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Driving Profits Through Analysis

  • March 21 2003, 1:00am EST

In the last few years, we have been talking about BI, the need for BI, the strategic impact of BI, best practices in BI, etc. For organizations that performed extensive research and training in BI, these concepts became very common and popular. Even though there is a growing level of acceptance for BI, what’s really key is to understand and justify why BI is essential in maintaining a profitable organization and how the decisions that impact the bottom line can benefit from implementing BI solutions.

The simplest form of profit equation is shown in Figure 1.

Figure 1: Profit Equation

Note: Some organizations attribute price to a function of cost. The reality is that the cost of goods or services is irrelevant in making pricing decisions. What matters is what the market is willing to pay, and that becomes the price. In modern pricing and revenue management, organizations try to create unique “value” of their offerings and try to set “prices” for the perceived value that are profitable for them.

Once we go into the details of profit, we break down the equation and start uncovering independent and dependent variables. We quickly see that the information needed to build the profit equation comes from several different business units. As we try to extract the data from these different business units we also see that we have been using different applications, which happen to have the data in different formats. We realize that we might even be using more than one application for the same process. We notice that there are inconsistencies in the data itself, and we uncover some information that we are not sure what it represents. With all these complications, we try to figure out what to do, where to start and what it takes for us to build a system that would help us make better business decisions by integrating disparate data that is also easy to maintain, scalable, flexible and comes at a great price.

Where do we start? At the heart of every organization, there resides an essential piece of information without which the integrity of the organization is in jeopardy. That is the financial, or general ledger data. Also, at the enterprise level, organizational effectiveness is monitored to ensure that the overall team is doing a good job. Concepts such as corporate performance management are driven at the enterprise level and cover several business processes. That said, the best place to start is finance and accounting. We build a financial data mart, which gives us summary and detail level information over different periods and versus budget data. A financial data mart will be the host for the single version of financial truth and will quickly be utilized in the organization. Aside from the strong impact on financial decisions especially in budgeting, a financial data mart will establish credibility of BI systems. With a financial solution in place, other business units will quickly see the benefits and desire to have similar systems in their departments. To maximize the benefits, expanding the scope must be done in an orderly fashion. If profit is of utmost importance, identifying components of profit and building BI systems at these components seems like the logical way to proceed.

Figure 2: Corporate BI

In order to understand cost, one must look at procurement details, manufacturing costs, logistics costs, cost of raw materials and other elements. These processes naturally position themselves somewhere between the supplier and the enterprise. In the scope of business intelligence, this is why one would be interested in building a procurement data mart or a supplier intelligence system. In doing this, the framework must conform to the standards set forth in the financial data mart. In essence, the scope is now expanded to include supplier information in addition to and in accordance with the financial information. General ledger data is linked to supplier data using conformed dimensions. With this expansion, we can now analyze our finances across our expenditures for suppliers and manufacturing versus budget. Thus, we have a better understanding of our costs.

In order to understand revenue, one must understand the customers first. Essentially, it is the customer who assesses the “perceived value” of a product or service, and it is the same customer who will buy more or stop buying. While customers drive the price, several customer attributes drive the cash flow. Customers have a direct impact on the financial statements. What’s key here, is to analyze customers from a profit point of view. Customer segmentation analysis based on criteria other than profit does not offer much of a value. Additionally, understanding general market conditions and competitor behavior helps us determine competitive levels of prices. As the organization is trying to estimate customer demand, it is trying to set the appropriate inventory levels. Having built a supplier intelligence system and a customer intelligence system, we can now combine information about quantity for products sold (demand, in essence) and inventory.

Business intelligence is an evolving strategic initiative. It is unrealistic to try to build all the components in one big project to get the benefits. It makes more sense to start building a BI system piece by piece, starting with the financial components first. Then one needs to identify the elements of profit and build the system to understand these elements better. The scope of the system and the total cost of ownership would vary from one organization to the next but the concept is the same and can be implemented at any business unit. Of course, as the organization grows, the complexity increases and the need for information increases. With that, the BI system will also grow and evolve; and a strong framework will allow the decision-makers take full advantage of the BI technology available to them.

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