Consulting Techniques v29 - Upload Version

Management Consulting Tools,
Techniques, and Frameworks

A practical guide with cases and exercises
1
Time and again you will come across problems that are seeming
unsolvable. In many cases, you don’t even know how to approach them… 2
Luckily, there are a lot of nice management consulting tools,
techniques, and frameworks that will help you solve problems. 3
Target Group What you will learn What you will get
▪ Students who want to work in ▪ How to apply management ▪ Ready-made analysis in Excel
consulting, private equity, consulting tools, techniques, and ▪ Real-life examples of applying a
investment banks, frameworks specific technique or framework
▪ Managers that want to improve ▪ How to solve problems ▪ List of typical application
their analytical skills ▪ When certain techniques can come ▪ List of Recommended readings
▪ Entrepreneurs and startup in handy (articles, books)
founders
▪ Management Consultants and
Business Analysts,
4
This course will help you solve problems
on the level of top management
consultants
5
How the course is
organized
6
Management consulting techniques and frameworks come in handy both at
work as well as in private life. In this course, you will see examples from both. 7
Intermediate
Basic techniques and Advanced techniques
techniques and
frameworks and frameworks
frameworks
8
Basic tools used by
Management Consultants
9
Basic tools –
Introduction
10
In this section, we will discuss the basic tools, techniques, and
frameworks used by Management Consultants
The bottom-up The top-down

Backward logic
approach approach
Compounded effect Issue Trees Priorities
Benchmarks The 80/20 rule Opportunity Tree
KPIs and business Theory of constraints

drivers and bottlenecks
11
The Bottom-up
Approach
12
…the one you will for sure use is the bottom-up approach where you go
from single (typical) consumer to market research
▪ First you should ▪ Then you should try to ▪ By estimating the number of
imagine the guess his consumption typical users, you and their
typical users level consumption level you get
the rough size of the market
13
…sometimes it makes sense to divide markets into segments and estimate
them separately (e.g., women and men, different age groups)
Segment A
Segment B
14
…let's do a simple example. Imagine that you want to make an application for
franchised restaurants
▪ You pick the sample – a ▪ You count the number of ▪ For the chosen area you
group or an area you all restaurants in the area count the franchising
want to estimate e.g., city restaurants
(here Warsaw)
▪ Assuming similar density as in Warsaw

you scale up the number of franchised ▪ You check the population of
restaurants proportionally to the the whole country – here
population Poland 15
…to make you better at this method imagine you want to sell homemade dog
food….. First, you have to estimate how many dogs they are…..
+
▪ First, you should pick your ▪ The next step is to calculate ▪ Once you have the number also calculate how
sample – can be your friends how many dogs they have many households they are in the sample
or neighbors
▪ And assuming a similar proportion as in

▪ It is now enough to know how many
your sample you scale up the number of
households there are in the country
dogs
16
…with the number of dogs, you just have to estimate the number of food eaten
per year by the average dog…..and you get to the size of the food market
+
▪ This requires us to estimate additionally how much food would
▪ We have the number of dogs in the whole average dog eat per year
country. Now we have to get from here to the
dog food
▪ In this way, using annual average consumption per dog and the estimated number
of dogs, we are able to estimate how much food is eaten every year in the country
17
Let’s sum up the bottom-up approach
▪ The bottom-up approach enables you to estimate within one minute the
indicative size of the market
▪ It is very good for the B2C markets
▪ For better estimation you should segment customers and increase the
sample size
18
The Top-down
Approach
19
When to use the top-down approach?
▪ You know the size of the whole market

▪ You are interested in a specific segment of the market
▪ Segment is big enough
▪ You are thinking about a niche strategy or low-cost strategy (market
re-segmenting)
20
For a change, let's see how it would work with the top-down approach
▪ You use the total market size ▪ You have to use some ▪ By applying the result from
to get to the size of the sort of sample the sample, you can get to
segment in which you are measure the size of the segment in
interested which you are interested
21
Let’s use the top-down approach to estimate the market for science
fiction books sold in Poland….
▪ You use the total number of books sold in your ▪ Then you go to the bookstore that belongs to the biggest
country chain of bookstores and check what percentage of the
shelves are occupied by science fiction books
▪ If you use this proportion for the whole market, you

should get a rough estimation of the science fiction book
segment
22
Ceramic tiles market
– Introduction
23
In this section, as a practice, you will have to estimate the market for
ceramic tiles
24
We will start with the problem. You will define the KPIs and then use it
to create the analysis in Excel as well as the slide with the results
Cost of traffic
x
Rent
Ratio of visitors +
to searches
Total searches % conversion
People
Average cost of 1
x visit
Development
# transactions
x Total revenue Total Costs

Average
revenue per
transaction
-
% Fee of the Average

Total margin
marketplace transaction value
25
To get the most out of this section please try to solve the problem on
your own before going to the solution
Go to the next lecture

Pause the course and
Problem set / Case where you will find the
solve the problem on
study step-by-step solution to
your own
the problem set
26
Ceramic tiles market
27
Imagine that you were asked to estimate the market for ceramic tiles
What is meant here by “the Do you want to estimate

market”? Annual sales or the market in volumes or in
total ownership? values?
What is included in the Are we talking about just

market? Should we include ceramic tiles or other
B2C or also B2B? connected products
28
If we look at the whole market, we could probably talk about 3 main
segments:
B2C market connected with

renovations
B2C market connected with

new buildings
B2B market
29
Let’s first start with the B2C renovation market
Average size of a
Total population
family
# of sq. m of tiles # of years of

÷ installed usage of tiles
# of apartments x
# of families x
÷
Average # of sq.
m of tiles per
apartment
# of apartments # of sq. m of tiles Average price per
per family sold for new B2C sq. m of tiles
Value of ceramic
tiles for new
B2C
30
Now, let’s have a look at the new B2C market
# of new
apartments
# of sq. m of
Average size of Average price per
x tiles sold for
an apartment sq. m of tile
new B2C
% of the surface x
covered with
ceramic tiles
Value of ceramic
tiles used by new
B2C investments
31
In the end, we also will have to look at the B2B market. For B2B it is
advisable to do it per category of buildings
# of Category A
buildings build
every year
Average size of # of sq. m of

x Average price per
the building in tiles sold for
sq. m of tile
sq. m Category A
% of the surface x
covered with
ceramic tiles
Value of ceramic
tiles used by
Category A
32
After we have calculated every segment, we have to sum it up to get the
total market
# of sq. m of
tiles sold for B2B
Category A
….
# of sq. m of # of sq. m of
tiles sold for B2B + tiles sold on the
Category Z whole market
# of sq. m of
tiles sold for
new B2C
# of sq. m of
tiles sold for
renovation B2C
33
Ceramic tile market –
Presentation in PowerPoint
34
The market should gradually increase to USD 32 billion by 2025 mainly
thanks to the growth in the renovation market
Size of the ceramic tiles market
In Millions of USD
Total market = 29 232 32 146
4 950
4 500
23 315
21 195
3 528 3 881
2016 2025
B2C new apartments B2C renovations B2B new buildings
35
Chicken Producer – the Top-down
approach – Introduction
36
In the next few lectures, we will be looking at a producer of chicken
meat. We will try to improve some aspects of his logistic system. 37
The supply chain is pretty complicated to grasp from the cost point of view.
Therefore, it is advisable to use the top-down approach
Take a broad look at Perform detailed

