Essential Management Consulting Tools, Techniques and Frameworks

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Management Consulting
Tools, Techniques and
Frameworks
Practical guide with cases and exercises

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In business you have to make a lot of important decisions
Time and again you will come across problems that are seeming unsolvable. In many
cases you don’t even know how to approach them…

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In business you have to make a lot of important decisions
Luckily, there are a lot of nice management consulting tools, techniques
and frameworks that will help you solve problems.

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This presentation will show you techniques that
will help you solve problems on the level of top
management consultants

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How the presentation is
organized

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Management consulting techniques and frameworks come in handy both at work
as well as in private life. In this presentation you will see examples from both

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Intermediate
techniques and
frameworks
Advanced techniques
and frameworks
Basic techniques and
frameworks
I have divided the techniques and frameworks in 3 groups

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Management Consulting Techniques,
Tools and Frameworks
$190
$10
What you will see in this presentation is a part of my online course
where you can find also all the calculations in Excel
Click here to check my course

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Basic tools used by
Management Consultants

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Basic tools – introduction

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In this section we will discuss the basic tools, techniques and
framework used by Management Consultants
Bottom-up approach Top-down approach Backward logic
Compounded effect Issue Tree Priorities
Benchmarks 80/20 rule Opportunity Tree
KPIs and business
drivers
Theory of constraints
and bottlenecks

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…the one you will for sure use is bottom-up approach where
you go from single (typical) consumer to market research
 First you should
imagine the
typical users
 Then you should try to
guess his consumption
level
 By estimating the number of
typical users you and their
consumption level you get
the rough size of the market

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…sometimes it makes sense to divide markets in segments and estimate
them separately (i.e. average and typical users, women and man, people
in different age groups or segmentation by lifestyle)
Segment A
Segment B

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…lets do a simple example. Imagine that you want to make an
application for franchised restaurants
 You pick the sample
group / area you want
to estimate i.e. city
(here Warsaw)
 You count the number
of all restaurants in the
area
 For the chosen area
you count the
franchising restaurants
 You check the population of
the whole country – here
Poland
 Assuming similar density as in
Warsaw you scale up the number of
franchised restaurants

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…to make you better at this method imagine you want to sell
home made dog food….. First you have to estimate how many
dogs they are…..
 First you should pick
your sample – can be
your friends or
neighbors
 Next step is to calculate
how many dogs they
have
 Once you have the number also
calculate how many households they
are in the sample
 It is now enough to know how
many households there are in the
country
 And assuming similar proportion as
in your sample you scale up the
number of dogs
+

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…with the number of dogs you just have to estimate the
number of food eaten per year by average dog…..and you get
to the size of the food market
 We have the number of dogs in the
whole country. Now we have to get
from here to the dog food
 This requires us to estimate additionally how much
food would average dog eat per year
 In this way using annual average consumption per dog and the
estimated number of dogs we are able to estimate how much food is
eaten every year in the country
+

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Lets sum up the bottom-up approach
Bottom-up approach enables you to estimate within
one minutes the indicative size of the market
It is very good for the B2C markets
For better estimation you should segment customers
and increase the sample size

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When to use top-down approach?
You know the size of the whole market
You are interested in a specific segment of the
market
Segment is big enough
You are thinking about niche strategy or low cost
strategy (market re-segmenting)

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For a change lets see how it would work with top-down
approach
 You use the total market size
to get to the size of the
segment in which you are
interested
 You have to use some
sort of sample
measure
 By applying the result from
the sample you can get to
the size of the segment in
which you are interested

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… let’s use the top-down approach to estimate the market for
science fiction books sold in Poland….
 You use the total number of books sold in your
country
 Then you go to the bookstore that belongs to the biggest
chain of bookstore and check what percentage of the
shelves are take by science fiction books
 If you use this proportion to the whole market you should
get the rough estimation of the science fiction book
segment

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Imagine that you were supposed to say how much you have to
spend to create a company that has revenue of $ 100 M dollar

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You could use for that the so called backward reasoning
CC: Flickr; Cycle Track

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Total Costs
$ 400 M
Cost of 1 lead
$ 2 K
# of leads
200 K
÷
% Conversion
10%
x # of customers
20 K
Average revenue
per customer
$ 5 K
Revenues
$ 100 M
x

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There are 2 types of compounding effect
Time related Operations related
 Even if the growth is small applied over long period of
time gives big end-results
 A lot of small changes in many areas may produce a
big end-results
# of customers Average revenue per
customer
Revenues
x
+15% +20%
+38%
= 2,6 x StartStart x (1+10%)^10

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Issue tree - general
Area of analysis
Area 1
Problem 1
Problem 2
Possible Reason 1
Possible Reason 2
Possible Reason 3
Possible Reason 4
Possible reasonsSuspected problems
Analysis to be
performed
Analysis 1
Analysis 2
Analysis 3
Analysis 4

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Issue tree in Logistics –
examples

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Issue tree - general
Area of analysis
Area 1
Problem 1
Problem 2
Possible Reason 1
Possible Reason 2
Possible Reason 3
Possible Reason 4
Analysis to be
performed
Analysis 1
Analysis 2
Analysis 3
Analysis 4

