Thursday, February 12, 2015

A New Article About Direct Profit by Product

Here is anew article I wanted to share with you about Direct Profit by Product. The Direct profit by product index is a method used in retailing to analyze the true profitability of one product, taken into account all the components of its margin and the cost related to its sale.

The article has been published in 1988, which proves that the idea of DPP has been there for quite a while, even though it is still not much used by retailers. This article shows the result of a study made in a supermarket chain on the mapple syrup categories. This is also the reason why the article is interesting, is that it gives a clear case study on how to use DPP.

Here are some of the highlights of the article.

There are 3 types of Direct Product Costs :
  • Warehouse costs, 
  • Transportation costs
  • Store costs

The allocation of costs is a function of several factors:
  •  Cubic volume of the unit and case
  •  Case weight
  •  Delivery schedule
  • The cost of the product
  • The inventory turn

The article also emphasize on the limits of the DPP analysis:” There are limitations to the use of DPP. Since DPP is a cost oriented approach to merchandising decision making, it does not take into account the consumer’s changing tastes or attitudes. The analysis also does not report how much shelf space should be changed. This problem is being addressed by the shelf space. One of these measures is the DPP of individual products. The integration of DPP and shelf allocation systems opens many possibilities for the effective management of grocery merchandising”.

The strategic approach of DPP
The article proposes a chart to charecterize the strategic interest of one product by its DPP.

Here is an example of how it works, and the axis of this strategy.

I also reconstructed a chart based on the same principle, with the same figures, to show how concretely we may picture the analysis. I have put the size of the circles by the size of the DPP/week.

Here are some charts showing the results of the study. It shows how to implement the technique.

I believe that this analysis may help to have a better view also about how to optimize the costs of goods sold in order to optimize profitability of product range.

Once again, DPP should not be taken solely, and you need to have a real category management strategy to properly manage your product selection.