While the global fight against COVID-19 intensifies, your business game plan should focus on more than just survival. Now is the critical time to prepare to capitalize on opportunities as soon as the economy turns toward recovery. At the core of both survival and recovery is having a true understanding of where your company generates profits—products, customers, markets, channels—to support strategic decision making.
Most companies, due to cross-subsidizations, do not have a clear understanding of where they make money. This is particularly dangerous given research, affirmed by client experience, showing that for most companies, only 20-30% of products generate up to 300% of profit, with the remaining products actually destroying up to 200% of profit.
The shelter-in-place mandates have already severely curtailed supply chain performance, customer demand, and labor availability/productivity. Resources will continue to be limited. Now, more than ever, you need to quickly gain an accurate picture of product and customer profitability in order to focus (or defocus) time, cash, and capacity, as well as more confidently cut costs.
WP&C’s Square Root Costing (SRC) methodology is a quick and dynamic approach to understand true profitability. SRC quantifies the costs of complexity and unlocks systemic cross-subsidizations that distort the view of SKU, customer, channel, and/or market profitability. Instead of months required for activity-based costing (ABC), SRC can be completed in weeks. And while ABC provides a static, backward-looking view of costs, SRC is flexible, able to dynamically model the impacts of shifting demand and input factors. This is especially beneficial in uncertain times.
[Read: Square Root Costing and Customer and Product Profitability]
SRC is impactful far beyond product portfolio simplification. A clear view of profitability empowers our clients to adjust pricing, set minimum order quantities based on customer costs/value, rethink supply chain strategies (upstream and downstream), balance service levels against costs-to-serve, standardize product design/formulation, and simplify manufacturing footprints.