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Issue tree – example – chicken meat producer
Area of analysis
Transport
High costs of transport per ton of
goods
Big level of waste and breakage in
transport
Analysis to be
performed
Analysis of correlation between type
of packaging and percentage of
damaged
Analysis of time spent on the way and
kilometers covered in that time
Analysis of designed routes, their
length and the influence of possible
changes
Analysis of fuel usage and kilometers
covered by vehicles
Analysis of load carried on the way
back
Badly designed routes
Too big fuel usage
No shipments on the way back
Low usage of resources
Badly designed method of packaging
which makes the product prone to
damage
Speed not adjusted to the product
Badly organized work and schedule of
deliveries
Limitation on delivery time of finished
goods
Analysis of level of overtime, daily
organization of drivers work
Analysis of Clients’ preferences on
delivery time

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Issue tree in Retail –
examples

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When you are talking about retail you should have a look a
the following areas
Retail chain development
Product Range / Category Range
Management
Pricing
Logistic / Supply Chain
Expansion model
In-store process
HR especially trainings

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Below you can see example of issue tree in Retail Chain
Development
Area of analysis
Retail chain
development
Low growth in sales
Decreasing EBITDA of new stores
Analysis to be
performed
Analysis of rents vs comparable
competition
Salaries growth vs rotation – comparison
with competition
Analyze the change in sales after opening
new stores / on-line introduction
Analysis of number of openings vs
availability of new places
Low LFL due to cannibalization (on-
line, new stores in old locations)
Few new openings in locations
Increasing rents due not proper usage
of purchasing power
Growing salaries to keep low rotation
High cost of building new stores
No support from the shopping malls
Not optimized formats, expensive
fixtures
Analysis of contracts with shopping malls
Analysis of cost per 1 sq. m, number of
fixtures, cost per fixtures

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Issue tree – example – chicken meat producer
Area of analysis
Product Range
Management
Low margin on Category A
Low margin on Category B
Analysis to be
performed
Analysis of whom we buy from Category B
and the whole value chain
Analysis of planning and allocation process
Analyze of number of suppliers and their
share in sales vs market
Analysis of Private Labels potential –
benchmarks and potential supplier
Too many supplier of Category A that
undermines your purchasing power
Lack of Private Labels
Usage of middlemen instead of direct
suppliers
Improper planning and allocation by
stores
High inventory cost
Improper planning and allocation by
stores
Non-responsive supply chain
Analysis of planning and allocation process
Analysis of lead times, deliverability on-
time, level of breakage

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Get the low hanging fruits first. By
low hanging fruits we mean things
with big impact and easy to
accomplish

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Resources needed
Impact
SmallBig
High
Low
 Things with big impact that
require little work
1
How to find low hanging fruits?
 Easy but with low impact
3
 Things with big impact yet
expensive, time consuming
2
No

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 Office hours
1
Low hanging fruits for a blog could look like this
2
4 3
 Blog posts
 Slideshare presentation
Impact
High
Low Resources needed
SmallBig
 Udemy Course
 Sniply
 Youtube
 Events
 Twitter
 Additional resources

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Priorities
 FCFS – First Come First Served (FIFO)
 LCFS – Last Come First Served (LIFO)
 Due Date
 SOT – Shortest Operating Time

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What you do depending on the rules you use?
FCFS
 Write 1 blog post
 Analyze sales
results
 Send email
 Read 4 articles
 Pay for cable TV
Task
When
it came Deadline
Time
needed for
completion
In minutes
 01.04
 01.04
 02.04
 02.04
 03.04
 10.04
 04.04
 09.04
 11.04
 04.04
 120
 30
 2
 25
 4
1
2
3
4
5
LCFS
5
4
3
2
1
Deadline
4
1
3
5
2
SOT
5
4
1
3
2

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There are 2 types of benchmarks
Internal External
 Based on previous execution
 Extremely comparable
 Very reliable
 Detailed – can be put for each and every activity
 Based on some external source (i.e. reports)
 Not that easily comparable
 They to be treated with caution
 Only for chosen amount of activities
 Can give you food for drastic improvements - by
analyzing them you can find totally different
method of working

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By comparing your results and benchmarks you can decide
what to improve, work on
Internal
 Salary
 Speed of typing
 Speed of
analyzing Excel
Area Unit
Current
result
 K USD
 words/ minute
 minute
 5
 40
 15
4
39
10
External
7
80
12
 Your salary went up in
comparison with your previous
one but you are still below the
market
 Your typing speed has improved
slightly yet you are far below the
speed achieved by others
 You not only improved your speed
of analyzing but also are better
than others
 Makes sense to teach others how
to do it
Conclusions

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Applying 80/20 rule
in practice

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What does 80/20 mean in practice
 Concentrate only on the big items
 Concentrate on the big customers
 Analyze the most typical cases
 Concentrate on the most frequently occurring problems
 Analyze problems with big impact
 Your analyses should have only 20% of the variable that
generate 80% of the impact
 Start with subjects where you see the biggest difference
between actual results and benchmarks

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Here are 3 examples of using 80/20 rules
 Learning Visual
Basic for Excel
 Checking
competitors
 Salsa course
Area
 Learn only the 5 most used items that will take only 20% of full course and will
be used by in you in 80% cases
 You check only 20% of competitors that sales add-up to 80% of the market
 Go through 20% of the course to learn the moves and the figures used in 80% of
cases
Description

