The Problem

The company was suffering from an increasing cost structure, particularly in distribution costs. The consensus between the executives and the board was that macroeconomic variables and US foreign policy were contributing to a higher logistics cost. Frustrated by the environment in which the company found itself, the CFO suggested conducting a deeper profitability analysis and contracted Margineo's services to properly audit the company's financial performance.

Margineo Analysis

Margineo was able to save the company over $1M in annual logistics cost.

After a single data request, Margineo returned with good news. The logistics cost increase was not due to variables outside of the company's control and was actionable. Instead, the rising cost was due to a slight increase in customers from a certain region, who were also the highest purchasers of an inefficient to ship product that the company was making. This interplay of product mix and region mix had a far more significant impact (about 4.5x) than the macro variables affecting the company.

Though the macro conditions were a plausible explanation for the increase in cost, and were therefore accepted as fact, if not for Margineo, the company would have kept facing unnecessary margin pressure. Following the discussion, the company resolved to invest in a new warehouse in the region to store its product, a project with under a year's payback and annual savings of over $1M.

Why Was This Previously Missed

The company was operating under the false belief that it had a correct intuition about the source of cost increase because, as the CEO attests, "the explanation of macroeconomic variables seemed extremely plausible." With the increasing complexity of today's businesses environment, companies that sacrifice rigorous profitability analysis in favor of "reasonable" intuitive guesses leave themselves at a disadvantage.

When businesses do conduct analyses, they often under-leverage technology by relying on rudimentary Excel analyses or generic preset analyses from their enterprise resource planning software. For businesses fighting basis point by basis point for margin improvement, intuition and sub-par tools are just not enough; yet, they are the norm.