing BL Lubes & Specialities BL Retail Finished Lubes Plant 1 Aviation Refining Fuels Marine Refining Lubes Base Oils Aviation Base oil Finished Lubes Plant 2 Marine Sales Wax Asphalt LPG Finished Lubes Plant 3 White oil Other Fuels Mkt Other Specialities BL Function 6

7. Business Line (BL) Profitability Company Owned SS Dealer Owned SS CO Retail Stores Industrial/Commercial Government/Military Home Direct Wholesalers Airlines General Aviation Export CUSTOMER GROUP BY BL EXAMPLES fromCustomer Group & Prod. Hier. The Customer Groups will typically appear in several of the Business Lines (BL) For the lower levels in the product hierarchy, Gross Margins are based on (net) invoice Lowest level for business segment profitability Motor Gasoline Diesel LPG PCEO (cars) MCO (motorbikes) HDDO (heavy duty) Asphalt PRODUCT HIERARCHY Grand totals by Prod. Hier. Grand totals by Customer Group 7

8. Report Hierarchy Affiliate High Level Affiliate Recon-ciliation Report MarketingBLPerformance (*) Marketing BL (*) All sets of reports are on user defined basis; month, quarter and/or plan, as well as selection of comparison period where appropriate • No drill downs • No drill downs • Split between Fuels, Lubes and Refining Drill down: -- to each BL Drill down: -- from BL total-- .. Mktg BL’s-- .. Market-- .. Prod Hier 1-- .. Prod Hier 2-- .. Prod Hier 3-- to Cust Grp Report Type Overview focus down to Net Income Validate with details down to Net Income Monitor perfor-mance. Options include YTD Plan and YTD prior Period down to Operating Earnings A.T. Marketing BL Performance down to Net Margin after all OPEX CG as lowest level (*) The two sets of reports are also available by Distribution channel; Retail and Lubes to meet user access profile needs Data content • Actuals • Plan data • Unit figures • Actuals • Plan data • Unit figures • Actuals • Plan data • Unit figures • Actuals • Plan data 8

9. Coverage Best Practices Reporting for marketing BL’s • Some reporting analysis (Overhead) is based on G/L Accounts. • For the marketing BL’s this analysis is often too detailed for business reporting. • Reports need a market/customer segment focussed tool and is therefore must get better data than the G/L Account analysis. What about refining? • The customer orientation is not as essential. • Refining earnings and costs are largely analysed in a spreadsheet tool outside Financial systems • Refinery costs vary with crude, operating severity and product slate. 9

10. Data Collection Sales orders/ Invoices Quantities/ revenues/ discounts Transfer Price incl. Primary Freight. Differential to reflect method of delivery as appropriate/ sec. freight BL Reporting Structure Actual cost of goods sold Other earnings effects Overhead andmarketing costcenter acctg. incl. Delivery and hdlg. OPEX Cost center costs aligned by Customer Groups allocated to Product hierarchy Settlementof orders Remember : All these “transfers” are at month end. Some data often not available until after month end. 10

11. Summary.. reports in a nutshell (*) only for specialty products (e.g. Lubes, LPG, Asphalt) 11

12. MechanicsDefinitions & Criteria 12

13. Definitions & Criteria (1/3) • Quantities in volume at ambient temperature, std. temperature and weight • Net Sales Realisation (NSR) • Total Net Sales Realisation (NSR2) = NSR minus Incurred, Accrued and Cash discounts (if no details on these, then included in NSR) • Transfer Price/Reference Product costs • Delta Actual vs Reference Product cost --> AT BL AND LEVELS ABOVE • Reference Production costs (Lubes only) (*) • Delta Actual vs Reference Production costs --> AT BL AND LEVELS ABOVE • Gross Margin (GM): • Reference GM = NSR2 minus Transfer Price/Ref. Product and Ref. Production costs • Actual GM = NSR2 minus Transfer Price/Actual Product costs minus Actual Production Cost --> AT BL AND LEVELS ABOVE (*) Note: Production Costs (Lubes) are OPEX. COGS for Lubes is sum of Production and Product costs 13

14. Definitions & Criteria(2/3) • OPEX: • Reference Terminal handling and Delivery OPEX (secondary freight costs) • Delta Actual vs Reference Terminal handling (*) and Delivery OPEX • BL Direct OPEX • BL Allocated OPEX • Contribution after Handling and Delivery (Contr): • Reference Contr. = Ref.GM minus Ref. Term. Handl. and Delivery OPEX --> ALL LEVELS • Actual Contr.1 = Ref.GM minus Actual Term. Handl. and Delivery OPEX --> BL AND LEVELS BELOW • Actual Contr. = Actual GM minus Actual Term. Handl. and Delivery OPEX --> BL AND LEVELS ABOVE • Net Margin Before Tax (NM) • Ref. NM = Ref.Contr. minus other OPEX --> ALL LEVELS • Actual NM 1 = Actual Contr. 1 minus other OPEX --> BL AND LEVELS BELOW • Actual NM = Actual Contr. minus other OPEX --> BL AND LEVELS ABOVE (*) only for specialty products (e.g. Lubes, LPG, Asphalt) 14