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Opportunity tree
Gross Margin
Sales
% Gross Margin
% Front Margin
% Back Margin
# of transactions
ATV
Traffic
% conversion
 YouTube
 Ads on instagram
 Affiliation with bloggers
 Guest blogging
Opportunities
 Long form / Short form
 Reduction of delivery methods
 No account
 Emailing for people abandoning cart
 Upselling and Cross selling
 Free delivery for higher tickets
 Introduction of new categories
 Reducing number of suppliers
 Finding new suppliers
 Renegotiation

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Cost drivers are causing the cost to go or down
Cost of a Udemy course
Slide preparation
Recording and editing
# of slides
Cost of 1 hour
# of hours per 1 slide
# of lectures
Cost of 1 hour
# of minutes per 1 lecture

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To understand and analyze business you have to identify the drivers / KPIs
that a key for specific business and translate it into a model in Excel
# transactions
Average
revenue per
transaction
Total revenuex
% Fee of the
marketplace
Average
transaction value
Total searches % conversion
x
x
Total Costs
Total margin
-
Rent
People
Cost of traffic
Ratio of visitors
to searches
Average cost of 1
visit
+
x
Development

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Imagine that you have to estimate typical family spending's. You can take
into account countless number of factors…..

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…or you can limit yourself to the most important ones i.e. number of kids,
size of house, main repetitive spending like food.

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To measure the selected factors you have to use some sort of KPIs
Spending per 1
person per month
per category
# of people in
average family
Average size of the
house in sq. m
Average rent per
sq. m

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In the next lectures I will show you how to define and use
KPIs and business drivers
How to improve the results of
the Cinema

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KPIs for cinema –
Introduction

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In this section as a practice you will have to define the KPIs of
the cinema business and use it to see how we can improve
the profits of this business

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We will start with the problem. You will define the KPIs and then use it to
create the analysis in Excel as well as the slide with results
# transactions
Average
revenue per
transaction
Total revenuex
% Fee of the
marketplace
Average
transaction value
Total searches % conversion
x
x
Total Costs
Total margin
-
Rent
People
Cost of traffic
Ratio of visitors
to searches
Average cost of 1
visit
+
x
Development

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To get the most out of the examples please try to solve the
problem on your own before going to the solution
Problem set / Case
study
Pause the course and
solve the problem on
your own
Go to next lecture
where you will find the
step by step solution to
the problem set

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Imagine that you were responsible for managing the cinema. What KPIs
metrics you would look at to see whether you are doing a good job?

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Let’s see what KPIs you should look at
# sold tickets
Average revenue
per Ticket
Total revenue Total Costs
x
Total margin
-
Average price per
ticket
Average additional
purchase per ticket
Total capacity in
tickets
% Utilization
Rent
People
# of People
Average wages
+
+
x
x

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What rules should be used when building analysis in Excel
Usage of colors
Consistency between sheets
Pyramid principle
1-source rule
Repetition of variables
Shortcuts
No mouse
Description
Data source
Master sheet

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The most useful functions
Basic functions Financial / Mathematical Others
 SUMIF / SUMIFS
 COUNTIF / COUNTIFS
 HLOOKUP
 VLOOKUP
 MATCH
 SUMPRODUCT
 IF
 AND / OR
 IFERROR
 AVERAGEIF
 LEFT / RIGH / MID
 FIND
 CONCATENATE
 YEAR / MONTH / DAY
 ROUND / ROUNDUP /
ROUNDDOWN
 TODAY
 VALUE
 WEEKDAY
 RAND / RANDBETWEEN
 MOD
 NPV
 IRR
 ABS
 MAX / MIN
 CORREL
 Pivot
 Slicer
 Relative addresses
 Formats
 Hyperlink
 Remove Duplicates
 Filters
 Sorting
 Data Validation
 Trace Dependents / Precedent
 Analysis Tool Pack

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Essential Excel for Business
Analysts and Consultants
A practical guide
presentation
Check also my other presentations

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What rules should be used for Power Point Presentations
Use the template
1 slide = 1 message
Agenda
Executive summary
Excel analysis for every
slide
Sources
Dates
Backup
Next version rule
Show money

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The kids market will be slowly growing as a result of low GDP growth
3 247 3 480 3 473 3 503 3 537 3 583 3 626 3 689 3 750 3 806 3 857 3 911 3 965 4 011 4 055 4 104 4 144
2 804
2 862 2 855 2 880 2 908 2 946 2 981 3 033 3 084 3 130 3 171 3 216 3 260 3 298 3 334 3 374 3 407
1 328
1 392 1 389 1 401 1 415 1 433 1 450 1 476 1 500 1 523 1 543 1 565 1 586 1 605 1 622 1 641 1 658
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
8 058 8 198 8 334 8 459 8 570 8 692 8 811 8 914 9 012 9 119 9 2097 9637 8597 7857 7177 7347 380Total
Source: Euromonitor
Toys
Hardware
Fashion
Market size
In milions of EUR

