techniques to measure and enhance profitability and quality of a product or service

1. Corporate Performance Measurement
Topic :-
Techniques To Measure And Enhance Quality And
Profitability Of Products/Services
(Session 2020-2022)
Submitted To : Submitted By :
Prof.Arun Kumar Sarthak Jain
5907

2. Techniques To Measure
Profitability
 Margin or Profitability Ratios
 Break-Even Analysis
 Return on Investments
 Return on Assets

3. Beak Even Analysis
Break-even is a situation where an organisation is neither making money
nor losing money, but all the costs have been covered .Break-even
analysis is useful in studying the relation between the variable cost, fixed
cost and revenue. Generally, a company with low fixed costs will have a
low break-even point of sale. For example, say Happy Ltd has fixed costs
of Rs. 10,000 vs Sad Ltd has fixed costs of Rs. 1,00,000 selling similar
products, Happy Ltd will be able to break-even with the sale of lesser
products as compared to Sad Ltd.

4. Components Of Break Even Analysis
 Fixed costs
Fixed costs are also called overhead costs. These overhead costs occur
after the decision to start an economic activity is taken and these costs
are directly related to the level of production, but not the quantity of
production. Fixed costs include (but are not limited to) interest, taxes,
salaries, rent, depreciation costs, labour costs, energy costs etc. These
costs are fixed irrespective of the production. In case of no production
also the costs must be incurred.
 Variable costs
Variable costs are costs that will increase or decrease in direct relation to
the production volume. These costs include cost of raw material,
packaging cost, fuel and other costs that are directly related to the
production.

5. Calculation of Break-Even Analysis
 The basic formula for break-even analysis is derived by dividing the total
fixed costs of production by the contribution per unit (price per unit less the
variable costs).
 For an example:
Variable costs per unit: Rs. 400 Sale price per unit: Rs. 600 Desired profits: Rs.
4,00,000 Total fixed costs: Rs. 10,00,000 First we need to calculate the break-
even point per unit, so we will divide the Rs.10,00,000 of fixed costs by the Rs.
200 which is the contribution per unit (Rs. 600 – Rs. 200). Break-Even Point =
Rs. 10,00,000/ Rs. 200 = 5000 units Next, this number of units can be shown
in rupees by multiplying the 5,000 units with the selling price of Rs. 600 per
unit. We get Break-Even Sales at 5000 units x Rs. 600 = Rs. 30,00,000. (Break-
even point in rupees)
 Additionally, break-even analysis is very useful for knowing the overall ability
of a business to generate a profit. In the case of a company whose
breakeven point is near to the maximum sales level, this signifies that it is
nearly impractical for the business to earn a profit even under the best of
circumstances.

6. Return On Assets
 Return on assets ratio is a profitability ratio that indicates the profitability of your business compared to
its total assets.
 This ratio measures the relationship between the profits your business generates and the assets that are
being used.
 Thus, the return on assets ratio indicates the efficiency with which your business utilizes its assets.
 Accordingly, the higher the return, the more productive and efficient your business is in utilizing its
economic resources.
 Though comparing profits to revenue is a good way to assess the operational efficiency of your business.
 However, comparing profits to your business’s assets or resources utilized to earn such profits indicates
the likeliness of your company’s existence.
 Return on assets is calculated by dividing your business’s net income with total assets.
 Formula For Return on Assets
 Return on Assets = Net Income After Tax/ Total Assets
 Here net income is nothing but sales minus COGS, selling, general, and administrative expenses,
depreciation, interest, taxes, and other expenses.

7. What Does Return On Assets
Indicate?
 Return on assets is a profitability ratio that indicates your business’s
ability to generate profits before leverage.
 Accordingly, such a ratio indicates the capital intensity of your business.
Such a ratio gives an indication to the investors about the efficiency of a
company to convert the money it invests into net income.
 The higher the return on assets, the more favourable it is for your
business. This is because such a number indicates that your business is
earning more money on the lesser investment.