15. Definitions & Criteria(3/3) • Other Earnings Effects (OEE) --> AT BL AND LEVELS ABOVE • Operating Earnings B.T. = Net Margin minus OEE • Tax • Operating Earnings A.T. • Segment Effects incl. LIFO/Non recurring Item & Tax --> AT AFFILIATE LEVEL ONLY • Segment Earnings = Operating Earnings minus Segment Effects • Financial Items --> AT AFFILIATE LEVEL ONLY • Net Income = Segment Earnings minus Financial Items • Product Group:Fuels, LPG, Lubes, Aviation Fuels, Marine Fuels, Crude, Feedstocks, Non-Products (e.g. rents and fees, shop products, thruput fees, royalties), Asphalt and Other Products (e.g. chemicals, naphtha) 15

16. Transfer Price / Ref. Product Costs • For all FUEL products, Transfer Price is agreed between Distribution and Marketing organisations • Represents the product market value at terminal rack • Based on external market indicator (e.g. Platt’s, Argus, LOR, OMR ) plus quality, location and other differentials • Defined by plant and material. Includes fuels handling costs for standard transportation mode independent on the receiving BL. • For all specialty products, Reference Product Cost represents the reference Market value at terminal entrance • Based on external market indicator (e.g. Platt’s, Argus, LOR, OMR ) plus quality, location and other differentials • Defined by Plant (refinery or terminal) and Product • Reference handling costs can be defined separately 16

17. OPEX categories • All costs are booked or allocated by BL’s /Lines of Business (specialties) in Cost Center Accounts (CCA). The following groups of costs are combined and then part of Reporting • DIRECT BL OPEX: marketing costs booked directly to the relevant cost centres in the respective and allocated down to Customer Group (CG) cost centres • HANDLING OPEX: costs associated with terminal & handling at plants are allocated to the relevant BL/LOB overhead (marketing) cost centres • DELIVERY OPEX: costs associated with delivery (secondary transportation) from terminal to customer are booked to the relevant BL/LOB overhead (marketing) cost centres • ALLOCATED OPEX: all other costs allocated to the relevant cost centres, (typically overhead cost centres) and then allocated down to CG cost centres • Tracking costs by these groups provides the user with information on Direct Marketing OPEX within the BL, the associated overheads, as well as the handling and delivery OPEX. 17

18. MechanicsAllocation Principles 18

19. OPEX allocations Booking Cost Center B e.g. Retail Sales Support Booking Cost Center A e.g. Retail Sales Overhead Cost CenterCust Grp 3e.g. Motorway SS Cost Center Cust Grp 2 e.g. DODO SS Cost Center Cust Grp 1 e.g. COCL SS Customer Groups: COCL SS DODO SS Motorway SS Base Business split (division) defines Product Hierarchy split Business Profitability Segments The allocation criteria are explained on the subsequent charts 19

20. Direct and allocated BL OPEX - allocation criteria (1/2) • Direct and Allocated BL OPEX allocation criteria differs depending on product type: Fuel Products • Volume within the relevant Customer Group (CG) and main Division • basis will initially be current period actual volumes. Use history as basis for developing volume plans by CG. The DIvision moves to cost assessment based on current period seasonalized plan volumes. This is in line with Best Practice Lubes • Gross Margin defined as Net Sales Realisation minus reference product and production costs 20

21. Direct and allocated BL OPEX - allocation criteria (2/2) Non-Petroleum Products: • No allocations to Non-Petroleum products. • This group includes miscellaneous items like rents/fees from service stations and terminals, margins on shop products, card system fees and 3rd party commissions • Exception is Retail Shop sales where profitability is shown for Shop by categories (TBA, Food and Other non-food). If no allocation basis, then the default is to assess all costs to “Food” 21

22. Handling OPEX - allocation criteria Specialty Products • Actual Handling costs are allocated from the relevant departmental overhead (marketing) cost centres down to the business segments based on reference Handling costs • Reconciliation between actual and reference costs needed at all reporting levels FUEL PRODUCTS • Actual Handling costs stay at BL level and are offset from the transfer price to avoid double counting • As a result, all the drill-down reports on Customer Group and Product Hierarchy for Marketing Fuels will have the line “Terminal Handling Allocated” empty for all drill-downs below BL 22

23. Delivery OPEX - allocation criteria LUBES and FUELS • Actual delivery costs are allocated down to the profitability segments based on reference Delivery costs as available in a the Sales Information System (SIS) FOR BOTH: • These costs are allocated based on the REAL delivery activitiesassociated with each customer shipment • Reports provide full reconciliation of delivery costs at all reporting levels 23

24. Summary.. reports in a nutshell (*) only for Specialty products 24

25. OPEX Allocations ALL BL COSTS need captured & Defined at Class of Trade level Cost Centers Retail Mgmt. and staff Corporate Pool Retail BL Sales Support Retail Sales Support Telephone Support Training Support Contracts RETAIL SALES Overhead Node, for reporting, no booking Cost centers COT DODO SS COT Motorway SS COT CO/CL SS 25

26. Conclusion • In Marketing, cost allocation is about profitability reporting • Use a Multidimensional Business Management Reporting System • On business profitability segments • down to Organizational focus, BL, Customer Group and Product Hierarchy • Profit defined as: • Net Margin (profit after OPEX) at profitability segments level • Operating Earnings After Tax (A/T) at BL level • Net Income at total affiliate level • ROCE (Return on average Capital Employed) is key long term profitability measure 26