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Global protability management

in the Ecco group

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The ECCO group h implemeted chge i the compy f-

ce mgemet rom trditiol mgemet o legl d or-

gitiol uit towrd icreed ocu o globl proftbility

mgemet. Tody, the group h etblihed globl overview

which mke the ctul proftbility t EBIT level viible i ll m-

teril dimeio, uch cutomer, product, ditributio ch-

el, etc.

In 2004, the situation in the ECCO group was that protability was alling

and costs were increasing. It was a worrying situation and it was made

worse by the act that it was dicult or us to identiy exactly where in our

value chain protability was alling and which specic business activities

were driving the cost increases. It was necessary to establish a model

which would be able to measure protability across our value chain, says

Annemette Nhr, CFO.

The vision or protability management at the ECCO group was established

rom the beginning:

Establishment o global protability management

Possibility o reporting and analysing protability rom multiple dimen-

sions, such as branding divisions, products, regions, customers, chan-

nels o distribution, etc.Reporting must include orecast, budget and realised protability with

possibility o both explaining and acting.

Protability data, analyses and reporting must be an integrated part o

the ECCO groups standard IT systems.

The vision still manages the development o and the work within prot-

ability reporting.

From cow to hoeThe ECCO group is a global group which owns and runs a or this line o

business unusually large part o the value chain. We hold on to the posi-

The ECCO group has implemented a change

in the companys nance management

FaCTs On ECCO

ECCO is a amily-owned group

with a leading position on themarket or casual shoes. In 2006,

the ECCO group had a total turno-

ver o DKK 4.5 bn, which is almost

600 million more than the year be-

ore. In addition, the result beore

taxes has more than doubled rom

DKK 350 million in 2005 to almost

DKK 709 million in 2006.

We are delighted with the

results because they refect a

handsome growth in all our areas.The growth in the USA is 20 %,

whereas it has been 40% in East-

ern Europe and 8% in Western

Europe. That is great, says Mi-

kael Thinghuus, Deputy Managing

Director, to the daily newspaper

Brsen on 23 March 2007.

He points out that the growth in

turnover in 2007 will be at least

10 %. This means that in 2007,

the ECCO group will reach a

turnover o around DKK 5 bn. Backin 2003, when the ECCO group

reached a turnover o DKK 3.2 bn,

the management set up an ambi-

tious goal to double the turnover

beore 2013. This goal will have

been achieved already in 2010 i

the group succeeds in increasing

the turnover by 10%.

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tion which is almost unique in the shoe business that we management the

entire value chain rom cow to shoe, according to the annual report rom

2006. The group includes an extensive and complex value chain with head-

quarters in Tnder and Bredebro. Here we nd people with the responsibi-

lity or design, branding, products and concepts, and group unctions such

as IT, nance, HR, logistics and legal aairs. In addition there are a total

o 11 business units: the leather group, ve shoe actories, and ve sales

regions. In 2006, the group sold 14.8 million pairs o shoes and had a turn-

over o *DKK 4.5 bn and a prot beore taxes o DKK 709 million.

From belie to kowledge

It was dicult or us to combine strategy with economy because o lack o

transparency regarding where the money was earned and what drove the

costs, says Annemette Nhr, CFO, and adds:

With the protability project we wanted to move part o the decision-

making basis rom belie to knowledge. This was a success, and today we

are able to report on the protability in relevant dimensions o our valuechain, and at the same time we can simulate the uture protability in con-

nection with dierent scenarios.

With the proftability project we

wanted to move part o the decision-

making basis rom belie to knowled-

ge, says Annemette Nhr, CFO.

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The proftbility project

The ECCO group and Valcon chose to let the protability project be driven

by a number o hypotheses set up by the key stakeholders o the busi-

ness. The aim o this approach was to create commitment and ensure the

balancing o expectations regarding the management inormation to be

brought about by the model.

The hypotheses might be that:

Own production is more protable on the bottom line than outsourcing.

Overspecialised products are less protable than other products.

A given product division produces low protability at EBIT level.

Distribution through partner shops is more protable than distribution

through own shops.

Costs o servicing retail customers vary considerably.

30% o the products contribute 70% o the protability at EBIT-level.

Procedure

A total o 14 key stakeholders were identied and interviewed by the

project group. The interviews led to a plan in which the ECCO group al-

located employee resources to a project group which then carried out an

analysis together with Valcon on the basis o the method Activity Based

Costing (ABC).

The actual analysis involved setting up conditions, identiying activities

and distribution keys, collecting data and developing tools. The model was

based partly on existing data and partly on a collection o data among the

employees regarding the distribution o their workday on dierent activi-

ties.

All data were incorporated in Valcons ABC Calculator which is a specially

developed database on the basis o Microsot technology. The database isable to handle the relatively large amounts o data and works as a strong

ABC calculator which is able to distribute costs into the desired areas.

The vision or the protability management was a wish or close integra-

tion with the ECCO groups standard IT systems, but traditional nance sys-

tems are not designed to calculate protability as the ECCO group wants to

see it. This means that we are working on an ongoing basis to improve the

interaces between our nance system and the ABC database, says Jrn

Olesen, Head o Business Controlling.

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Permet prt o buie rhythm

Protability reporting is today a permanent part o the ECCO groups busi-

ness rhythm and decision-making basis. It includes a number o reports to

the management at the head oce and to the ve sales regions about the

protability development on their specic markets. In addition, there are

a number o reports to the rest o the organisation, including in particularthe branding organisation which is in charge o the development o new

products.

