Situation:
A PE fund had acquired 3 lighting businesses across Europe and sought to improve profitability without harming growth. The lighting market had grown strongly with innovations in LED lighting attracting new market entrants. However, with a weaker construction market and reduced technology advances, market conditions had deteriorated creating a greater focus on profitable operations.
What we did:
The business understood profitability at a Gross Margin level (sales less manufacturer costs) but did not have visibility of profitability by customer (e.g. lighting wholesalers) nor at a product contribution level. Our start point therefore was to build a “cost-to-serve” model to allocate relevant costs by customer and product. This included product driven costs such as R&D, technology licensing, shipping, import duties & warehouse costs. And then customer driven costs such as price discounts, rebates, customer deliveries and sales team costs. The end result was a model that could report EBITDA by customer and by product and to show how costs (as a % of sales) varied across customers and categories.
Business Outcomes
Understanding the true profitability of customers and products led to a number of commercial actions including:
- Re-negotiation of commercial terms with customers ensuring price discounts and rebates were proportional to the volume of business
- Review of product pricing (and cost re-engineering) to ensure adequate profit
- Development of a “good, better, best” product segmentation by customer type (national wholesalers, independents, retail, online) to standardise approach to pricing and protect margin
- New rules around minimum order quantities to avoid margin erosion from small orders
- Changes to sales team processes to ensure access to profitability information and rules on what level of discounting could be applied