8. Margin or Profitability Ratios
 Margin Ratios are one of the most commonly used profitability
ratios. These provide insights about the ability of your business to
convert sales into a profit.
 In other words, margin ratios indicate what percentage of your
company’s sales has converted into profits.
 Or, simply put, the percentage figure of the margin ratios report the
cents of profits your business has earned for each dollar of sale.
 Generally, margin ratios are used by stakeholders like creditors,
investors, and business owners to understand a business’s financial
health and growth potential. Following are the various margin ratios:

9. Gross Profit Margin Ratio
 Gross Profit Margin is nothing but the gross profit as a percentage of net
sales. It is also referred to as Gross Margin Ratio.
 Gross Profit refers to the profit left after the cost of goods sold is subtracted
from net sales.
 The Cost of Goods Sold, also known as the Cost of Sales, is the price your
business pays for the products it sells during a given accounting period. It
refers to the direct costs of goods your business manufactures.
 These costs include the cost of materials and labour directly used to produce
the goods. However, COGS excludes indirect costs and expenses like sales and
marketing and overhead.
The Formula for Gross Profit Margin
 Gross Profit Margin = (Net Sales – COGS)/Net Sales

10. Net Profit Margin Ratio
 The net profit margin, or simply net margin, measures how much net
income or profit is generated as a percentage of revenue. It is the ratio of
net profits to revenues for a company or business segment. Net profit
margin is typically expressed as a percentage but can also be represented
in decimal form. The net profit margin illustrates how much of each rupee
in revenue collected by a company translates into profit.
KEY TAKEAWAYS
 Net profit margin measures how much net income is generated as a
percentage of revenues received.
 Net profit margin helps investors assess if a company's management is
generating enough profit from its sales and whether operating costs and
overhead costs are being contained.
 Net profit margin is one of the most important indicators of a company's
overall financial health.

11. Operating Profit margin Ratio
 Operating profit margin is a profitability ratio that indicates how much
profit your business generates from its core operations.
 It measures the amount of profit your business generates on a dollar of
sales. This is calculated after deducting variable costs of production like
raw materials and wages, but before considering interest or tax.
 So, your business’s operating income is divided by its net sales to
calculate the operating margin ratio.
 Operating income is the same as earnings before interest as taxes and is
used in calculating operating margin.
The Formula for Operating Profit Margin
 Operating Profit Margin = Operating Earnings/Revenue

12. TECHNIQUES TO ENHANCE
PROFITABILITY :-
The profitability of products, service, processes or whole business depends upon three factors: Sales,
Cost of sales and capital employed. There are several techniques to enhance the profitability :
 Increasing sales
 Controlling and reducing cost
 Avoid Markdowns
 Elevate Your Brand
 Increase Average Order Value
 Implementing Savvier Purchasing Practices
 Increases Prices
 Optimizing Relationships With Vendors
 Be Smart About Discounting
 Inspire Your Staff To Do More
 Identify And Eliminate Waste

13.  Increasing sales:
Profitability depends on sales potential of a product or service. So
profitability can be enhanced by increasing sales in the following
alternatives:-
i. The selling price of product or service can be increased when it will
not affect the market. It is more beneficial for the companies under
monopoly or who are following price leadership strategies of
as it is possible to increase the price without affecting the market.
ii. The selling price can also be reduced when there is possibility of
greater sales volume due to lower selling prices.
iii. New sales potentials through market research can be discovered.
Before entering the market detailed analysis can be done through
various techniques like target costing, activity based costing etc.
iv. As competition is increasing day by day, every businessman wants to
prove his product superior than others. So design of products can
also be changed for increasing demand for those products.

14.  Controlling and Reducing cost:
Control is the process by which management ensures that the
company is confirming to prescribe plans and policies in working
towards the attainment of corporate goals.
Cost control is operated through setting standards of targets
and comparing actual performance therewith, with a view to
identify deviations from standards and taking corrective
action in order to ensure that future performance conforms
to standards.
Each aspect of the business is critically examined and
reviewed with a view of improving efficiency and
effectiveness and reducing the cost.
In cost reduction, standards which are the basis of control are
constantly challenged for improvement. Cost reduction may
be achieved by various techniques like incentive scheme,
work measurement techniques etc.