Reporting to branding is made on an ad hoc basis and at various times

during a products lie cycle. The early reporting is made already at the rst

presentation o the collection or the coming season. Protability report-

ing is made beore the product is presented to the sales organisations, and

this enables us to act at a very early stage o the products lie cycle, says

Jrn Olesen.

Reult

The protability reporting rom contribution margin level to EBIT level is

today a central element in managing the global shoe group and is a supple-

ment to the existing management reporting to ensure that the organisation

makes the right business decisions.

The results o the new model include:

Global insight into the protability within product divisions, single

products, sales regions, customers, distribution channels, etc. and a

visualisation o where in the value chain money is earned or lost.

Adjustment o prices on some markets. Today, a previously unprot-

able product group on an important market has managed to contribute

avourably to the ECCO group earnings.

Simulation o protability, break-even analyses, etc.

The ECCO group has combined volume considerations with protabilityconsiderations.

All parts o the group are now better able to assess and challenge the

protability o uture collections.

The protability project has also led to increased ocus on essential

areas such as reight charges, discount structures, and other heavy

costs.

The protability project has visualised inappropriate aspects o the

ECCO groups ERP system and processes, and it has thereore been

necessary to optimise process and IT in some areas, or exampleproduct calculations.

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Another material result o the protability project is the common acknowl-

edgement that business activities started in one region may have material

consequences or the activities in the other business units and thereore

on the total protability at group level. Previously, that did not appear rom

the traditional protability reporting, says Annemette Nhr.

strtegic imultio o buie developmet

The primary benet rom the protability model is that the management

in the ECCO group now has multi-dimensional transparency in the prot-

ability structure in the total value chain and is thereore able to simulate

the costs generated by uture initiatives. On the basis o the model, the

management can now also implement analyses which can in advance as-

sess the eect o eorts and plans to improve protability. This may be

analyses o or example the ollowing questions:

How will growth rates within regions and brands aect the total prot-

ability or the ECCO group at EBIT level?

How many pairs o shoes must be sold in a specic product group in

order to reach break-even, also measured at EBIT level?

What is the eect on the bottom line o concrete initiatives on a mar-

ket (product mix, price increases, reallocation o sales resources, etc.)?

How will the allocation o product capacity aect protability?

What is the eect on protability o the use o distributors rather than

own sales channels?

Which costs will a new product lead to or the value chain?

Generally, the analysis conrmed our own, partly subjective, impression

o the situation; but it also did away with some o our assumptions. There

is no doubt that the work has made our nancial navigation more precise.

Finally and this is clearly the most important result the protability

analysis has created a much wider business understanding o our value

chain across ECCO, says Annemette Nhr.

Populr tool

According to Jrn Olesen, the ABC model has been easy to market in-

ternally at ECCO. Together with his team he has staged a road show to

explain the new model, and all parts o the organisation have easily been

able to understand the opportunities o the model.

The protability model is an additional dimension in our decision-mak-

ing process which makes it easier or many people in our organisation todistinguish between protable and less protable initiatives. We now have

a more objective basis or our decisions, says Jrn Olesen, adding, the

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protability model also means that today the nance department is much

more o a proactive sparring partner or the business than beore.

sttu or the viio

Today, the vision has largely been implemented. Protability reporting has

given us ull transparency at contribution margin level and at EBIT level,

and today the results are used proactively to improve earnings in the ECCO

group.

Still remaining and we are working on this are primarily improvements

within the process and IT integration area to make working with the model

as fexible as possible. O course, a protability model must be maintained

on an ongoing basis to make sure that it will always support the needs o

the business. Changes must or example be made to the model in case o

changes to such aspects as customer segmenting and/or value chain.

Icreed eed or globl mgemet

ECCO and a ew other large businesses lead the way or the largest groupsin Danish trade and industry regarding ull transparency in their protabi-

lity structure.

The proftability model also means

that today the fnance department is

much more o a proactive sparring

partner or the business than beore

says Jrn Olesen, Head o Business

Controlling.

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Businesses like ECCO, Novo Nordisk, Novozymes and most recently the

LEGO group have a clear competitive advantage because o the global

protability management. They have implemented a change in paradigm

in their work methods by using new nancial business models based on

Activity Based Costing principles. In these businesses, decision-makers at

all levels consider the net eect o any behaviour on the companys bot-

tom line, says Sren Holm, Valcon Director. Sren Holm has more than

15 years experience in nancially orientated consulting work at top level

or some o the largest businesses in the country, and he has implementedmore than 70 management projects or both medium-sized businesses and

groups in the absolute heavyweight class.

He points out that because o globalisation, numerous small and medium-

sized Danish businesses are today acing the challenges aced by the large

groups 5 10 years ago, i.e. being able to create ull cost transparency in

the global value chain.

Management risks making the wrong decisions because it does not have

the necessary inormation to be able to calculate consequences across the

business. The primary reason is that even todays advanced nance man-

agement systems are simply not suited to manage protability in global

businesses, he says.

How many pairs o shoes must be sold

to achieve break-even at EBIT level?

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Valcon A/S. Management Consultants. Christianshusvej 187. DK 2970 Hoersholm. Tel. +45 4580 2037. Fax +45 4580 8137. www.valcon.dk

Vlco = Vlue Coultig

Value creation is the aim o everything we do.

Our specialist competencies and experience lay the

oundation or creating solutions that work

- and ensure innovation and added value or our customers.

The customers include a broad segment o

Danish and oreign companies, rom the public sector

as well as the private sector.

Valcon sets the direction, advises and implements within

the areas o:

Strategy, operations, nance management, innovation and

sourcing

Valcon projects were awarded with

consultant prizes in 2004, 2005, 2007, 2008 and 2009.