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Market size
In millions of EUR
3 247 3 480 3 473 3 503 3 537 3 583 3 626 3 689 3 750 3 806 3 857 3 911 3 965 4 011 4 055 4 104 4 144
2 804
2 862 2 855 2 880 2 908 2 946 2 981 3 033 3 084 3 130 3 171 3 216 3 260 3 298 3 334 3 374 3 407
1 328
1 392 1 389 1 401 1 415 1 433 1 450 1 476 1 500 1 523 1 543 1 565 1 586 1 605 1 622 1 641 1 658
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
8 058 8 198 8 334 8 459 8 570 8 692 8 811 8 914 9 012 9 119 9 2097 9637 8597 7857 7177 7347 380
Total
Source: Euromonitor
Toys
Hardware
Fashion
 The kids
market will
develop
slowly as a
result of low
GDP growth

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Market size
In millions of EUR
3 247 3 480 3 473 3 503 3 537 3 583 3 626 3 689 3 750 3 806 3 857 3 911 3 965 4 011 4 055 4 104 4 144
2 804
2 862 2 855 2 880 2 908 2 946 2 981 3 033 3 084 3 130 3 171 3 216 3 260 3 298 3 334 3 374 3 407
1 328
1 392 1 389 1 401 1 415 1 433 1 450 1 476 1 500 1 523 1 543 1 565 1 586 1 605 1 622 1 641 1 658
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
8 058 8 198 8 334 8 459 8 570 8 692 8 811 8 914 9 012 9 119 9 2097 9637 8597 7857 7177 7347 380
Total
Source: Euromonitor
Toys
Hardware
Fashion
 Toys make
30% of the
kids market
The kids market will develop slowly growing as a result of GDP growth

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Presentations
Practical guide how to prepare a great presentation
presentation

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$190
$10

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Intermediate tools used by

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Intermediate tools –
introduction

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In this section we will discuss the intermediate tools, techniques and
frameworks used by Management Consultants
Rankings Scenario Analysis
Representative
element analysis
Decision Tree
Analysis
Critical Chain
Theory of constraints
and bottlenecks
Lean Manfuacturing

87
Quite often you have options that you want to somehow compare and
rank them
Option 1
Option 3
Option 4
Option 5

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Thanks to the ranking you not only give points but you can sort them
from the most wanted to the least desired
Option 5
Option 3
Option 1
Option 4

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You may use ranking for many things
Pick the best option from
available options
Create priorities for further
actions
Rank people / team members
Rank business ideas
Motivate
Create benchmarks

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Rankings are done in 5 steps
Create criteria and
weights for the
ranking
Gather data
Calculate the points
and create the
ranking
Pick the preferred
option
 At least 3-4 criteria,
preferably
independent
 Every criteria
should have a
weight – not all
criteria have to
have the same
importance
 For defined options
gather data on the
criteria so you are
able to calculate
the points for every
criteria and option
 Define the rule /
function that
assigns points for
every criteria
 Calculate the score
for every option-
criteria
 Using weights
calculate the total
score
 Use the total score
to rank the options
 You can use
additional criteria
 Using the ranking
and additional
criteria you can
pick the preferred
option
Define options
 You have to define
all options that you
will be choosing
from

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In the next lectures I will show you how to create and use the
rankings in practice. I will be talking about 2 examples
DIY (Home Improvements)
Expansion strategy for foreign
markets

92
How to expand the
brand – Introduction?

93
Let’s have a look at milk producer that wants to expand its product
range
Leader in milk
2nd place in butter
25 products considered

94
There are things you should consider when selecting the right
products to be developed within the same brand
Is the product consistent with the
current brand?
Does it require the same
distribution?
Do you have strong players on
the market you enter?
What is the potential of the
market?
Are there customers who already
think that you have the product?
What is the growth rate of the
market for the product?

95
How to expand the
brand – Solution

96
After we have gone through research we got the following results.
This suggest that we should start with yoghurt and yellow cheese
0
50
100
150
200
250
300
350
0 0,5 1 1,5 2 2,5 3
Market size
In mln USD
Attractiveness
(1-Low;3-High)
Cheddar
Cottage cheese
Yoghurt
Milk Desserts
(i.e. Monte)
Yellow (swiss)
cheese
Ice cream
Feta

97
$190
$10
For more details on the case study go to my online course. You will
find there all details and Excels with calculations

98
Expansion strategy into other
countries - Example

99
Let’s imagine that you were to create an expansion plan for
expansion into new countries for a fashion brand

100
As you remember we have create a ranking of countries
Define criteria and
weights for the
criteria
Gather data on the
markets
Create the ranking
of markets to enter
Define limits that
you have
Set priorities
 4-6 criteria on the
basis of which you
will value specific
markets
 Ranking on the
basis of criteria and
weights created
 Money for
expansion
 People for
expansion
 Logistics
 Lead time due to
your supply chain
 Limitation in stock

101
For this we will use 4 criteria and we will estimate the size of
the markets in standard stores
 GDP per capita PPP
 Similarity in product range
 Competition level
 Franchising infrastructure and the
Criteria for
measuring the
attractiveness of
the market
Potential of the
market
 Potential was measured using the size of the markets in terms of
potential number of standard stores

