Strategic resource allocation

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Overview

Everyone has heard of the 80/20 rule, but have you heard of the 120/50/30 rule? Generally speaking, 50% of the capital a company deploys drives 120% of the profits, about 20% of capital returns approximately the required rate of return and at least 30% is used on activities that destroy shareholder value. Facing these realities, a small improvement in focus towards value-generating activities and away from value-destroying activities can drive monumental results. DPO&Co. helps clients identify the 5-10 issues that will drive the highest impact for the enterprise and allocate everything from owners' equity to the finite sales manager's time on the customers, geographies or product segments that actually drive profits. 

CASE EXAMPLE

12-week project: Identified $130M of potential profit improvement at heavy industrial client by prioritizing resource allocation on eight opportunities with the highest value at stake  



Situation

  • Client had an extremely profitable after-market parts business with a major new product line that was discontinued, which was expected to reduce Economic Profit by $100M over ten years
  • Given the extremely high profit margin in the overall business, client wanted to expand production on all products
  • Increasing production in the wrong products could potentially cannibalize other more profitable businesses
  • Several large dealers were selling significantly fewer after-market parts than others, suggesting potential opportunity to bring laggards up to average  

Approach

  • Allocated consumption costs such as assembly machinery, real estate fuel, and equity investment down to the 22 individual product lines to develop fact base
  • Drew Pareto curve of profitability to show that even in the highly profitable business, seven of the 22 product lines were not returning the cost of capital and some were variable cost negative
  • Identified strategy to allocate a disproportionate amount of additional resources to the six most profitable product lines, fix five product lines and potentially discontinue two
  • Segmented dealers by Underperformers, Poor Resellers, Top Performers and Top Upsellers and sized the potential opportunity for moving the largest six Underperformers up to benchmark
  • Created strategy for allocating a disproportionate amount of marketing spend and training on the dealers with the highest value at stake  

Impact and Results

  • Implementable roadmap for allocating resources optimally to drive $400M+ revenue growth and $130M+ profit growth
  • Client stock price and Economic Profit increased 40% the following year, far exceeding its competitive peer set