Gather ideas
logistics costs analyses
Tools ▪ Excel ▪ Word ▪ Word / Excel
End product ▪ The issue tree ▪ List of PBC (documents to ▪ Formats and manual for
be Prepared By the Client) filling them in
Aim ▪ Structure your problem ▪ Put into words your ▪ Create formats in Excel to
▪ Specify analyses to be information needs gather data as raw as
performed possible
Time ▪ A week or two before the start ▪ After preparing the issue tree. If ▪ After preparing the issue tree
of the project. possible, at least a week before and a list of questions for the
▪ Should take up to 4-8 hours arriving at the client's premises. client. If possible, at least a week
before arriving at the client's
premises.
Source of ▪ Your own mind ▪ The issue tree ▪ The issue tree
information ▪ Internet ▪ Former projects
▪ Specialized literature
38
As we have mentioned, you should start from the issue tree
Analysis to be
Area of analysis Suspected problems Possible reasons performed
Possible Reason 1 Analysis 1
Problem 1
Area 1
Problem 2
39
Elements of the issue tree are later used to define the analysis you have to
perform and the data you have to ask for
Analyses to be Data required for the Formats – tables for

Possible reasons performed analyses feeding in the data
List of data needed for the
Analysis 1
▪ Question / Data 1.1
Possible Reason 1 Analysis 1 ▪ Question/ Data 1.2

Analysis 2
Possible Reason 2 Analysis 2 ▪ Question / Data 2.1
▪ Question/ Data 2.2

Analysis 3
Analysis 4
40
There are some rules for formats that are worth following to speed up the
process of analysis later on
▪ Limit the choice of options for the people who will feed in the data you asked for
(validation list, specify formats in which data should be put, units of measures in which you
want to have the data)
▪ Shift as much as possible of data feeding processes to the client. However, remember that
the deadline is the deadline. So, if the client cannot, or does not want to do it, you have to
do it on your own
▪ See what is the IT system capable of delivering – sometimes raw data only possible to get
there, many useful yet not used by other departments reports can be found there
▪ If there they are late on feeding in the data – do it on your own
41
For the chicken producer, we got the following issue tree.
Area of analysis Suspected problems Possible reasons Analysis to be performed

Analysis of designed routes, their length,
Badly designed routes
and the influence of possible changes
High costs of transport per ton of Analysis of fuel usage and kilometers
Too big fuel usage
goods covered by vehicles
No shipments on the way back Analysis of load carried on the way back
Badly designed method of packaging

Analysis of the correlation between types
which makes the product prone to
of packaging and percentage of damaged
damage
A big level of waste and breakage
Transport
in transport
Analysis of time spent on the way and
Speed not adjusted to the product
kilometers covered in that time
Badly organized work and schedule of Analysis of the level of overtime, daily
deliveries organization of drivers’ work
Low usage of resources
Limitation on the delivery time of finished Analysis of Clients’ preferences for
goods delivery time
42
There are 3 ways to present the general view of logistics costs
1 General view by product groups
Cost Position 1 Cost Position 2 Cost Position 4 … Cost Position m

Product Group 1
Product Group 2
…
Product Group n
2 General view by stages

Stage 1
Stage 2
…
Stage n
43
There are 3 ways to present the general view of logistics costs
3 General view by type of transport

Type 1
Type 2
…
Type n
44
Let’s look at 3 specific examples
1 General view by product groups – a producer of chicken meat
Fuel Wages External Services Waste Frozen capital
Concentrate
Life chicken
1-day chicken and
eggs
Finished goods
2 General view by stages and products – a retail chain of convenience stores with strong newspapers
FMCG – central
FMCG – local
Newspapers – central
Newspapers – local
3 General view by type of transport – a producer of alcohol

Transport by train
Transport by trucks
45
Now, let’s imagine that you were to create such a general view of costs
for the chicken producer.
Introduction:
▪ Zivinar is a Serbian producer of chicken meat – both fresh and processed. It is a vertically integrated company that tries to
produce everything needed for its final products on its own. It has its own farms in which it breeds broilers, farms where
parents flock (old special hens) hatch eggs, and incubators where eggs mature. The food, for both parents flock and broilers,
is mixed by Zivinar in their mixing site.
▪ Since Zivinar wants to ensure excellence in everything it performs the distribution of all raw materials, semi-products, and
finished products on its own
Tasks:
▪ Create for every stage of distribution a separate sheet in which you could estimate the costs of distribution (Fuel cost, wages
of drivers, maintenance costs, costs of financing frozen capital in trucks and stocks)
▪ Create a summary for the whole distribution system
46
Below you can find some info on how the production process for
chickens looks like
Source: http://www.scandistandard.com/Global/Scandi%20Standard/Externwebb/Production%20cycle.jpg 47
Chicken Producer – the Top-down
approach – Solution
48
Below we have a summary of estimations, we did in Excel
Annual costs of the whole logistic system by stages and type of cost
In thousand of EUR
98
119
203
574
12
38 63
17
172 159
67
5
1 0
3
8
Concentrates-for broilers Concentrates-for parents Eggs 1-day old eggs Life chickens Finished goods
flock
Petrol Drivers Maintenance Frozen Capital
49
Below is the summary of what you should have learned so far from this
case
▪ You can do a lot of things before appearing at the client’s premises (issue
tree, formats, list of PBC, etc.)
▪ You have to establish the starting point (costs of distribution groups
presented in a convenient summary) to manage PM expectations, priorities
analysis
▪ First, use your own brain. Afterward, you resort to ready-made solutions and
tools
▪ Appreciate your time – use the 80/20 approach
50
There are some rules for gathering of ideas that you should use during
projects
▪ Be friendly
▪ Talk not only with the managers but also with grassroots workers
▪ Talk with people from production, sales, and purchasing on logistics-related
topics
▪ Organize workshops including people from all walks of life
▪ Look at daily activities (loading, unloading, packaging, transport)
▪ Ask directly – “What would you improve…?”, “What potential for
improvements do you see…?”, “What would you need to lower the costs…?”
▪ Ask people to estimate their proposals
▪ Stick to deadlines
51
When it comes to detailed analyses there are some tips worth following
▪ Parameterize your analysis in such a way that all parameters are visible at
first glance and can be easily altered
▪ Include steering variables that enable easy changes to the whole structure
or scope of the analyses
▪ Stick to the 80/20 rule – do first the analyses which were identified by the
issue tree and the general view analysis as the most promising
▪ Base your analyses on raw data if possible and not on the Client’s analyses
▪ Make the analysis easy and nice looking so that it can be presented to the
Client
52
Backward reasoning
53
Imagine that you were supposed to say how much you have to
spend to create a company that has revenue of $ 100 M dollar. 54
You could use for that the so-called backward reasoning. This method is fast and
extremely efficient. It will give you a good rough estimation that you need. 55
Imagine that you were supposed to say how much you have to spend to
create a company that has revenue of $ 100 M dollar
Total Costs
$ 400 M
# of leads
÷ 200 K
The average revenue
Cost of 1 lead x # of customers
per customer
$2K 20 K
$5K
% Conversion
10%
x
Revenues
$ 100 M
56
Backward logic based decisions
– Case Introduction
57
Let’s try to put backward reasoning to practice. In this case study, we will
use it to decide what effort has to be done to 10x the current business. 58
Let’s see what we know about the retailer
The firm has currently 100 stores. Each

