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Case
Study: Gross Margin Profiling
The
Company Doig
Corporation is a Wisconsin-based distributor of a full line of industrial automation
components. Founded in 1956, they provide automation solutions to a broad spectrum
of industries ranging from paper, printing, packaging, automotive, robotics, special
machinery and the food industry. Doig Corporation focuses on enhancing their customers'
profits by being a valuable business resource with its highly trained staff, disciplined
internal controls, and by offering a single source for their automation needs
with their diverse line of pneumatic, motion control, industrial PC's, safety,
sensors and vision products. The company uses a combination of inside and outside
sales staff, supported by application engineers, to sell products and quote prices
to customers. Doig Corporation is a member of the Fluid Power Distributor Association
(FPDA).
The
Opportunity & Need CEO
Bob Doig determined during his 2003 business planning process that the company
needed new insights and ideas to grow sales and profit margins. As traditionally
performed by distributors and manufacturers, Doig Corporation prices were quoted
by taking product cost plus mark-up to achieve a gross margin percent target.
Bob had three primary concerns regarding this traditional pricing method: -
Traditional gross margin pricing assumed that all overhead costs below gross margin
apply equally to every product, every order and every customer. From experience,
Bob knew that Doig overhead costs were not consumed equally. Some customers consumed
lots of selling, engineering, expediting, value-added assembly, accounts receivable
and customer support time. Others consumed very little.
-
Doig's method for bidding on large contracts primarily relied upon gut feel and
intuition. A common question during bid prep was, "Can we win this bid with
a 13% gross margin?" With heightened competition, Bob wanted a more precise
bid & quote method that used financial facts and less feelings.
- Traditional
gross margin pricing focused on product, yet customers valued Doig Corporation's
services. Bob realized that he had no effective way to cost and price value-added
services performed by engineering, assembly or shipping.
The
Solution From
attending FPDA meetings and his own reading, Bob Doig had learned about the principles
and benefits of Activity Based Cost Management (ABM/ABC). Upon reading "Gross
Margin Profiling", an article authored by Tom Pryor, president of ICMS, Bob
felt the timing and technique was right to implement ABM/ABC. He felt the ABM/ABC-based
Gross Margin Profiling method explained in the article would address his organization's
decision-making needs. Bob also felt that ABM/ABC would fit nicely with Doig Corporation's
pre-existing continuous improvement program. To maximize the impact on 2003, Bob
asked ICMS to help Doig Corporation quickly implement a Gross Margin Profiling
system in January 2003.
The
Implementation Tom
Pryor and the ICMS staff developed and executed an ABM/ABC implementation plan
for Doig Corporation that was: -
Quick … implementation took less than one week.
- Low
cost … consulting and software fees less than $8,000.
- Simple
to use … ABM/ABC linked to an easy-to-use Excel template.
- Results-driven
... positive results on the P&L in a matter of weeks.
Prior
to onsite work, ICMS reviewed and analyzed Doig Corporation's 2002 P&L, prepared
an interview schedule and entered preliminary data into their ABM/ABC software.
During
three days of onsite work at Doig Corporation: a.
Tom Pryor, on Day One, provided the entire staff a concise understanding of ABM/ABC.
Using the ICMS Activity Dictionary, Tom held 30-minute activity analysis interviews
with each group of employees. b.
Tom, on Day Two, with assistance from Bob and other staff, allocated overhead
costs to nine (9) activity centers (i.e., Outside Sales, Inside Sales, Shipping,
etc.). c.
Using ICMS' CMS-PC 4.0 software, Tom allocated overhead costs to forty-five activities
and created ten ABC cost pools and cost drivers. 
d.
Tom, on Day Three, exported the ABM/ABC software data to an Excel-based Gross
Margin Profiling template designed by ICMS. The template had three primary uses:
(1) It served as a pricing tool for sales orders and bids;
(2) It served
as tool to calculate customer profitability; and,
(3) It served as a tool
to calculate product-line profitability.
e.
The Gross Margin Profiling system was demonstrated to the Doig senior management
team, tested for reasonableness and turned over for use at the end of Day Three.
The
Results The
following results and activities were accomplished following ICMS' Gross Margin
Profiling system implementation: -
Bob Doig and his staff profiled the profit & loss of the Top 100 customers
that comprised 80% of Doig's annual business. Doig developed profitability strategies
for each customer based on their overall potential and implementation of these
strategies has begun. Where appropriate, pricing to selected customers has been
strategically decreased to defend current business and even gain market share
because of the "low-cost provider" status identified by ABC/ABM.
- Bob
and his staff profiled the profit & loss contribution of Doig's vendors. Fully
half of Doig's 40 vendors were underperforming but only four made up 90% of the
losing dollars. Different solutions were implemented on these four, ranging from
working with the vendors to eliminate the activities that didn't add value (like
product defect and returns, etc), instituting minimum quantities, and raising
prices. Of the other 16 underperforming vendors some pricing was adjusted and
some vendors were either replaced or dropped.
- Bob
adjusted billing rates for the Fabrication and Engineering activities valued by
their customers.
-
Doig Corporation employees have combined their continuous improvement training
with the new ABM/ABC data to target non-value added activities for reduction in
2003. Some individuals' secondary duties were re-assigned to improve internal
productivity and reduce costs further.
- Doig
won back a large customer lost to competition in 2002, using prices set by the
new Gross Margin Profiling system.
- In
less than eight weeks, Doig Corporation increased Gross Margin a full percentage
point.
-
Bob and his staff replaced some of the ABC cost pools and drivers with data that
they found easier to collect from existing inventory control and accounting systems.
Then, to verify the time estimations given during the interviews with Tom, each
employee filled out a detailed time log of their actual activity times to update,
re-confirm and sustain relevance of the ABC costing model.
-
Bob spoke about his company's Gross Margin Profiling results at the March 2003
FPDA Annual Meeting.
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