15. Avoid Markdowns
 Markdowns are notorious profit-killers, so avoid them whenever
possible. How do you do that? Start by improving how you manage
your inventory. You should always have a handle on the merchandise
you have on hand, as well as what your fast and slow-movers are. This
will help you make better decisions around purchasing, sales, and
marketing, allowing you to sell more products and reduce the need for
markdowns.
“One way to maximize margins which also has other significant benefits is
to have 100% visibility of inventory. By doing so, this minimizes
markdowns and thus margin erosion. Zara are a particularly good
example of this,” says Andrew Busby, Founder & CEO at Retail Reflections.

16. Elevate Your Brands
 It’s interesting to see that cosmetics retailers have some of the best
margins in retail. According to experts, one reason behind this is the
fact beauty and cosmetics brands excel at creating personal and
emotional connections with customers.
 She continues, “We ran a story earlier this year titled “Why beauty will
continue to rule retail in 2018” that outlines some of the reasons behind
this trend. The product category creates a kind of personal connection
with shoppers, unlike many other consumer goods. The price value
equation is quite good, cosmetics make people feel better about
themselves and foster strong customer loyalty, and the merchandising
creates a sense of exploration — something the off-price retailers have
also done quite well. Depending on the brand, packaging, and
marketing attached, the profit on each small item can be really high.”

17. Increase Average Order Value
 Increasing the basket size or average order value (AOV) from shoppers
already in your store is a great way to improve your profits. You’ve already
invested in getting them to your location; now go and find ways to
maximize their spend.
 Start with upselling and cross-selling. As Matthew de Noronha, Head of
SEO at Eastside Co., puts it, “someone who makes a purchase from you has
already been qualified. They have engaged with your brand and, while it
may sound obvious, they are significantly more receptive to offers and
product advertising. For that reason, it makes complete sense to encourage
them to spend more.”
 Matthew says that you can start by finding products likely to be purchased
together. Then, after a user has committed to purchasing a product,
encourage increased spending by recommending relevant items

18. Be Smart About Discounting
 While discounting typically goes against traditional advice on profitability, it
could work to your advantage if you do it right.
Consider personalized offers
 For instance, you could try to provide tailored offers. Remember that not all
customers are wired the same way. Some people may need a 20% off
incentive to convert, while others don’t really require a lot of convincing.
 Instead of killing your profits with large, one-size-fits-all offers, identify how
big of a discount is necessary to convert each customer.
 Case in point: Online bicycle retailer BikeBerry.com. The e-tailer sought the
help of big data company Retention Science to analyse customer behaviour
and gather intel on their customers’ past purchases, browsing history, and
more. This allowed them to get to know their customers and figure out the
most cost-effective way to convert each one.

19. Identify And Eliminate Waste
 Finding areas of waste in your business — and eliminating those wastes — can save money
and add to your bottom line.
 The world of lean manufacturing recognizes the 8 types of wastes that are costing
businesses money. While the concept largely applies to manufacturers, retailers can also
apply the concept to their operations.
 Put it simply, the 8 types of wastes can be summarized using the acronym “D-O-W-N-T-I-
M-E”:
 D – Defects (defective products due to issues like quality control, poor handling, etc.)
 O – Overproduction (ordering or making more merchandise than necessary)
 W – Waiting (unplanned downtime, absences, unbalanced workloads, etc.)
 N – Not utilizing talent (not fully leveraging the skills or potential of your team, having
employees do the wrong tasks, etc.)
 T – Transportation (unnecessary movements of products — e.g., unnecessary shipping,
inefficient movement from one store to the next)
 I – Inventory excess (surplus or dead stock sitting in your backroom)
 M – Motion waste (unnecessary movements of people — e.g., inefficient store layout)
 E – Excess processing (having to process, return, or repair products that don’t meet the
customer’s needs)
 Go through each of these components individually and see how they apply to your
business. If these types of wastes are present, find ways to reduce or eliminate them.

20. QUALITY
 Quality is a perceptual, conditional and somewhat subjective
attribute and may be understood differently by different people.
Thus, simply put, quality item has the ability to perform
satisfactorily in service and is suitable for its intended purpose.
 In manufacturing, quality is a measure of excellence or a state of
being free from defects, deficiencies and significant variations. ISO
8402:1986 standard defines quality as “ the totality of features and
characteristics of a product or service that bears its ability to satisfy
stated or implied needs.”