store’s sales are equal to EUR 2 M
The firm wants to 10x the business up

to Year 5
Estimate what LFL growth they must

get & how many stores they must
open
Assuming EUR 1 M per store estimate

the Capex
Estimate how many people they have

to recruit, assuming 6 people per store
59
Backward logic-based decisions
– When it makes sense to use it
60
Backward logic can be used in many situations. Below are some of them
You want to see what are the

You have a clear goal for the future
limitations preventing you from
but not a clear path toward it
reaching the goal
You want to estimate the pace You want to see whether the goal is
needed to reach the goal not too ambitious
You want to check the implications You want to see whether the goal
for you or your department does not require too big resources
61
Compound effect
62
There are 2 types of compounding effect
Time related Operations related
▪ Even if the growth is small applied over a long period ▪ A lot of small changes in many areas may produce big
of time gives big end-results end-results
Average revenue per

# of customers
customer
Start x (1+10%)^10 = 2.6 x Start +20%
+15%
Revenues
+38%
63
Improvement in Content marketing
agency – Case Introduction
64
Imagine that you have to help a content agency estimate what will be the effect of increasing
the number of posts produced by 10% every month. Use the compounded effect to estimate it. 65
A few things about the content agency
They have 10 people. Every person

produces 10 posts every month
Estimate the impact of a 10%

improvement every month for 1 year
An employee costs USD 4 000 a month

and a USD 50 bonus per post
You pay USD 1 000 for rent per month
You charge your customer

USD 600 per post
66
Create Issue Trees
67
Let’s have a look at a definition of an issue tree
Analysis to be

Problem 1
Area 1

Problem 2
68
Examples of Issue Trees
69
In the next lectures, we will have a look at examples of issue trees
Issue tree for logistics Issue tree Retail firm Issue tree for FMCG firm
70
Issue Trees in Logistics
– Examples
71
Let’s have a look at a definition of an issue tree
Analysis to be
Problem 1
Area 1
Problem 2
72
For the chicken producer, we got the following issue tree.

Analysis of designed routes, their length,
Badly designed routes
and the influence of possible changes
High costs of transport per ton of Analysis of fuel usage and kilometers
Too big fuel usage
goods covered by vehicles
No shipments on the way back Analysis of load carried on the way back
Badly designed method of packaging

Analysis of the correlation between types
which makes the product prone to
of packaging and percentage of damaged
damage
A big level of waste and breakage
Transport
in transport
Analysis of time spent on the way and
Speed not adjusted to the product
kilometers covered in that time
Badly organized work and schedule of Analysis of the level of overtime, daily
deliveries organization of drivers’ work
Low usage of resources
Limitation on the delivery time of finished Analysis of Clients’ preferences for
goods delivery time
73
Issue trees in Retail
– Examples
74
When you are talking about retail you should have a look at the
following areas
Retail chain development The expansion model
Product Range/Category Range

In-store processes
Management
Pricing HR, especially training
Logistics & Supply Chain
75
Below you can see an example of an issue tree in Retail Chain Development
Analysis to be
Low LFL due to cannibalization (online, Analyze the change in sales after opening
new stores in old locations) new stores / online introduction
Low growth in sales

Analysis of the number of openings vs
Few new openings in locations
availability of new places
Increasing rents due to improper Analysis of rents vs comparable

usage of purchasing power competition
Retail chain Decreasing EBITDA of new stores
development Growing salaries to keep a low Salaries growth vs rotation – comparison
rotation with competition
No support from the shopping malls Analysis of contracts with shopping malls
High cost of building new stores

Not optimized formats, expensive Analysis of cost per 1 sq. m, number of
fixtures fixtures, cost per fixtures
76
Below you have an example of an issue tree for Product Range Management
Analysis to be
Too many suppliers of Category A that Analyze the number of suppliers and their
undermines your purchasing power share in sales vs market
Low margin on Category A

Analysis of Private Labels potential –
Lack of Private Labels
benchmarks and potential supplier
Usage of middlemen instead of direct Analysis of whom we buy from Category B

suppliers and the whole value chain
Product Range Low margin on Category B
Management
Analysis of the planning and allocation
Improper planning and allocation by stores
process
Analysis of the planning and allocation

Improper planning and allocation by stores
process
High inventory costs

Analysis of lead times, deliverability on-
Non-responsive supply chain
time, level of breakage
77
Issue trees – Examples
for an FMCG firm
78
When you are talking about FMCG you should have a look at the
following areas
Supply Chain including

Marketing
Planning & Sourcing
Product Development Customer Data Analysis
Managing Sales Force Competition Analysis
Production Expansion Model
79
Below you can see an example of an issue tree in FMCG – Sales Force
Management
Bonus system with a high threshold

