Profitability Framework in Product Management with a Case Study.

Profitability problems require analysis of the Revenues and Costs of a company to zero in on the cause of decreasing/increasing profitability. A thorough understanding of revenue and cost heads for various industries can help bring out key insights and reach valuable recommendations

Profitability framework for business

Cost side / Value Chain Analysis

Costs can also be divided (depending on the type of problem statement & the information available):

1. Direct & Indirect Costs
2. Fixed & Variable Costs

Cost framework for business

Now let us use this framework to do a case study on a Beer Manufacturing Company

Interviewer: Your client is a beer manufacturing company that operates in India. The cost structure for the company is poor compared to the international benchmarks, and you have been asked by the client to find out why.

Candidate: Is the problem only on the cost side, or should I also analyze the revenues of the company to look for a problem there?

Interviewer: No, the problem is only on the cost side.

Candidate: Alright. Is the problem with only one specific beer product, or is the problem spread out across different products? Additionally, is this an industry-wide problem, or specific to our client?

Interviewer: The problem is not limited to one product. In fact, the client is facing the problem across many beer products. There is no relevance to the problem being limited to our client or the industry.

Candidate: Okay. I think it would make sense to break the costs down into the value chain to see where the cost issue lies. Should I go ahead with the same?

Interviewer: Sure, you can do that.

Candidate: I would start by breaking this into the value chain. The components that I would like to analyze are as follows: R&D, Raw Material Procurement, Processing, Storage and transportation, Distribution, and finally marketing. Does this sound okay or should I look into something more as well?

Interviewer: The value chain seems fine

Candidate: Next, I would like to understand which component contributes to the maximum deviation in costs so that I can analyze accordingly.

Interviewer: Good question! The processing costs seem to be the issue.

Candidate: Okay, in that case, I would like to delve deeper into processing costs. However, before I proceed with the same, I would like to see if this is the only cost head that has an issue.

Interviewer: You may proceed with processing costs. There are no other cost heads where the client is facing a problem.

Candidate: Okay, the possible sub-heads to analyze Processing Costs would be Rent, Electricity expense, Machinery, Technology, Labour Hours and Wages, Capacity Utilization, Packaging, and Efficiency (Defects). Should I analyze all these heads or is there a particular head with an issue?

Interviewer: Yes. The client is indeed facing a problem in the utilization of capacity.

Candidate: So, capacity utilization can be broken down as Actual Output/Potential Output. Is the utilization with the current capacity 100%?

Interviewer: Yes, current capacity utilization is 100%.

Candidate: This means we should look into potential capacity. How many plants and machines is the client currently operating?

Interviewer: As of now, the client has 3 plants with 3 machines each. The total capacity of each plant is 30,000 bottles.

Candidate: How is this figure when compared with the competitors of the client?

Interviewer: Competitors are manufacturing 50,000–80,000 bottles per plant.

Candidate: This difference might be due to more plants, more machines/plant, or better efficiency of the machines being used

Interviewer: Rightly pointed out. The difference is due to better machine efficiency.

Candidate: Okay. Then there could be multiple reasons for the client not having been able to install better machinery: Cost of Machinery, Accessibility to the seller(s), Logistical issues in procuring the machinery, and lack of skilled labor force. Which of these applies to the client?

Interviewer: The cost of the new machines is 1.5 times the normal machine, which is not a challenge for the client to invest and there is no special training needed for the labor force to operate the machine. There is no accessibility problem as well. Let’s explore the logistics problem.

Candidate: Okay. 2 reasons can be responsible for this: The size/build of the machinery is not compatible with the current factory plan. Or the machine requires the client to change the type of raw material being used.

Interviewer: So, the size of the machine seems to be the issue. What would be your recommendations?

Candidate: I would recommend 2 things: The client can increase the operating hours of the machines if currently, it is not at 24 hours. Second, they can undertake capital investments to adjust the current plant size if feasible or invest in newer plants that are compatible with better machines

Approach framework — Proposal

Candidate notes:

1. In qualitative case, no numbers were provided
2. A single cost head case where one issue needs to be identified
3. The cost problem is identified to be in the processing
4. Either the client cannot invest capital or there are logistical issues in relation to getting advanced machines

Case Facts

1. The client is a beer manufacturing company with multiple products
2. It is facing cost issues with more than one beer product
3. Thus, is it not an industry-wide problem?
4. The client has 3 plants with 30,000 bottles capacity working at 100% utilization
5. Advanced machines cost 1.5 times the normal ones and produce twice as much

Recommendations

1. Candidate should give a combination of short-term and long-term recommendations
2. In the short term, the shifts can be increased to increase the capacity of the plant.
3. In the longer run, the client should aim to buy plants that are larger as compared to the existing plant to accommodate high-capacity machines or make size adjustments to existing plants.

Recommendations

1. Candidate should give a combination of short-term and long-term recommendations
2. In the short term, the shifts can be increased to increase the capacity of the plant.
3. In the longer run, the client should aim to buy plants that are larger as compared to the existing plant to accommodate high-capacity machines or make size adjustments to existing plants.

Reference:

1. Consult Club notes IIM-A
2. GrowthSchool
3. Cipherschool

Anubhav Mishra

Product Manager