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Keith Dunn: Chapter 8.1: Performance Analysis (Continued)
Posted On: 04-05-2009 23:15:35 PM

8.1 EFFECTIVE PERFORMANCE ANALYSIS

While the principles given below won’t give you the answers they will at least ensure that any analysis you do will be thorough and robust.

8.1.1 THREE IMPORTANT RULES

8.1.1.1 RULE 1 : YOU CANNOT MAKE A JUDGEMENT USING A SINGLE MEASURE IN ISOLATION

You must consider all available date before reaching a conclusion. Taking action based on a single piece of information can easily lead to costly mistakes. While this is true whatever research you are doing it is especially pertinent when you are analysing performance where there are many, inter-related metrics that you need to consider.


EXAMPLE

We want to decide which of 2 options is performing the best.

• Option A sold 100 units, Option B sold 100 units.
Which is the better performer? On the face of this evidence you would have to say Option A

• You look further and you find that Option A has 1,400 units of stock, which means it is turning on 7.0 weeks cover, while Option B has only 350 units of stock and is turning on 3.5 weeks cover.

Which would you say is the better performing option now?. Although Option A has delivered more sales it has only done so as a result of a much higher stock investment. The analysis has become more difficult.

• Let’s look at the Rate of Sale next. Both options are stocked by 100 outlets, giving Option A a rate of sale of 2.0 and Option B a Rate of Sale of 1.0. This doesn’t really help us. Since the number of outlets is the same there is no change in the relative sales performance of the two options.

• Margin is the next thing to look at and in this case Option A is delivering 45% while Option B is achieving 65%. On this measure alone Option B is far and away the better performer.

Needless to say you still can’t absolutely say which of the two option is the best and you need to dig deeper.

• Firstly look at the performance history. Sales of Option B, for instance, may have fallen off due to a lack of stock while sales of Option A may might have increased as a result of this shortage.

• Next, based on the data available, consider what future performance is likely to be. If , for example, both options are due to be reduced for clearance in 2 weeks then, assuming no further deliveries and a continuation of current sales levels, you will have to reduce far more stock of Option A than you will of Option B and the Markdown will be much higher. Given its current Margin on Sales % this means that the Option A is likely to end up making a far lower percentage contribution than Option B, even though its’ value margin could be higher.

• Finally look at the performance of the options relative to that of a wider selection of their peers and hierarchical parents and in relation to plan and last year, which leads us neatly to Rule 2.



8.1.1.2 RULE 2 : RELATIVE PERFORMANCE IS OFTEN MORE IMPORTANT THAN ABSOLUTE PERFORMANCE

Performance of any entity, such as a SKU, an option or a department, should always be viewed in relation to its’ peer group and to its’ hierarchical parents. Performance of a single option, for example, should be compared to that of similar options, and that of product, sub-department and department to which it belongs.

Performance against plan and, if comparative figures are available, against last year should also be taken into consideration. Your expectations for the performance of each option will differ and an item that is performing badly relative to its’ peers in absolute terms may be over-achieving against its’ plan or performing much better than its peers compared to last year.

If we return to our two example options and show their performance in relation to the total for the department a different picture emerges.

  OPTION A OPTION B TOTAL DEPARTMENT
ACTUAL SALES UNITS 200 100 5,000
PLAN SALES UNITS 175 125 4,000
ACT VARIANCE TO PLAN % +14.3% (20.0%) +25.0%
STOCK UNITS 1,400 350 50,000
WEEKS COVER 7.0 3.5 10.0
RATE OF SALE 2.00 1.00 1.50
MARGIN ON SALES % 45% 65% 45%


We can now see that in although Option A is beating its’ sales plan it is well below the departmental average – which means that there must be other options which are performing much better than it is – while Option B’s sales performance is well below expectations. This may not be significant on its’ own since there can be a differential in the performance against plan of two options, providing they are both adequately stocked (and we know this isn’t the case here) when the plan that is set for one option is relatively (that word again) more pessimistic than that set for the other.

We can also see that the weeks cover for both options is significantly better then the departmental average, that the rate of sale for option A is much higher than the average, while that for Option B is much lower and . that the Margin on Sales % for Option A, which we though may have been low, is in fact at the departmental average. Whether any of this is good or bad is still hard to say since we don’t know what the plans for these measures are.

These examples show that although the picture becomes clearer the more information that we have, performance analysis is rarely black and white. One question usually leads to another, the path of investigation continually twists and divides and as a result the answer to most questions has to be, unfortunately, relative.

8.1.1.3 RULE 3: ACT QUICKLY

Performance analysis ages quickly. New information arrives continuously and what was correct today may not be correct tomorrow and if you don’t act on it quickly you can easily miss the opportunity. Never forget, your competitors will receive similar information at the same time and if they act on it before you do they will win.

 
 
 

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