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Home > Operations Management Best Practice > Customer Product Rationalization (CPR) for Ailing Businesses

Operations Management Best Practice

Customer Product Rationalization (CPR) for Ailing Businesses

by Jeffrey T. Luftig and Steven M. Ouellette

This Chapter Covers

  • The customer product/process rationalization (CPR) model—a tool for profit optimization.

  • The total asset utilization (TAU) model.

  • Average (standard) vs allocated cost accounting.

  • Calculating actual vs apparent profitability.

  • Product/process rationalization.

  • Understanding potential market opportunities.

  • Ramifications, implications, and cautions related to the CPR model.

Introduction

Every organization knows that some of its products or services, and perhaps even some customers, lose money with every sale. The problem, of course, is in figuring out which they are. There is a complex interplay between production or service provision rates, differential revenue, and costs, which all needs to be accounted for in order to make rational decisions about the product and service portfolio and customers selected. This is further hindered by antiquated average cost accounting methods which obscure true profitability and the lack of connection between profitability and production trade-offs. Accordingly, most businesses make decisions to simply increase revenue while acknowledging, but rarely cost justifying, loss leaders. In this chapter, we propose a method to combine true profitability and production trade-offs to make the identification of current profitability sinks easy to identify, giving managers the ability to make data-based management decisions to maximize profit given market constraints.

Scenario

You are considering resigning your job as a high-powered (and highly paid) vice-president of a major corporation. You have risen about as far as you can expect in that company, and you have an opportunity to trade your current level of job security for the opportunity to become a CEO and run a corporation by accepting an offer from the board of directors of an existing, but troubled, manufacturing business. This organization has existed for quite some time, but recently, while revenue has increased, profit has not. Benchmarked against its competitors, this company’s profitability is in the lowest quartile of its group.

Could you be the one to turn things around? Is there a tool to help you to use the company’s own data to do so? Indeed, is there a tool which might help to identifycompanies that have great potential but are currently performing at a lower level of profitability than they should? In this chapter we are going to present such a tool, termed “customer product/process rationalization” (CPR). This offers a way to not only resuscitate a failing or underperforming business, but indeed to assist organizations to move, as Jim Collins (2001) would state, from “good to great” through the optimization of profitability.

CPR: A Tool for Profit Optimization

The CPR model is the result of the merger of three contributory models: the total asset utilization (TAU) model; an allocated cost accounting (ACA) model (although an activity-based cost accounting model will work equally well); and a strategic product/market capability analysis model (which most firms of any significant size will already possess).

CPR is useful when a company has multiple customers, processes, and/or products which may contribute differently to the profitability of the corporation. It should be noted, as will be discussed in a later section, that the differentiation in profit contribution may not be apparent to management if an average or standard cost accounting system is being employed. However, those differences will surely exist, and this model will reveal them. The CPR model provides a technique for modeling profit differences using real data, and subsequently allows management to plan and achieve a profit-optimized customer, product, and process portfolio in the presence of growth. The model will also provide key information that can be used to drive future strategic improvements.

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Further reading

Book:

  • Collins, Jim. Good to Great: Why Some Companies Make the Leap... and Others Don't. London: Random House Business, 2001.

Articles:

  • Luftig, Jeffrey T. “Total asset utilization.” Measuring Business Excellence 3:1 (1999a): 20–25. Online at: dx.doi.org/10.1108/eb025561
  • Luftig, Jeffrey T. “Customer/product rationalization: CPR for profitability.” Measuring Business Excellence 3:2 (1999b): 4–8. Online at: dx.doi.org/10.1108/eb038871

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