21. Techniques To Measure Quality
 Inspecting
 Testing
 Process Control And Ownership
 Control Charts
 Metrics
 Error Counts
 Benchmarking
 Follow Up Survey
 In App Survey
 Post Servicing Rating
 Social Media Monitoring
 Mystery Shopping

22.  INSPECTION : Inspection is a critical path of measuring
quality. The product can be evaluated to see if it
conforms to predetermined criteria, perhaps by going
over a checklist of required functions and physical
attributes.
 TESTING : This usually includes stressing the mechanical
properties of the product such as material strength,
elasticity and impact resistance. Test for vibration and
temperature might also be conducted. Which tests to
use are determined by the product, its use and the time
and financial constraints of the business.

23.  CONTROL CHARTS : Charts can be effective tool when it comes to
evaluate the product’s quality. The use of two types of charts-
univariate and multivariate depends upon the number of
characteristics that will be measuring. The univariate chart displays
one characteristic and the multivariate chart is used when multiple
characteristics need to be evaluated.
 METRICS: Quality metrics are the parameters of a quality
measurement program. They include definitions of quality terms,
how your measurement process relates to customer specifications
and the decision process to accept or reject items inspected. If your
business customers have a specific need for speed in receipt of their
orders, you will measure the things that will affect the speed of your
delivery process.

24.  BENCH MARKING : It is a quality measuring tool that
establishes a starting point for a quality issue against
which future quality measures will be evaluated. It
involves quality data on issues like the no. of customers
a company serves, the no. of defect product items a
company receives back from customers.
 ERROR COUNTS : Error counts is a basic quality
measuring tool , tallying the number of errors in the
production process or service. It can be a place to start
measuring quality or a motivating tool to raise
awareness and generate ideas to reduce errors.

25.  PROCESS CONTROL AND OWNERSHIP : Everyone involved
in the manufacturing of the product should be encouraged
to take ownership of a part of the success. Given the
responsibility, employees will take more pride I their work
and strive to have a successful outcome of the job for which
they are responsible.
 MYSTERY SHOPPING :
This is a popular technique used for retail stores, hotels, and
restaurants, but works for any other service as well. It consists
of hiring an "undercover customer" to test your service quality
– or putting on a fake moustache and going yourself, of
course.

26. Post Service Rating: This is the practice of asking
customers to rate the service right after it’s been delivered.
With User like live chat , for example, you can set the chat window to
change into a service rating view once it closes. The customers make
their rating, perhaps share some explanatory feedback, and close
the chat. Something similar is done with ticket systems like Help
Scout , where you can rate the service response from your email
inbox.
Follow-Up Survey: this method you ask your customers
to rate your service quality through an email survey – for example
via Google Forms . It has a couple advantages over the post-service
rating. It also provides a more holistic overview of your service.
Instead of a case-by-case assessment, the follow-up survey
measures your customers’ overall opinion of your service

27. In App Survey: an in-app survey, the questions are asked
while the visitor is on the website or in the app, instead of after the
service or via email. It can be one simple question – e.g. "how would
you rate our service" – or it could be a couple of questions.
Social Media Monitoring: method has been
gaining momentum with the rise of social media. For many people,
social media serve as an outlet. A place where they can unleash their
frustrations and be heard. And because of that, they are the perfect
place to hear the unfiltered opinions of your customers – if you have
the right tools. Facebook and Twitter are obvious choices, but also
review platforms like TripAdvisor or Yelp can be very relevant.

28. Techniques To Enhance Quality
 TQM(Total Quality Management)
 SIX Sigma
 Benchmarking
 Business Process Reengineering
 Kaizen
 Always Strive For Quality
 Perform Product And Market Test
 QMS (Quality Management System)
 Make Quality Part Of Company Culture

29. Total Quality Management
TQM describes as a continuous process of reducing error in
manufacturing, supply chain management, improving the customer
experience and ensuring the employees are up-to-speed with their training.
It aims to hold all parties involved in the production process as accountable
for the overall quality of the final product or service. It involves :
1. Executive management – Top management should act as a driver for
TQM and create an environment that ensures its success.
2. Training- Employees should receive regular training on the methods
and concepts of quality
3. Customer focus- improvements in quality should improve customer
satisfaction
4. Continuous improvement – companies should continuously work to
improve manufacturing and quality procedures.
5. Employee involvement – Employees should be encouraged to be pro-
active in identifying and addressing quality related problems.