Analyze the motivation system
that incentives pushing the product
High sales at the end of the month
The firm is not producing what the Analyze sales forecasting, planning of
customer wants production, and return rate
We have set up too low targets for

Analyze the motivation system
some regions
Sales Force Different market shares in regions
Management
Some regions have different channels Analyze channels per region
Drive with sales force team members,

We have an inefficient sales team
analyze processes, tools, and efficiency
High cost of the sales force in
relation to sales
We have too many overlapping sales Analyze sales per sales representative and
representatives compare with the competition
80
Below you can see an example of an issue tree in FMCG – Production
A lot of people are required for some Analyze solutions used by other firms,
of the processes especially automatization
We have high production costs
related to labor
Check the Overall Labor Efficiency (OLE)
We use the people inefficiently
and look for bottlenecks
We are very bad at planning and there Analyze production planning and
is no sales forecasting procurement, sales forecasting
Inventory levels are extremely high
Production
The machines/parts of the production Analyze how work is controlled on the
are not linked properly production floor
We are using the wrong technology or Analyze waste by technology and

machines machines. Check planned vs actual
We have a high waste cost

Analyze the costs of production by
We are using the wrong materials
different types of materials
81
Low-hanging Fruits
(Quick Wins)
82
It’s always a good idea to first do things that generate a big impact. To
identify such items, you can use the low-hanging fruit approach. 83
Get the low-hanging fruits first. By low-
hanging fruits, we mean things with big
impacts that are easy to accomplish
84
How to find low-hanging fruits?
Impact
High
2 1
▪ Things with a big impact yet ▪ Things with a big impact that
expensive, time-consuming require little work
No 3
▪ Easy but with a low impact
Low Resources needed
Big Small
85
Low-hanging fruits for our blog
Impact
High 2 ▪ Blog posts 1

▪ Udemy Courses
▪ Office hours
▪ Additional resources
▪ Events
4 3
▪ SlideShare presentations
▪ Sniply
▪ YouTube
Low Resources needed

▪ Twitter
Big Small
86
Quick wins for cost reduction
87
Let’s see how the quick win framework looks like for cost reduction
What are the potential savings we
can achieve
Big
2 1
▪ Second best ▪ Holly Grail
4 3
▪ Big effort savings ▪ Compounding savings

▪ To be considered at a later stage ▪ You need a lot of them to make the
difference
How easy is it to
Small implement it?
Difficult Easy
88
Let’s look at what animals could represent every category
can achieve
Big
2 1
▪ Elephant – difficult to catch yet big ▪ Cow saving – easy to kill and big
4 3
▪ Bat savings – small and difficult to ▪ Chicken savings – easy to kill yet
catch you need to kill a lot of them not to
be hungry
How easy is it to
Small implement it?
Difficult Easy
89
Remember that the potential reduction in costs depends on 2 elements:
potential percentage cost reduction and the cost starting point.
Potential % cost
x Cost starting point = Potential Saving
reduction
10% x 100 = 1
50% x 2 = 1
90
When it comes to cost savings what would you be happier about?
% $
▪ Big savings ▪ Big savings

expressed as % of expressed in
initial costs absolute value (e.g.,
in dollars)
regardless of the
initial cost
91
Quick wins in Drugstore
92
Imagine that you have to identify quick wins in cost reduction for an
international chain of drugstores. We know their cost structure. 93
Let’s see what we know about the firm that we will be analyzing
They have 4 000 stores
We have their cost structure
They have sent us a list of projects that

will help them reduce costs
Estimate the potential and group them

using the quick wins framework
94
How to estimate the potential
reduction in costs
95
In quick wins for cost reduction, we want to set priorities for projects
can achieve
Big
2 1
▪ Elephant – difficult to catch yet big ▪ Cow saving – easy to kill and big
4 3
▪ Bat savings – small and difficult to ▪ Chicken savings – easy to kill yet
catch you need to kill a lot of them not to
be hungry
How easy is it to
Small implement it?
Difficult Easy
96
As we have said, potential reduction in costs depends on 2 elements: potential
percentage cost reduction and the cost starting point.
Potential % cost
reduction
10% x 100 = 1
50% x 2 = 1
97
The cost starting point is known. What is a mystery is the potential percentage
cost reduction. We have to somehow estimate it
Potential % cost
reduction
? x 100 = ?
? x 2 = ?
98
There are some ways to estimate the potential reduction in costs
Ask suppliers of tools, IT solutions,

Get benchmarks
or machines
Carry out a 1-day audit Organize auctions/tenders
Do a consulting project with a

Measure a sample
consulting firm
Ask experts
99
Priorities
100
Let’s see what methods you can use to set priorities for smaller
tasks. As you will see, every method will give you different results.
101
There are 4 main rules you can use to set priorities for tasks that you
need to perform
▪ FCFS – First Come First Served (FIFO)
▪ LCFS – Last Come First Served (LIFO)
▪ Due Date
▪ SOT – Shortest Operating Time
102
What do you do, depending on the rules you use?
Time
needed for
When it completion FCFS LCFS Deadline SOT
Task came Deadline In minutes
▪ Write 1 blog post ▪ 01.04 ▪ 10.04 ▪ 120 1 5 4 5

▪ Analyze sales ▪ 01.04 ▪ 04.04 ▪ 30 2 4 1 4
results
▪ Send an email ▪ 02.04 ▪ 09.04 ▪ 2 3 3 3 1
▪ Read 4 articles ▪ 02.04 ▪ 11.04 ▪ 25 4 2 5 3
▪ Pay for cable TV ▪ 03.04 ▪ 04.04 ▪ 4 5 1 2 2
103
Benchmarks
104
To make meaningful conclusions, you need benchmarks.
They help you decide how important or big something is. 105
Why do you need benchmarks?
106
There are 2 types of benchmarks
Internal External
▪ Based on previous execution ▪ Based on some external sources (i.e., reports)

▪ Extremely comparable ▪ Not that easily comparable
▪ Very reliable ▪ They have to be treated with caution
▪ Detailed – can be put for each and every activity ▪ Only for a selected number of activities
▪ Can give you food for drastic improvements. By

analyzing them you can find totally different methods of
working
107
By comparing your results and benchmarks you can decide what to
improve, work on
Current Internal External
Area Unit result Conclusions
▪ Salary ▪ K USD ▪ 5 4 7 ▪ Your salary went up in comparison with your

previous one, but you are still below the
market
▪ Speed of typing ▪ words/ minute ▪ 40 39 80 ▪ Your typing speed has improved slightly yet
you are far below the speed achieved by
others
▪ Speed of analyzing ▪ minute ▪ 15 10 12 ▪ You not only improved your speed of

