Improving agility and insight transforms the business

Summary

Philips Lighting had around 30% market share in the European Compact Fluorescent Lamps business. When a new channel arose requiring much faster and more critical short-term profit insight, Philips developed new decision making insights. This channel grew much faster than expected, and Philips was much better placed than competition to respond. It lead to a tripling of volumes and clearly leading market share, as well as enormous credibility for the brand as a key player in sustainability.

Starting Situation

• Stable volumes caused a lack of awareness of product contribution margin.
• A new market segment was emerging: Electricity Utilities needing to comply with CO₂ reduction targets, meaning tenders and spot-deals for large volumes of lamps

Insights

The traditional sales process was via lengthy tenders processes involving a full range of lighting products. Once awarded, the successful bidder would have two to three years of exclusive sales rights. The main players tended to maintain stable volumes, and the commercial analysis made only high level scans of the contribution margin of individual products. 

The new market segment relied on a very narrow base of products, but with much more emphasis on product wattage and specific packaging. The deals were often for one-shot deliveries or large volumes, but at aggressive prices. The cost to serve these accounts was very different to traditional business.

Fixed costs in sub-assemblies and internally produced components were converted into variable costs at subsequent processing steps; there was no accurate picture of integral variable cost. As a consequence, variable cost was greatly exaggerated.

Analysis

Insight into true short-term cash costs of products was needed. Insight into the cost differences of specific wattages was needed. The ability to simulate packaging and distribution variations was needed. A turn-around go/no-go time of less than one hour was targetted (as opposed to several weeks for traditional analysis). 

Implementation

• New product prototypes were developed to remove all packaging costs, and increase accuracy of wattage. 
• Hidden overheads in components and sub-assemblies were split into true variable and fixed costs.
• Labor costs were carefully split into fixed and variable costs. 
• New simplified decision making tools were devleoped and deployed, with easy-to-use spreadsheet front-ends.
• Commercial cost to serve analysis was made, and irrelevant overheads were removed.

Results

Philips was able to make highly accurate and fast decisions about profitability of these tenders. Volumes and profit surged. Philips came to dominate as much as 80% of the regulation-triggered Eletricity Utiliity business, mainy because it could quicjly and confidently offer agressive pricing meeting the specific requirements of the tender.