Welcome to Streamlining for Profitability, where you'll master the proven methods that leading companies use to uncover hidden costs, eliminate complexity, and dramatically improve their return on invested capital. Throughout this course, you'll discover how businesses that appear profitable on the surface can actually be destroying value through hidden inefficiencies and unnecessary complexity.

You'll learn to see beyond traditional accounting metrics to identify the true drivers of profitability in your organization. By exploring real-world cases like Consolidated Inc.'s shocking discovery of massive hidden losses and Groupe Danone's remarkable Brazilian turnaround, you'll develop the skills to analyze profitability at a granular level, streamline operations for maximum efficiency, and boost your company's ROIC by an average of 30%.

This transformative journey will fundamentally change how you think about business complexity and profitability. You'll gain practical frameworks for identifying which customers, products, and services actually contribute to your bottom line versus those that secretly drain resources. Once you master these skills, you'll be equipped to make data-driven decisions about product portfolios, customer relationships, and operational investments that can revolutionize your organization's financial performance.

The journey toward true profitability begins with a startling revelation: what looks profitable on paper can actually be bleeding money. Consider Consolidated Inc.'s experience with their longtime major account, MacGuffin. On the surface, MacGuffin appeared to be one of their most important customers, generating $5 million in annual sales. Yet when managers dug deeper into the true costs of serving this account, they discovered it was actually creating a $700,000 annual loss.

How could such a massive discrepancy exist? The answer lies in hidden costs that traditional accounting systems fail to capture. MacGuffin required nearly 30 custom SKUs developed specifically for them. Furthermore, Consolidated operated four separate manufacturing facilities to produce these SKUs and maintained a dedicated mixing center solely to aggregate MacGuffin's complex orders. These infrastructure costs had been spread across all accounts in the region rather than attributed directly to MacGuffin, thereby masking the account's true unprofitability.

Here's how a similar discovery might unfold in your own organization:

• Victoria: Ryan, I've been analyzing our top accounts and something doesn't add up with TechGlobal. They generate $3 million in revenue with our standard 40% margin, so they should be contributing $1.2 million to gross profit.
• Ryan: That's right, they're one of our biggest success stories. Why, what's the issue?
• Victoria: Well, I started tracking all the resources dedicated to them. We have two full-time engineers just managing their custom specifications, plus that warehouse section we use exclusively for their special packaging requirements.
• Ryan: Sure, but those costs are part of our general overhead, aren't they?
• Victoria: That's exactly the problem. When I allocate those dedicated resources—the engineers at $200,000 annually, the warehouse space at $150,000, plus the expedited shipping we eat the cost on—TechGlobal is actually costing us $50,000 a year.
• Ryan: Wait, you're saying our third-largest customer is losing us money?
• Victoria: Exactly. And I suspect TechGlobal isn't the only one.

This conversation illustrates how easily hidden costs can transform apparent winners into actual losers. The realization that overhead costs aren't really overhead when they're driven by specific customers is the first step toward true profitability analysis.

Once you've identified hidden costs, the next critical step is addressing the complexity that drives them. Bonomo and Pasternak's groundbreaking research reveals a powerful strategy: most complex companies can eliminate 60% of their SKUs while sacrificing only minimal revenue. This dramatic simplification frees up resources, reduces operational complexity, and improves profitability on remaining products in ways that transform entire organizations.

The principle behind the 60% reduction strategy is both straightforward and profound. Analysis typically shows that a large portion of SKUs contribute little to the bottom line while adding substantial complexity to operations. One U.S. computer manufacturer discovered that its low-volume products had modest customer reach, low revenues, and minimal profits—yet these offerings consumed up to 20% of its assets. By targeting profitable brands and SKUs while cutting the rest loose, the company freed significant capacity with negligible revenue loss, demonstrating the power of strategic simplification.

Applying this strategy successfully requires careful analysis combined with deep customer insight. You'll need to evaluate which products truly drive value versus those that exist merely because "we've always offered them" or because "a customer once asked for it". Through rigorous research that blends survey tools with economic analysis, you can estimate actual demand for various products and understand precisely how and why customers make their choices. This data enables you to evaluate the trade-offs between volume, pricing, and systemwide costs that ultimately optimize profitability.

Returning to Consolidated's MacGuffin example provides a perfect illustration of this principle in action. The company successfully reduced the account's 30 SKUs by 60% while actually improving the relationship. They accomplished this by focusing on core products that mattered most to MacGuffin and delivering superior service on those items rather than spreading resources thin across rarely-ordered variants. The lesson is crystal clear: fewer products delivered excellently beats many products delivered adequately. When you eliminate marginal SKUs, you can reinvest those resources into enhancing quality, service, and innovation for your core offerings, creating a virtuous cycle of improvement and profitability.

After uncovering hidden costs and reducing complexity, the final step in achieving true profitability is implementing pricing that reflects actual cost-to-serve. Many companies apply uniform markups or pricing strategies without understanding the vastly different costs associated with serving different customers. This approach systematically subsidizes expensive customers at the expense of profitable ones, creating a hidden transfer of value that undermines overall performance.

True cost-to-serve analysis reveals that complex customers often drive 30-50% higher costs than standard ones. These additional costs emerge from various sources including expedited delivery requirements, custom packaging specifications, special payment terms, extensive technical support needs, and unique quality requirements. Yet traditional pricing models rarely capture these differences, leading to chronic underpricing of complex services and overpricing of simple ones—a misalignment that destroys value across the entire customer portfolio.

The transformation begins by calculating the specific costs each customer or product type generates. Consider factors such as order frequency and size, delivery requirements, payment terms, support needs, and return rates. One particularly effective approach involves creating service tiers that align price with complexity. Customers requiring extensive customization, rapid delivery, or intensive support pay premium prices that reflect those services' true costs. Meanwhile, customers accepting standard products and terms receive competitive pricing that still maintains healthy margins. This tiered approach creates transparency and fairness while ensuring profitability across all customer segments.

Consolidated's approach with MacGuffin demonstrates this principle perfectly. After identifying the true costs of serving the account, they repriced certain products to reflect actual resource consumption and restructured supply terms to reduce complexity costs. Most importantly, they gave MacGuffin choices: maintain current service levels at higher prices reflecting true costs, or accept simplified service at lower prices. This transparency transformed a money-losing relationship into a profitable partnership while actually improving customer satisfaction by aligning expectations with reality.

The power of true cost-to-serve pricing extends far beyond individual accounts. When applied systematically across your entire portfolio, it reveals which business you should pursue aggressively, which you should serve but only at compensatory prices, and which you should strategically exit. This clarity enables you to optimize your entire portfolio for profitability rather than just revenue growth, fundamentally changing how you think about business development and customer relationships.