30.  Six sigma seeks to improve the quality of process outputs by
identifying and removing the causes of defects/errors. A six sigma
process is one in which 99.99966% of the products manufactured
are statistically expected to be free of defects. Process sigma can be
calculated using a six sigma calculator.
 The six sigma project an be accomplished through the use of two six
sigma sub-methodologies: DMAIC and DMADV. The six sigma
DMAIC(define, measure, analyse, improve, control) process is an
improvement system for existing processes falling below
specification and looking for incremental improvement. The six
sigma DMADV(define, measure, analyse, design, verify) process is an
improvement system used to develop new processes or products at
six sigma quality levels. It can also be employed if a current process
requires more than just incremental improvement.
SIX SIGMA

31. Kaizen
It is the policy of constantly introducing small
incremental changes in a business in order to improve
quality. Some of the features are :
1. Improvements are based on many small changes
rather than the big radical changes.
2. As ideas come from workers themselves, they are less
likely to be different and therefore easier to
implement.
3. Small improvements are less likely to require major
capital investment than major process changes.
4. All employees should continually be seeking ways to
improve their own performance.

32. Always Strive For Quality
 The number of manufacturers and service providers is growing by
the day. Standing out in such a competitive environment can be
extremely difficult. However, the majority of their products and
services do not offer satisfying levels of quality to their customers.
By understanding product quality, you will be able to create more
informed decisions about how to develop your product from start to
finish. A lot of experts have different opinions on what constitutes
quality. Remember to create a strategy, implement a QMS, embed
quality in your culture, and perform regular product and market
tests. By doing all of this, you are well on your way toward creating
high-quality products that will delight your customers and keep
them coming back for more.

33. Perform Product and Market Testing
 It is highly important to analyse and test your product prior to launch.
Chances are you will need to fix errors, add features and adjust the
functionalities so the product meets the needs and requirements of
consumers. You will need to test the product through beta testing, as
well as test how consumers react to it via market testing.
 Beta testing will allow you to meet the promised user experience and
ensure all product components including quality perform as initially
intended. Product testing will also allow you to see how your product
performs in the real world vs. its performance in a controlled
environment. You will test your product for usability, support, and
marketing so you can measure customer validation and enhance
product quality accordingly.

34. Quality Management System (QMS)
 While it is important to conceptualize, envision and create a roadmap for
the product, these steps alone will not determine the quality of the
product by default. A quality management system (QMS) such as ISO
9001 is a set of internal rules that will determine how a business will
create and deliver their products or services.
 Implementing a QMS will allow you to audit your processes yourself
along with a certification body. Since a quality management system is
based on the 7 strict principles of quality, your customers will not have to
audit your business themselves. ISO 9001 is an internationally recognized
standard that provides quality assurance, which is essential if you are
looking to increase the quality of your products.

35. Make Quality a Part of Your Company
Culture
 Implementing a QMS is important, but it is not enough to just
appear compliant. These quality principles need to be embedded
firmly across your entire organization. The entire team needs to be
on the same page when it comes to what constitutes a quality
product.
 For some, it is a low-cost product while for others it is a cutting-
edge solution. Regardless of what you agree on, have your
managers constantly reinforce the idea. This is how you will get
everyone on board with your vision of quality.

36.  BENCHMARKING : Companies may also use
benchmarking to improve product quality. Engineers
sometimes, purchase leading competitors products. They
may then take them apart, study them and determine
how the competitors products outlast in the industry.
They then compare various elements of that product to
their own. Subsequently, improvements can be made to
product quality.
 BUSINESS PROCESS REENGINEERING : BPR involves the
redesign of core business processes to achieve dramatic
improvements in productivity, cycle times and quality.
Companies reduce organizational layers and eliminate
unproductive activities.