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Profitability and cost management (PCM) software is an area of keen interest for CFOs and their staff. Any opportunity to improve revenue with a smaller increase in cost will improve margin. Similarly, the ability to reduce cost without dramatically affecting revenue is also positive. But managing to pull this off is never easy. Consider these two examples:
It is not just the sale of the base. In the automobile industry, for example, it is not just the price of the car, but the price of the spare parts. Revenue comes from sales, service and maintenance agreements. Three distinct P&Ls are interconnected around profitability. Or consider the notion of kitting in warehouses. In this scenario, a "product" to be shipped could be five products that are kit together.
It is not just the cost. Lowering the cost of producing and delivering a product to market is a neat trick, but there is no free lunch. Your customers and prospects will detect any decrease in quality or service, and your competitors will take advantage.
Choosing the right PCM software requires a strong collaboration between IT and line executives, and IT has a clear role to play in the selection. The algorithms can be complicated and IT must test various scenarios. The software itself must fit well in the overall portfolio, especially in terms of data import and export. Indeed, it may be the case that the existing enterprise resource planning (ERP) or enterprise performance management (EPM) software is a candidate for PCM, and this will take some analysis. Finally, PCM software must come with robust reporting and analytics tools.
Here are three vendor examples and accompanying case studies. These vendor examples are meant to be illustrative, and do not represent an endorsement of their products.
Acorn Systems is built from the ground up as a revenue/cost analysis package. Acorn provides its performance analyzer set of products to manage profitability both for revenue and for cost.
On the revenue side, Acorn's customers can pursue an unlimited number of business dimensions: product, geography, time period, etc. The key to profitability analysis is to provide process modeling, analysis of dimensions and unlimited what-if analysis. Of course, the revenue side must be tightly tied to the cost management side.
On the cost side, Acorn offers a wide variety of techniques, including its approach to time-driven activity-based costing (TDABC). Unlike traditional activity-based costing (ABC), TDABC inputs include the cost of supplying resources and the unit time for the consumption of these resources.
Case study: Assan Aluminyum
Assan Aluminyum, in Turkey, sells aluminum coil sheets and foils to a variety of different industries (e.g., construction, electronic appliances), with 60% of its production being exported to Europe, North America, the Middle East and the Far East.
One way to manage profitability is to understand cost in great detail. A key cost in the manufacture of aluminum coils is electricity, and Assan used Acorn Systems to understand the cost of electricity by measuring parameters like transportation, coil length and elements of the manufacturing process. By measuring cost in detail, Assan could assure itself of fair profits and high margins.
AxiomEPM's platform includes profitability and cost management, budget and forecasting, strategy management, and reporting and analytics. The technology engine leverages Microsoft Excel to create a calculation engine, metadata management for rollups and hierarchies, and an integrated workflow engine. The profitability engine supports full P&L reporting, and analyzes revenue and costs at the most granular level.
Case study: STAR Financial Bank
STAR Financial Bank is a private bank in Indiana with 48 locations throughout the state. The bank wanted to know what affected profitability and selected AxiomEPM as its solution provider.
At the heart of a profitability system is the ability to disaggregate key data to its lowest level (e.g., customer, product, service) and then roll it up as needed. Using Axiom's data structures and analytics, STAR had the visibility it required to manage profitability. Producing its Top 25 customer report now takes minutes, not days.
Vendavo's profitability and cost management software suite includes profit analytics, price optimization, price setting and deal negotiation. The Vendavo profit analyzer focuses on deals, sales performance and pricing, and allows for the analysis of customers and products over time.
Case study: Becton, Dickinson and Company
Becton, Dickinson (BD) is a $74 billion manufacturer of medical devices. BD needed better pricing visibility across its 3,000 product categories. BD Diagnostic Systems Europe implemented the Vendavo profit analyzer. As a result, BD was able to zoom in on single transactions, which allowed the company to improve margins on each transaction and hold the price with large customers.
Few PCM systems will be as effective as those affecting profitability. Financial and IT executives should first examine existing ERP, EPM or accounting software to see how these packages can help in profitability automation -- both in terms of functionality and data integration. Profitability packages should be examined in terms of their centricity toward activity-based costing, pricing or modeling. Finally, hooks from these systems to existing report writers/analytics will be critical.
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