Excel analyzing but also you are better than
others
▪ Makes sense to teach others how to do it
108
Applying the 80/20 rule
in practice
109
Pareto Principle, known also as the 80/20 rule, shows you that 80% of results are generated by 20% of
efforts, resources, and time devoted. It has huge implications for how you should organize your work. 110
What does the 80/20 rule mean in practice?
▪ Concentrate only on the big items
▪ Concentrate on the big customers
▪ Analyze the most typical cases
▪ Concentrate on the most frequently occurring problems
▪ Analyze problems with big impacts
▪ Your analyses should have only 20% of the variable that generates 80% of the impact
▪ Start with subjects where you see the biggest difference between actual results and
benchmarks
111
Here are 3 examples of using the 80/20 rules
Area Description
▪ Learning Visual ▪ Learn only the 5 most used items that will take only 20% of the full course and will be
Basic for Excel used by you in 80% of cases
▪ Checking ▪ You check only 20% of competitors that sales add up to 80% of the market
competitors
▪ Salsa course ▪ Go through 20% of the course to learn the moves and the figures used in 80% of cases
112
Set SMART goals
113
The SMART formula translates to 5 rules you should use when defining
the goals
S Specific – target a specific area for improvement
M Measurable – it has to be quantifiable; you have to have a way of measuring it
A Assignable – it says who will do it
R Realistic – it can be delivered
T Time-related – it says when it has to be delivered, or by which date it has to be

finished
114
SMART goals should be set for the task but also for skills
Goals for ordinary tasks Goals for skills
▪ Avoid vague tasks ▪ Set goals for improving your skills

▪ Always for projects set deliverables, dates, and ▪ Set goals for learning new things
responsible persons
▪ Set goals for making the repetitive things faster and
▪ Merge the task with the goal on the to-do list and set better
the right pace to achieve the goal within the defined
time
115
Imagine that you want to write a book. Let’s
translate it into tasks with SMART goals. 116
Imagine that you want to write a book. Let’s translate it into tasks with
SMART goals
Imagine that you

want to write a book
Define the size
Divided into Make the tasks Set the pace and
of the book and
small tasks SMART execute
deadline
▪ 200 pages ▪ Write pages ▪ Write 1 page ▪ Measure every

▪ 1 page = 800 every day week completion
characters rate against the
▪ Time= 1 year target (1
page/day=7
pages/week)
▪ If necessary, act
to keep the pace
117
By comparing your results and benchmarks, you can decide what to
improve, work on
Current
Area Unit result
Internal External Target Actions
▪ Learn ▪ Level ▪ 0 n/a Intermediate ▪ Intermediate in ▪ Sing in the course

Spanish 2 years ▪ Listen to Spanish TV for 30 minutes
every day
▪ Speed of ▪ words/ ▪ 40 39 80 ▪ Achieve 60 ▪ Enroll in an online course
typing minute words/minute ▪ Devote 15 minutes every day to training
In 3 months
118
Map your skills, experience, skills and set goals where you want to be
# of projects Industry
Experience Current Target Current Target
▪ Sales projects ▪ 1 ▪ 4
▪ Marketing projects ▪ 2 ▪ 6
▪ Supply chain projects ▪ 2 ▪ 2
▪ Production projects ▪ 3 ▪ 3
▪ HR projects ▪ 0 ▪ 1
Skills Lowest Level Highest level
▪ Excel
▪ Negotiation
▪ English
▪ Optimizing production
▪ Setting up online
marketing campaigns
119
Opportunity tree
120
Opportunity Trees Opportunities
▪ YouTube
Traffic ▪ Ads on Instagram
▪ Affiliation with bloggers
# of transactions ▪ Guest blogging
Gross Margin
▪ Long form/Short form
% conversion ▪ Reduction of delivery methods
▪ No account
Sales ▪ Emailing people abandoning a cart
ATV ▪ Upselling and cross-selling

▪ Free delivery for higher tickets
% Gross Margin ▪ Introduction of new categories
% Front Margin ▪ Reducing the number of suppliers

▪ Finding new suppliers
▪ Renegotiation
% Back Margin
121
Cost drivers
122
Cost drivers are causing the cost to go or down
# of slides
# of hours per 1 slide

Slide preparation
Cost of 1 hour
Cost of an online course

# of lectures
Recording and editing # of minutes per 1 lecture
Cost of 1 hour
123
KPIs and business drivers
124
To understand and analyze business you have to identify the drivers / KPIs that
a key for a specific business and translate them into a model in Excel
Cost of traffic
x
Rent
Ratio of visitors +
to searches
People
Average cost of 1
x visit
Development
# transactions

Average
revenue per
transaction
-

Total margin
125
Imagine that you have to estimate typical family spending. You can take
into account a countless number of factors….. 126
Imagine that you have to estimate typical family spending. You can take into
account a countless number of factors…..
127
…or you can limit yourself to the most important ones e.g., number of kids, size
of the house, main repetitive spending like food.
128
To measure the selected factors, you have to use some sort of KPIs
Spending per 1
person per month
per category
# of people in
average family
Average size of the

house in sq. m
Average rent per

sq. m
129
In the next lectures, I will show you how to define and use KPIs and business
drivers
How to improve the results of

the Cinema
130
KPIs for cinemas –
Case Introduction
131
In this section, as a practice, you will have to define the KPIs of the cinema
business and use it to see how we can improve the profits of this business. 132
We will start with the problem. You will define the KPIs and then use it
to create the analysis in Excel as well as the slide with the results.
Cost of traffic
x
Rent
Ratio of visitors +
to searches
People
Average cost of 1
x visit
Development
# transactions

Average
revenue per
transaction
-

Total margin
133
To get the most out of the course please try to solve the problem on
your own before going to the solution
Go to the next lecture

Problem set / Pause the course and solve where you will find the
Case study the problem on your own step-by-step solution to the
problem set
134
KPIs for cinemas
– Case Solution
135
Imagine that you were responsible for managing the cinema. What KPIs
metrics would you look at to see whether you are doing a good job? 136
Let’s see what KPIs you should look at
# of People
Rent
Total capacity in
% Utilization
tickets Average wages x
People +
x
# sold tickets
Total revenue Total Costs

x
Average revenue
per Ticket
-
+
Average price per Average additional

Total margin
ticket purchase per ticket
137
KPIs for cinemas –
Presentation in PowerPoint
138
Let’s summarize the results of the analysis done in Excel.
Profit and Loss breakdown before the improvements