102
Potential markets for expansion – Ranking vs Potential – region
2,2
2,3
2,5
2,6
2,7
2,7
2,9
3,0
3,3
3,3
3,4
3,4
3,5
3,6
3,9
4,3
Philipines
North America
Australia
Turkey
South America
Indonesia
China
Africa
ex USRR
Western Europe
India
Middle East
Malaysia
Thailand
Eastern Europe
Poland
Ranking of market attractiveness
(1-low; 6-High)
Potential of countries / regions to capture
assuming achieving share like in Poland
In standard stores
579
2 215
76
324
1 870
1 255
4 287
4 944
534
1 136
6 288
208
134
209
215
100
Philipines
North America
Australia
Turkey
South America
Indonesia
China
Africa
ex USRR
Western Europe
India
Middle East
Malaysia
Thailand
Eastern Europe
Poland

103
Potential markets for franchise – Ranking vs Potential – region
0
500
1 000
1 500
2 000
2 500
0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0
Poland
Middle East
Philippines
Eastern Europe
Russia + Asian
ex USRR
Thailand
Malaysia
Indonesia
Australia
North America
South America
Turkey
Western Europe
Potential
In number of standard stores
Attractiveness
(1-Low;6-High)

104
Scenario Analysis –
Introduction

105
Future is pretty difficult to figure out. You don’t know what will happen.
In those cases it is a good idea to consider a few different scenarios

106
Future is pretty difficult to figure out. You don’t know what will happen.
In this cases it is a good idea to consider a few different scenarios

107
Imagine that you are ice cream producer and you have to decide how much
ice-cream to produce for the next day without knowing what will be the
weather. Therefore, you have to consider different scenarios
Scenario 1 Scenario 2 Scenario 3
100 70 30

108
The scenario analysis consists of 5 steps
Define the thing
(goal function) you
want to analyze
Define which drivers
are the least certain
Define the scenarios
Define your
behavior / policy
Check the goal
function for every
policy
 You should be
analyzing the things
that are threatened
by different
scenarios and are
important for your
business
 It can be profit,
NPV from new
investment,
inventory you
should have etc.
 It is good to define
3-5 different
scenarios
 In every scenario
the main drivers
will have different
value
 You should assign
certain probability
to every scenario
 Scenarios do not
depend on you but
your behavior does.
 You can define a
policy / behavior
that helps you in a
specific situation
 Concentrate on
drivers that have
big impact and big
volatility
 The aim of this step
is to pick the right
policy, given the
scenarios and their
policy
 The best policy is
the one that gives
you highest
benefits (highest
goal function)

109
In the next lectures I will show you how to create and use
scenario analysis in practice using an example from airplane
industry
Which price formula is the best
for my profits

110
for my profits – Introduction

111
Now we will try to see which price formula is better for aircraft
maintenance service company
2 sites – in Poland and
Croatia
Consider 4 different
formulas
scenarios

112
Materials
Scenario 1
 $ 30 K
Number of
manhours needed
 3 000 man-hours
Probability of the
scenario
 30%
Scenario 2
 $ 20 K
 3 400 man-hours
 25%
Scenario 3
 $ 15 K
 3 800 man-hours
 45%

113
Materials
Times & Materials
 Cost of Materials
increased by 15%
markup
Labor
 $ 50 per 1 man-
hour
 We look at the real
man-hours needed
Fixed Fee
 $ 25 K
 $ 140 K
Mixed Option 1
 $ 25 K
 Fixed: $ 140 K
 On top of that 15%
of the labor cost
calculated using
Times & Materials
formula
Mixed Option 2
 $ 25 K
 Fixed: $ 140 K
 On top of that for
all man-hours
above 2 800 we
use the Time &
Materials formula
but using the price
of $ 90 per 1 man-
hour

114
for my profits – Solution

115
2 sites – in Poland and
Croatia
formulas
scenarios

116
It seems that the Mixed Option 2 price formula is the best
solution
Gross Margin
In thousands of USD
90
58
84
117
Times & Materials Fixed Fee Mixed Option 1 Mixed Option 2

117
$190
$10

118
Representative element
analysis – Introduction

119
In many cases there are a lot of options that you can consider. For simplicity you
want to limit the options and get down to 1-5 representative elements

120
There are usually 2 main ways to use representative element analysis
Average 3 options

121
Thanks to representative element analysis you can achieve a
lot of interesting things
Compare different solutions and
decide which is better
Compare different offers and
decide which is better
Find optimal solution
Create benchmarks
Plan & Forecast
Do the segmentation

122
In the next lectures I will show you how use the
representative element analysis in practice
Analysis of tariffs in a
convenience store

123
Convenience stores - Analysis
of tariffs - Introduction

124
Now we will analyze tariffs used by a Retailer operating chain of
convenience stores
Area of analysis Possible reasonsSuspected problems
Analysis to be
performed
Transport
High costs of delivery to points of
sales
Discrepancies in tariffs
Comparison of costs of delivery and its
components for different regions
Lack of unified tariff / method of
calculating tariffs
Data needed:
 Tariffs charged for each and every region
 Number of points of sales
 Average length of a route, average number of points of sales per route, average number of newspapers
delivered to a point of sales

125
Now we will analyze tariffs used by a Retailer operating chain of
convenience stores
Introduction:
 You were employed by a company which distributes newspapers and FMCG goods to around 36 thousands
of small convenience stores.
 Company consists of 18 virtually independent entities linked to regions.
 Each and every entity uses different way of setting tariffs for delivering goods
Tasks:
 Figure out a way to compare costs and try to estimate in which region costs are the lowest
 Estimate current costs of distributing to points of sales
 Estimate savings provided that you manage to lower costs to the level equal to the average of 3 lowest
tariffs

