Profit Characteristic Curve

Quantifying the relationship between ready mixed concrete customer price and last-mile logistics productivity

A ready-mix concrete producer’s profitability is heavily dependent upon a robust revenue management strategy. Linking customer product price and last-mile logistics metrics allows managers to evaluate each account’s profit contribution. The profit relationship between customer price and last-mile logistics productivity is defined as the Ready-Mix Profit Characteristic Curve. It illustrates the trade-off between material margin, an indicator of price ($/cubic yard), standardized by removing the raw materials cost from the product price, and last-mile logistics productivity (cubic yards/hour).

1.0 LOGISTICS
Ready-mix concrete logistics consists of primary and last-mile factors. These logistics operations are illustrated in the supply chain of Figure 1. Primary logistics are operations moving raw materials (cement and aggregates) from processing facilities or from storage terminals to the ready-mix concrete production facility.

Last-mile logistics represents the delivery of ready-mix concrete to the customer. This metric is critical as the required specialized delivery vehicle (mixer truck) carries a high capital cost and is asset-liquid only in the ready-mix concrete market. Customer job site effectiveness, waiting time, and travel time are some of the variables feeding into the last-mile productivity metric.

Equation 2.1 may be expanded to illustrate the raw material margin (P – rm) and the last-mile delivery productivity metric, DP, as indicated here:

Varying the material margin and computing the resulting last-mile productivity value in the profit equation (2.2) results in the Profit Characteristic Curve. The material margin, (P – rm) is on the x-axis and the last-mile productivity, DP, is on the y-axis. This plot represents the actual prior year Example Ready-Mix Producer’s Profit Characteristic Curve:

The Characteristic Curve represents the locus of points required to reach the annual $11.4 million profit and is a constant profitability measure. Each customer’s annual characteristic metrics, material margin and last-mile productivity may be plotted against the annual Characteristic Curve. This enables the producer to make current year decisions regarding customer and market segment selection.

Consider Example Ready-Mix Producer’s analysis of six (A-F) customers’ prior year cost/margin averages.

The Example Ready-Mix Producer Characteristic Curve equation is:

(P – rm) = (19910)DP-2.142

where the variable DP is the last-mile delivery productivity metric and the variable relationship (P – rm) is the material margin.

The Example Ready-Mix Producer’s customer Characteristic Curve plot is illustrated in Figure 3. The customer plot also illustrates annual sales volume (CY) by the size of the bubble. This plot allows the company to examine various price-volume scenarios as it moves forward in its strategic setting. The producer may ask, “Can we increase Customer E’s price? What are other market segment options?”

Market segment options may include the paving, residential or commercial sectors. The Ready-Mix Profit Characteristic Curve allows a distinct visual picture of a producer’s market performance through customer analysis. The curve’s use as an annual planning tool develops a thorough market segmentation analysis allowing the ready-mix producer to better align assets to geography.

The steps for developing the Ready-Mix Characteristic Profit Curve are as follows:

  1. Determine the data sources for the annual profit equation variables. The classification of component costs into variable (rm, pc, DV) and fixed (F) costs may be accomplished through accounting data analysis.
  2. Construct the company’s annual Characteristic Curve.
  3. Calculate each customer’s annual last-mile productivity and raw material margin.
  4. Plot each customer’s Characteristic metrics, revenue, last-mile productivity, and raw material margin with the producer’s annual Characteristic Curve.

Once Step 4 is completed, further segmentation is achieved by constructing other customer Characteristic Curve plots; market segment (paving, residential and commercial) plot; geographic delivery plot; delivery time of day plot; and payment timeliness plot. In addition, movement of the Characteristic Curve to an improved profit value may be examined for price and volume increase/decrease effects. A revenue management strategy may then be determined from the Characteristic Curve scenarios.

Vic Serri is Managing Partner of The Charles Mound Group, a management advisory serving clients in materials, construction, mining and industrial minerals, and can be reached at [email protected]. He presents the research, models and opinions here for business management perspective, but not investment advice.