And that is what we do looking at the historical costs.
Now, here we have soft drinks,
fresh produce, and packaged food.
And here like I said,
where I identified ordering,
deliveries, shelf stocking,
and then customer support.
And then, compared to what we did over the last year,
we have calculated like how many orders we had,
how much were paid for that.
And then, we realize that actually this is $120 per order.
This is $100 per delivery.
This is $25 per hour of work.
And this is $0.15 per item sold.
We take these numbers from a past activity.
And now, we'll just see how many of these go to what line.
So we have 18 orders for soft drinks,
30 orders for fresh produce,
and 20 orders for packaged food.
Deliveries, here we had 15,
here we had 90. Well, why is that?
Because fresh produce must be delivered more often because otherwise it just gets rotten,
and you throw it away.
Here, we had 28 shelf stockings,
28 here, 220 here.
Why such a huge amount?
Because you got these strawberries.
Not only do we have to put them on the shelf,
but also keep checking.
If one of the strawberries goes rotten,
you have to remove that and replace by another one,
or otherwise you have to really fix
the price label if there are few strawberries in this basket.
Here, it's 94.
And for customer support,
5,000 items sold here,
41,200 items sold here,
and 12,400 items sold here.
So that's an important thing.
And all that was done in the process of refinement.
To the extent, we identified these activities,
then we started to associate which of these activities they go to these product lines.
And then, with the use of this table,
we can actually refine the cost approach,
and then I did that specifically for you just before.
See what happens here. Now, I put all the numbers in thousands,
because some of them are not round.
So, revenue stays the same for 40,000, 85, 55.
The totals, they don't change.
But see what happens here.
Bottle return goes on for soft drinks,
but this is a small amount.
But ordering, these other numbers, delivery, you can see it.
Ordering, delivery, and shelf stocking,
and customer support for fresh produce they are huge compared to others.
And the total indirect costs,
they happen to be 5,310, 24,280, 9,410.
And in red, I show to you the operating income. See what happened.
Now, the operating income dropped fundamentally for
fresh produce and jumped up for soft drinks.
So now, we see that actually soft drinks and packaged food,
they contribute most to our profitability.
And fresh produce, although has almost half of overall sales,
but look at the contribution to the bottom line,
is just a minor 0.84%.
Why is that so?
Because fresh produce is difficult to deal with.
We spend a lot of time ordering frequently,
delivery very frequently, and then just also dealing with that in the store.
And then maybe for fresh produce,
you have to put them on the balance and weigh them,
and the customer support also take some more time.
Now, see what happens,
looking at these numbers.
Before, our idea, or our advice to the store owner would be,
why wouldn't you order more strawberries?
But now, we can see that it's much better to order
more coke and more order packaged food.
So, you can say, "Well,
maybe these numbers give you an idea that you could do without fresh produce altogether."
But here comes the point that doesn't deal with costs.
Maybe the people who get used to come to this store,
they would also like to pick up a basket of strawberries or blueberries here.
So, you may still have to keep
that fresh produce in
your store to make sure that the people who got used to that still keep coming.
But, unfortunately, this is just to keep your customers,
because you basically don't make money on fresh produce,
just a meager 0.84%.
So, see what happen.
Like I said, this number hasn't changed.
But after having redistributed indirect costs
with respect to these product lines based on activities,
we've been able to reveal the actual contribution of these lines to the bottom line.
And this is a much more realistic thing.
And if for example,
look at that, you could say, "Well,
in order to start making a little bit of money on fresh produce,
we have to probably become pickier in our ordering.
We have to bargain more actively to make sure that this number goes up."
Because, like I said,
we cannot close this line altogether,
but clearly with these numbers we are not very much satisfied.
So, that are the findings of ABC on an example of a retail store.
In the next two episodes,
we will take a look at what happens in a manufacturing company.
That also is not only important,
but sort of even more important,
because this store was sort of a minor thing,
and here you can go without the system or maybe it's sort of cumbersome to come up with.
But in a manufacturing company,
you cannot go without that at all.
So, in the next two episodes we will see how that goes.