126
He is using different formulas in different regions
 Region 1
 Region 2
 Region 3
 Region 4
 Region 5
 Region 6
Fixed fee per
Point of
delivery
Fixed fee per
day for
allocating
newspapers
Fixed fee per
route Fee per km
Fee per
allocated
newspapers

 
 
   
   
 


127
In order to be able to compare the results we will have create 2 typical
routes
Parameters of a typical city route:
 Average length (km)
 Number of Points od delivery
on a typical route
 Newspapers allocated in pieces
31
21
9 000
 Average length (km)
 Number of Points od delivery
on a typical route
 Newspapers allocated in pieces
124
29
3 000
Parameters of a typical rural route:

128
Convenience stores - Analysis
of tariffs - Solution

129
After we have done the calculations we got the target to which more
expensive regions should strive
City route
Average daily cost per Point of Delivery in EUR
Rural route
Average daily cost per Point of Delivery in EUR
5,5 5,3 5,4
6,0
5,2 5,4
Region 1 Region 2 Region 3 Region 4 Region 5 Region 6
6,6
9,5
7,6
6,4
7,5
6,3
Region 1 Region 2 Region 3 Region 4 Region 5 Region 6
5.4
7.6
weighted average for 3 leas
expensive regions

130
If we renegotiate the contracts we can get significant savings both for
city and rural routes
Current weighted average cost per Point of
Delivery
In EUR per 1 visit in Point of delivery
Targeted weighted average cost per Point
of Delivery
In EUR per 1 visit in Point of delivery
Number of Point of
deliveries
City routes Rural routes
5.39 7.57
5.26 6.47
24 828 10 829
1 064 3 729
Estimated annual savings
In thousands of EUR
City routes

131
$190
$10

133
Quite often you have to make important decision faced with uncertainty. In those
situation it is very useful to apply the so called decision tree

134
Let’s have a look at example. You are to build a chocolate factory. You
have to decide on the size of it.
Big Factory
(Invest $50 M)
What factory you
should build?
Small Factory
(Invest $30 M)
Big Demand
(EBITDA= $100 M)
Small Demand
(EBITDA= $20 M)
Big Demand
(EBITDA= $50 M)
Small Demand
(EBITDA= $30 M)
 50
Outcome
In M USD
 -30
 20
60%
40%
60%
40%
 0

135
Once you have the outcomes for each and every option it is time to
calculate the expected value for both decisions
Expected Value = Outcome 1 x
Probability of
Outcome 1
+ Outcome 2 x
Probability of
Outcome 2
Expected Value for
Big Factor
= 50 x 60% + - 30 x 40% 18=
Expected Value for
Big Factor
= 20 x 60% + 0 x 40% 12=

136
Once you have the outcomes for each and every option it is time to
calculate the expected value for both decisions
Big Factory
(Invest $50 M)
What factory you
should build?
Small Factory
(Invest $30 M)
Big Demand
(EBITDA= $100 M)
Small Demand
(EBITDA= $20 M)
Big Demand
(EBITDA= $50 M)
Small Demand
(EBITDA= $30 M)
 50
Outcome
In M USD
 -30
 20
60%
40%
60%
40%
 0
18
12

138
* Sort,Set,Shine,Standardise,Sustain
** Total Productive Maintenance
*** Overall Equipment Efficiency
Kanban Kaizen Poka Yoke Nested
Production
Zero defectsOEE***TPM**SMEDJust in time
Process
mapping
Continuous flow
management
Standardizing
work
Heijitsu box
5S*
Lean Manufacturing is a philosophy of working with little waste and highest
quality. It consists of many techniques that should be gradually mastered

139
Essential Lean Manufacturing
for Management Consultants
Practical guide how to cut costs
presentation

141
Overall Labour Efficiency how much work there is in the work
? Workday
Time that you can devote
Time left for real workLack of work
100%
54%
OLE =
100 %
54 %
x
x
98%
Work
98%
37%
No work due to
organizational
issues
Movement
70%
Work well done
70 %
Liczba
dostępnych
godzin
lalka Stawka Godzinna
Dodatkowe
przychody

143
Bottlenecks are dangerous as their hurt the efficiency of the
whole system

144
What is the throughput of every system and where
is the bottleneck?
Example 1
7 5 7
Example 2
5 10 20
Example 3
5 5 3
x Stage capacity

145
The are 4 rules that you should follow when it comes to
bottlenecks
 Identify what is the bottleneck
 Increase its throughput by lowering the time needed for
everything that goes through the bottleneck
 Add new resources to bottleneck
 Adjust everything to the bottleneck – so it works at the
same pace

146
Imagine that you are working in a company working in a
content marketing
Research topics for a
post
Write a post Create illustration
Edit and modify
post, add illustration
and schedule
20 5 7 10
# of post that can
be done in a week
by 1 person
 Speed up the writing process (faster typing,
better tools, shortcuts for the most popular
words)
xx
20 8 7 10
10 9 10 10
 Make the researcher do also par time
writing and making illustration
 We have almost doubled the production of post with the same resources
 The same principles would apply if all the activities were done only by you – in this case it would mean that you
should not do too much research and illustration but rather improve the typing speed and match the number of
illustration and researches to your capacity in writing
 If you have no impact on the process (you are one of the guys above just doing his own part and your boss does not
want to listen to you then simply do less – identify the bottleneck and adjust your speed to his speed.
 On the other hand if you are the bottleneck then speed up because the whole team depends on you.