In Million of USD
9 900 800
19 800
9 900 6 600 990
1 510
Maximal potential Tickets not sold Real revenue People Rent Other costs EBIT
revenue
Profit and Loss breakdown after the improvements

In Million of USD
7 920 760
19 800 6 600 1 069 3 451
11 880
Maximal potential Tickets not sold Real revenue People Rent Other costs EBIT
revenue
139
KPIs for marketplaces
– Problem
140
Imagine that you were responsible for managing a marketplace for
patients and doctors (e.g., Docplanner). What KPIs you would look at?
Patient Marketplace Doctor

▪ Online booking
▪ Reviews
▪ Statistics for doctors
141
KPIs for marketplaces
– Solution
142
Costs of traffic
x
Rent
Ratio of visitors to +
searches
People
Average cost of 1
x visit
Development
# of transactions
Total revenue Total Costs

x
Average revenue
per transaction
-
x
% Fee of the Average transaction

Total margin
marketplace value
143
KPIs for marketplaces –
Alternative Solution
144
If you add suppliers, you have to modify the KPIs
Cost of acquiring
partners
x Cost of traffic
Ratio of visitors to
searches Rent +
Average cost of 1 People

x visit
Development
# of transactions
Average revenue
per transaction
# of Suppliers that
- have to be acquired
x
x
Cost of Acquiring 1
% Fee of the Average transaction supplier
Total margin
marketplace value 145
KPIs for the FMCG businesses
model – Problem
146
Imagine that you have to define KPIs for a cosmetics producer.
2 brands. 1 strong in Poland

the other one in Romania.
No e-commerce.
Penetration in some regions

is stronger than in others.
147
Main Drivers of the
FMCG Model
148
The FMCG business model is driven by some basic KPIs
# sold
Market share Market size
Unit Gross Margin x
- Average price
Cost of sales &
Gross Margin Head office
marketing
Unit production
cost
-
+ -
Fixed Cost /
Unit variable cost Net Margin Operational profit
Quantity produced
149
KPIs for the FMCG businesses
model – Solution
150
Imagine that you have to define KPIs for a cosmetics producer.
2 brands. 1 strong in Poland

the other one in Romania.
No e-commerce.
Penetration in some regions

is stronger than in others.
151
Now, let’s look at drivers and pick the best KPIs
Cost of sales &

# sold Unit Gross Margin Brand awareness New products Reach
marketing
Cost of sales &

Gross Margin per Top of the mind % of sales generated Weighted
# of pieces sold marketing as % of
piece sold brand awareness by new products distribution
Sales
% of Net Margin
Supported brand
% Market share % Gross Margin % Net Margin generated by new Numeric distribution
awareness
products
Average price sold NPS score
% Discount given to
retail chains
152
Now, let’s look at drivers and pick the best KPIs
Working capital
Cost position level Profitability Cash Generation
Level
Cost positions to Inventory level in Debt to EBITDA

% Gross Margin
sales Days of Sales ratio
% increase in cost
Receivables level in Operational cash
level vs last year or % Net Margin
Day of Sales flow to EBITDA
previous periods
% increase in cost
Payables in Days of % EBITDA
level to % increase Capex to EBITDA
Production
in sales
Dead stock as % of
all inventory stock
Dead stock as % of
sales
153
KPIs for SaaS
– Problem
154
Imagine that you are responsible for managing a SaaS offering tool for
emailing. What KPIs would you use to manage the business? 155
Before you move on to the solution, just quick info on the flow of
customers in SaaS
Visitor
Freemium / Trial User

Conversion
Paid User
Engaged Heavy
User
Ambassador
156
KPIs for SaaS
– Solution
157
Just as a reminder, you are responsible for managing a SaaS offering tool
for emailing. let’s see what KPIs you can use to manage the business. 158
Cost of acquiring
Churn rate customers
Customers lost Rent

+
# of customers in Net change of
the previous period customers
-
New customers x People
-
CAC per 1 customer Development
# of customers
Gross Margin Total Costs

x
Average revenue
per customer
-
x
% Fee of customer Average price per

Total profit
buying Plan A…. Plan A….
159
Rules for Excel
160
What rules should be used when building analysis in Excel
Use colors to make it easy to find

Shortcuts
things
Consistency between sheets No mouse
The Pyramid Principle Descriptions
1-source rule Data sources
Repetition of variables Master sheet
161
Let’s look at the most useful functions
Basic functions Financial / Mathematical Others
▪ SUMIF / SUMIFS ▪ RAND / RANDBETWEEN ▪ Pivot

▪ COUNTIF / COUNTIFS ▪ MOD ▪ Slicer
▪ HLOOKUP ▪ NPV ▪ Relative addresses
▪ VLOOKUP ▪ IRR ▪ Formats
▪ MATCH ▪ ABS ▪ Hyperlink
▪ SUMPRODUCT ▪ MAX / MIN ▪ Remove Duplicates
▪ IF ▪ CORREL ▪ Filters
▪ AND / OR ▪ Sorting
▪ IFERROR ▪ Data Validation
▪ AVERAGEIF ▪ Trace Dependents / Precedent
▪ LEFT / RIGH / MID ▪ Analysis Tool Pack
▪ FIND
▪ CONCATENATE
▪ YEAR / MONTH / DAY
▪ ROUND / ROUNDUP /
ROUNDDOWN
▪ TODAY
▪ VALUE
▪ WEEKDAY
162
Things that will help you
learn Excel
163
To help you improve your Excel skills, we have prepared in additional
resources a number of things
Detailed posts covering things that we

recommend learning
Presentation on most often used functions
Overview of the most useful shortcuts
Movies showing how to use some of the

functions
164
PowerPoint
Presentations
165
What rules should be used for PowerPoint Presentations
Use the right template Sources
1 slide = 1 message Dates
Agenda Backup
Executive summary The next version rule
Excel analysis for every slide Show the money
166
The whole market will be slowly growing as a result of GDP growth
Category A
Category B
Category C
Market size
In millions of EUR
Total 7 380 7 734 7 717 7 785 7 859 7 963 8 058 8 198 8 334 8 459 8 570 8 692 8 811 8 914 9 012 9 119 9 209
1 641 1 658
1 605 1 622
1 565 1 586
1 523 1 543
1 476 1 500
1 433 1 450
1 392 1 389 1 401 1 415
1 328
3 334 3 374 3 407

3 216 3 260 3 298
3 084 3 130 3 171
2 946 2 981 3 033
2 862 2 855 2 880 2 908
2 804
3 806 3 857 3 911 3 965 4 011 4 055 4 104 4 144

3 480 3 473 3 503 3 537 3 583 3 626 3 689 3 750
3 247
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Source: Euromonitor 167

Market size
In millions of EUR
Category A
Category B
Category C
Total
7 380 7 734 7 717 7 785 7 859 7 963 8 058 8 198 8 334 8 459 8 570 8 692 8 811 8 914 9 012 9 119 9 209
1 641 1 658
1 605 1 622
1 565 1 586
1 523 1 543
1 476 1 500
1 392 1 389 1 401 1 415 1 433 1 450
▪ The market will
1 328
develop and will
3 407
3 084 3 130 3 171 3 216 3 260 3 298 3 334 3 374
be slowly
2 946 2 981 3 033
2 804
2 862 2 855 2 880 2 908 growing as a
result of GDP
growth
3 806 3 857 3 911 3 965 4 011 4 055 4 104 4 144

3 480 3 473 3 503 3 537 3 583 3 626 3 689 3 750
3 247
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

The market will develop and will be slowly growing as a result of GDP growth
Market size Category A
In millions of EUR Category B
Category C
Total
7 380 7 734 7 717 7 785 7 859 7 963 8 058 8 198 8 334 8 459 8 570 8 692 8 811 8 914 9 012 9 119 9 209
1 641 1 658
1 605 1 622
1 565 1 586
1 523 1 543
1 476 1 500
1 392 1 389 1 401 1 415 1 433 1 450
▪ Category C will
1 328
be equal to
3 407
3 084 3 130 3 171 3 216 3 260 3 298 3 334 3 374
around 30% of
2 946 2 981 3 033
2 804
2 862 2 855 2 880 2 908 the market
3 806 3 857 3 911 3 965 4 011 4 055 4 104 4 144

3 480 3 473 3 503 3 537 3 583 3 626 3 689 3 750
3 247
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Basic Tools
– Summary
170
Just to recap below you can find the things we have learned in this
section
The Bottom-up The Top-down

Backward Logic
Approach Approach
Compounded effect Issue Trees Priorities
Benchmarks The 80/20 rule Opportunity Trees
KPIs and business

drivers
171
Intermediate tools used by
172
Intermediate tools
– Introduction
173
In this section, we will discuss the intermediate tools, techniques, and
Representative element
Rankings Scenario Analysis
analysis
Theory of Constraints
Decision Tree Analysis Critical Chain
and Bottlenecks
Lean Manufacturing
174
Rankings
– Introduction
175
Quite often you have options that you want to somehow compare and
rank them
Option 1
Option 3
Option 4
Option 5
176
Thanks to the ranking you not only give points, but you can sort them
from the most wanted to the least desired
Option 5
Option 3
Option 1
Option 4
177
You may use ranking for many things
Pick the best option from

Rank business ideas
available options
Create priorities for further

Motivate
actions
Rank people or team members Create benchmarks
178
Rankings are done in 5 steps
Create criteria and Calculate the points

Pick the preferred
weights for the Define options Gather data and create the
option
ranking ranking
▪ At least 3-4 criteria, ▪ You have to define ▪ For defined ▪ Define the ▪ Using the ranking
preferably all options that you options, gather rule/function that and additional
independent will be choosing data on the criteria assigns points for criteria you can
▪ Every criterion from so you are able to all criteria pick the preferred
should have a calculate the points ▪ Calculate the score option
weight – not all for every criterion for every
criteria have to and option option/criterion
have the same ▪ Using weights
importance calculate the total
score
▪ Use the total score
to rank the options
▪ You can use
additional criteria
179
In the next lectures, I will show you how to create and use the rankings
in practice. I will be talking about 2 examples
The expansion strategy for

DIY (Home Improvements)
foreign markets
180
How to expand the brand
– Introduction?
181
Let’s have a look at a milk producer that
wants to expand its product range. 182
Let’s have a look at a milk producer that wants to expand its product
range
Leader in milk
2nd place in butter
25 products considered
183
There are things you should consider when selecting the right products
to be developed within the same brand
Is the product consistent with the Are there customers who already
current brand? think that you have the product?
Does it require the same What is the growth rate of the

distribution? market for the product?
Do you have strong players on the

market you enter?
What is the potential of the market?
184
How to expand the brand
– Case Solution
185
After we have gone through research, we got the following results. This
suggests that we should start with yogurt and yellow cheese
Market size
In millions of USD
350
Yogurt
300
250
Milk Desserts
(e.g., Monte)
200
Yellow (swiss)
cheese
150 Ice cream
Cottage cheese
100
50 Feta Cheddar
0
0 0,5 1 1,5 2 2,5 3
Attractiveness
(1-Low;3-High) 186
Expansion strategy into other
countries – Introduction
187
Creating an expansion strategy requires you to do several things
Define criteria and

Gather data on the Create the ranking Define limits that
weights for the Set priorities
markets of markets to enter you have
criteria
▪ 4-6 criteria on the ▪ Ranking on the ▪ Money for

basis of which you basis of criteria and expansion
will value specific weights created ▪ People for
markets expansion
▪ Logistics
▪ Lead time due to
your supply chain
▪ Limitation in stock
188
Expansion strategy into other countries
– Introduction
189
Imagine that you are working for a fashion player from Spain that wants
to expand abroad
The firm currently has 310 stores in

Spain
The firm wants to decide where to

expand now
The firm takes into account 4

criteria
Estimate the potential size and

attractiveness of markets
190
Just as a reminder creating a ranking of countries consists of the following
stages
Define criteria and

Gather data on the Create the ranking Define limits that
weights for the Set priorities
markets of markets to enter you have
criteria
▪ 4-6 criteria on the ▪ Ranking on the ▪ Money for

basis of which you basis of criteria and expansion
will value specific weights created ▪ People for
markets expansion
▪ Logistics
▪ Lead time due to
your supply chain
▪ Limitation in stock
191
In our case, we will use 4 criteria and we will estimate the size of
markets using the population and the number of current stores
▪ GDP per capita PPP

Criteria for ▪ Similarity in the product range
measuring the ▪ Competition level
attractiveness of ▪ Share of online sales
the market
▪ Potential was measured using the size of the markets in terms of the
Potential of the potential number of standard stores
market
192
Expansion strategy into other countries
– Solution
193
Just as a reminder that you are working for a fashion player from Spain
that wants to expand abroad
The firm currently has 310 stores in