148
One of the biggest problem for efficiency is the so called Parkinson’s Law –
Work expand so as to fill the time available for its completion

149
People when asked to evaluate the time certain things will take build in
buffers
A B C
A + B + C
A + B + C
A B C Central buffer
Declared time
Buffer time
Real execution

150
$190
$10

151
Advanced tools used by

152
Advanced tools –
introduction

153
In this section we will discuss the basic tools techniques and
framework used by Management Consultants
Simulations Feasibility Analysis Sensitivity analysis
Decomposition
Analysis

154
Simulation analysis –
Introduction

155
Future is pretty difficult to figure out. You can use scenario analysis or
you check ALL the potential options and see which is optimal

156
Imagine for a second that you have a small bakery trying to decide what is the optimal
number of cakes that you should bake. You want to use simulations to find out

157
For the producer of cakes that at the same time can bake from 1 to 10
cakes using the simulation to find optimal production batch would
entail calculating the costs for all options

158
There are plenty of things you can do thanks to simulations
Find optimal solutions
Carry out sensitivity analysis
Plan & Forecast
Test the boundaries of the system
Find weak spots
…..

159
In the next lectures I will show you how to use simulation in
practice. I will be talking about 2 examples
What will be the effect of the
price increase
Simulation of the whole
Logistics System

160
price increase – Introduction

161
The impact of the price change on your profit will depend on
a few factors
How big the increase is
What your competition
does?
How aware of prices are the
customers?
Price sensitivity
The role of the product you
are increasing the price
Components of the average
basket

162
Imagine that you want to estimate the price change impact for a small
chain of local coffee shops
20 location in Poland
Sell coffee, cakes,
sandwiches and quiches
3 different motives for
going there

163
price increase – Solution

164
Sell coffee, cakes,
3 different motives for
going there

165
If we look just at coffee gross margin we should increase the price of
coffee by 9%. If we take into account total gross margin 4% would be a
better choice
0
2 000
4 000
6 000
8 000
10 000
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
0
5 000
10 000
15 000
20 000
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
Gross Margin – Only for Coffee vs price increase
In thousands of USD
Gross Margin – Coffee and Cakes vs price increase
In thousands of USD

166
$190
$10

167
Juice Producer – Simulation of the
whole Logistics System – Introduction

168
Let’s imagine that you have to optimize the distribution system of a
juice producer located in Serbia
Introduction:
 You were employed by a producer of local brand of Cola to carry out an operational audit.
 The producer located in Serbia where it has a significant market share. Currently, apart from warehouse next to the production facility
in Subotica, it has two additional distribution centers in Novi Sad and Belgrade.
 Currently, the goods are collected from the distribution centers by shops
Tasks:
 Calculate the cost of the current system assuming that you have warehouses in all locations
 Assume that you use 24-tonnes trucks for transportation

169
Let’s imagine that you have to optimize the distribution system of a
juice producer located in Serbia
Subotica
Novi Sad
Belgrade
Niš
Kragujevac
Prijepolje

170
Juice Producer – Simulation of the
whole Logistics System – Solution

171
At the end thanks to the simulation we get the optimal distribution
system
1 611
1 480
1 838
2 431
2 788
2 657
3 015
1 254
Warehouse only in
Subotica
Warehouse only in
Novi Sad
Warehouse in
Subotica and Novi
Sad
Warehouse only in
Belgrade
Warehouse in
Subotica and
Belgrade
Warehouse in Novi
Sad and Belgrade
Warehouse in all
locations
No warehouses
Total cost of end products distribution system
In thousands of USD

172
$190
$10

173
Decomposition analysis –
Introduction

174
Revenue Growth
Decomposition analysis shows you what are the components, driving
forces behind certain phenomena. Imagine for a second that we are
analyzing revenue growth of a FMCG company

175
We would like to break it down to following components. This
decomposition helps us see how we managed to grow the
revenues
New customers
New products
Increased sales in existing customers and products
Others
Increased price

176
Decomposition analysis helps you achieve a lot of goals
Pick the biggest contributor
You will know what to focus on
to get the required effect
Check to what extent you were
dealing with one-offs
Create a business model based
on drivers and KPIs
Forecast / Plan the future
results
Evaluate the business / business
unit

177
In the next lectures I will show you how to create and use the
decomposition in practice
LFL analysis for a coffee shops
chain

178
LFL analysis – Introduction

179
LFL analysis is the analysis of the change in revenues for stores that have
been at least for 12 months. In this analysis through decomposition we try
to pinpoint the most important aspects
Average
transaction
value (ATV)
Average selling
price (ASP)
Traffic % Conversion
Items per
transaction (IPT)
Total # of
transactions
x x
Revenue
x
x
Average first
price
% of first price
Driving KPI
Indicators dependent on others

180
Imagine that you identify the driving factors in LFL growth in the last
few years
Sell coffee, cakes,
15 stores are LFL stores

181
Since in the case of the coffee shops we do not give many discounts we will
stop at the level of Average Sales Price (ASP) and not go deeper
Average
transaction
value (ATV)
Average selling
price (ASP)
Items per
transaction (IPT)
Total # of
transactions
x x
Revenue
x
Driving KPI

182
LFL analysis – Solution in
Power Point

183
Sell coffee, cakes,
15 stores are LFL stores

184
LFL analysis shows that the biggest impact was from IPT increase.
Second in importance was traffic
Average
transaction
value (ATV)
Average selling
price (ASP)
Items per
transaction (IPT)
Total # of
transactions
x x
Revenue
x
Driving KPI
120%
20% 12% 50% 13%
5% Percentage growth between
2019 and 2015

185
LFL analysis shows that the biggest impact was from IPT increase.
Second in importance was traffic
12 960
3 472
2 025
8 679
2 170
29 306
Revenue 2015 Traffic Impact Conversion Impact IPT Impact ASP Impact Revenue 2018
Total LFL sales growth by KPI for stores existing since 2015
In millions of USD

186
$190
$10

187
Feasibility analysis –
Introduction

188
In feasibility analysis you want to check whether something is possible or
what are the limitations that you have to consider

189
In feasibility analysis you are given the goal you have to achieve. Now
you need either to find the limitation or alternative ways to reach that
goal
Limitation 1
Limitation 2
Goal
Limitation 3
Limitation 4
Way to achieve
the goal 1
Way to achieve
the goal 2
Way to achieve
the goal 3
Way to achieve
the goal 4
Limitation 1
Limitation 2
Limitation 3
Limitation 4

190
There are plenty of things you can do with feasibility analysis
Identify the limitation you have to
remove to achieve the goal
Pick the most interesting way to
achieve the set goal
Check what are the limitation behind
alternative ways to achieve the goal
Find directions in which you can to
develop your company
Build a strategy for a business unit

191
In the next lectures I will show you how to create and use in
practice the feasibility analysis
How to increase the net profit
by 10%

192
by 10% – Introduction

193
Imagine that you supporting a beauty saloon chain in Easter Europe in
their attempt to increase net profit
50 location in Easter
Europe
They mainly do manicure
They are looking for ways
to increase profit by 10%

194
There are number of ways in which you can increase the profit by
10%
Get new customers
Convince existing ones to come
more often
Upsell and cross-sell customers
during their visit
Introduce new product
Increase prices

195
by 10% – Solution

196
Imagine that you supporting a beauty saloon chain in Easter Europe in
their attempt to increase net profit
50 location in Easter
Europe
They mainly do manicure
They are looking for ways
to increase profit by 10%

197
Option 1 –
Increase price
Description
Required change to increase net margin
by 10%
Commodity is a basic good used in commerce that is interchangeable with
other commodities of the same type
 We increase the price for manicure for all customers
 Current price is 25 USD per visit
 5% increase of the price
Option 2 –
Increase
Frequency
 We increase the frequency of visiting our beauty shop
 Currently, an average customer does 1.4 visit per
customer
 Increase from 1.4 to 1.6 visit per
customer
Option 3 –
Increase
Customer Base
 We increase customer bases size – acquire new customers
 Currently, we have 60 K of customers per shop
 Increase customer base from 60 K
to 68 K
Option 4 – New
product
 We introduce new product
 Currently we do not sell any additional product
 We need 36% of our customer to
buy the new product

198
$190
$10

199
Sensitivity analysis
– Introduction

200
Once you come up with an optimal solution you want to see how
sensitive it is to small changes in underlying assumptions. The solution
can be pretty stable….
Current Solution -
7%
Current Solution -
5%
Current Solution -
2%
Current Solution -
1%
Current Solution Current Solution
+1%
Current Solution
+2%
Current Solution
+5%
Current Solution
+7%

201
… or the contrary very volatile
Current Solution -
7%
Current Solution -
5%
Current Solution -
2%
Current Solution -
1%
Current Solution Current Solution
+1%
Current Solution
+2%
Current Solution
+5%
Current Solution
+7%

202
You want to carry out a sensitivity analysis for many reasons
Volatility means risks
You want to prepare for the risk /
hedge against the risk
In some cases you may want to
choose less sensitive option
Sensitivity analysis is basis for
managing a portfolio of projects
Sensitivity analysis helps you
manage expectations

203
Sensitivity analysis –
Solution

204
As you can see the revenue growth is very sensitive to changes in
IPT but not that much to changes in conversion rate
7 569 8 191 8 813 9 435 10 057 10 679 11 301 11 923 12 545 13 167 13 789 14 412 15 034 15 656 16 278
0,03 0,04 0,05 0,06 0,07 0,08 0,09 0,10 0,11 0,12 0,13 0,14 0,15 0,16 0,17
Revenue growth between 2019 and 2015 depending on the increase of IPT (Items per Transaction)
In millions of USD
Revenue growth between 2019 and 2015 depending on the increase of % Conversion
In millions of USD
10 835 10 990 11 146 11 301 11 457 11 612 11 768 11 923 12 079 12 234 12 390 12 545 12 701 12 856 13 012
0,30% 0,40% 0,50% 0,60% 0,70% 0,80% 0,90% 1,00% 1,10% 1,20% 1,30% 1,40% 1,50% 1,60% 1,70%

205
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206
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