Spain
The firm wants to decide where to

expand now
The firm takes into account 4

criteria
Estimate the potential size and

attractiveness of markets
194
If we look at potential top 20 markets, there is quite a lot of room for
expansion
The potential of countries/regions to capture,
Ranking of market attractiveness assuming achieving share like in Spain
(1-low; 10-High) In standard stores
Norway 7,5 Norway 34

Ireland 7,0 Ireland 31
Finland 7,0 Finland 36
Austria 7,0 Austria 57
Switzerland 6,8 Switzerland 54
Sweden 6,8 Sweden 64
Denmark 6,8 Denmark 37
Belgium 6,8 Belgium 75
Slovak Republic 6,5 Slovak Republic 36
Latvia 6,5 Latvia 13
Germany 6,5 Germany 536
France 6,5 France 438
Estonia 6,5 Estonia 9
Belarus 6,5 Belarus 63
Spain 6,3 Spain 310
Portugal 6,3 Portugal 70
Netherlands 6,3 Netherlands 112
Lithuania 6,3 Lithuania 20
Italy 6,3 Italy 400
Greece 6,3 Greece 73 195
Let’s look at how the potential is distributed between regions
Potential
In the number of standard stores
10 000
9 000 China
8 000 India
7 000
6 000
5 000 Africa
4 000
North America
3 000 Western Europe
South America
2 000
Indonesia Russia + Asian
ex USRR
1 000
Malaysia Turkey Eastern Europe
0
0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0
Attractiveness
(1-Low; 10-High) 196
Scenario Analysis
– Introduction
197
The future is pretty difficult to figure out. You don’t know what will happen.
In those cases, it is a good idea to consider a few different scenarios. 198
199
Imagine that you are an ice cream producer, and you have to decide how much
ice cream to produce for the next day without knowing what will be the
weather. Therefore, you have to consider different scenarios
Scenario 1 Scenario 2 Scenario 3
100 70 30
200
The scenario analysis consists of 5 steps
Define the thing Check the goal

Define which drivers Define your
(goal function) you Define the scenarios function for every
are the least certain behavior/policy
want to analyze policy
▪ You should be ▪ Concentrate on ▪ It is good to define ▪ Scenarios do not ▪ The aim of this step
analyzing the things drivers that have a 3-5 different depend on you, but is to pick the right
that are threatened big impact and big scenarios your behavior does. policy, given the
by different volatility ▪ In every scenario, ▪ You can define a scenarios and their
scenarios and are the main drivers policy/behavior policy
important for your will have different that helps you in a ▪ The best policy is
business values specific situation the one that gives
▪ It can be profit, ▪ You should assign a you the highest
NPV from new certain probability benefits (highest
investment, the to every scenario goal function)
inventory you
should have, etc.
201
In the next lectures, I will show you how to create and use a scenario
analysis in practice using an example from the airplane industry
Which price formula is the best

for the profits
202
Which price formula is the best for
my profits – Introduction
203
Now, we will try to see which price formula is better for aircraft
maintenance service company
2 sites – in Poland and Croatia
Consider 4 different formulas
Consider 3 different scenarios
204
Let’s look at the scenarios
Scenario 1 Scenario 2 Scenario 3
▪ $ 30 K ▪ $ 20 K ▪ $ 15 K
Materials
▪ 3 000 man-hours ▪ 3 400 man-hours ▪ 3 800 man-hours

Number of
manhours needed
▪ 30% ▪ 25% ▪ 45%

Probability of the
scenario
205
Let’s look at the 4 price formulas that we will consider
Times & Materials Fixed Fee Mixed Option 1 Mixed Option 2
▪ Cost of Materials ▪ $ 25 K ▪ $ 25 K ▪ $ 25 K
Materials increased by 15%
markup
▪ $ 50 per 1 man-hour ▪ $ 140 K ▪ Fixed: $ 140 K ▪ Fixed: $ 140 K

▪ We look at the real ▪ On top of that 15% of ▪ On top of that for all
Labor man-hours needed the labor cost man-hours above 2
calculated using the 800 we use the Time
Times & Materials & Materials formula
formula but using the price of
$ 90 per 1 man-hour
206
Which price formula is the best for
my profits – Solution
207
Just as a reminder we were trying to decide which pricing formula is the
best for the MRO organization
2 sites – in Poland and Croatia
Consider 4 different formulas
Consider 3 different scenarios
208
It seems that the Mixed Option 2 price formula is the best option
Gross Margin
In thousands of USD
117
90 84
58
Times & Materials Fixed Fee Mixed Option 1 Mixed Option 2
209
How to shorten the lifespan of a
product – Case Introduction
210
Imagine that you are working for a ceramic tiles producer that wants to change
the frequency at which customers are remodeling their houses
Ceramic tiles in Eastern Europe are

exchanged every 12 years
Ceramic tiles in Western Europe are

exchanged every 3-5 years
The ceramic tiles producer wants to

get closer to Western Europe
211
Before we move on, let’s look at a short example of why it is so important to
consider the lifespan of the product
10 years between 10 houses to be

100 houses ÷ =
renovations renovated every year
5 years between 20 houses to be

100 houses ÷ =
renovations renovated every year
212
product – General rules
213
There are some standard ways to make people shorten the lifespan
Fad or Fashion Give discounts for the exchange
Shorten the technical lifespan of the

Standards required by law
product, or make it less durable
Lower the cost connected with the Create a second-hand market for the
exchange exchanged products
Solve problems connected with the

Recycle the exchanged products
exchange
214
In our case, we will look at 3 ways
Fad or Fashion Give discounts for the exchange
Shorten the technical lifespan of the

Standards required by law
product, or make it less durable
Lower the cost connected with the Create a second-hand market for the
exchange exchanged products
Solve problems connected with the

Recycle the exchanged products
exchange
215
product – Solution
216
Imagine that you are working for a ceramic tiles producer that wants to change
the frequency at which customers are remodeling their houses
Ceramic tiles in Eastern Europe are

exchanged every 12 years
Ceramic tiles in Western Europe are

exchanged every 3-5 years
The ceramic tiles producer wants to

get closer to Western Europe
217
Both the Revenue and the Net Sales Margin level suggest that we should
reduce the lifespan by mainly lowering the cost of exchange of the ceramic tiles
Total Revenues 2020-2030

In millions of USD
2 015
1 775 1 775
1 217
Current Fad or Fashion Lower cost of exchange Simplify the exchange
Net Sales Margin 2020-2030

In millions of USD
355 403 391

304
Current Fad or Fashion Lower cost of exchange Simplify the exchange
218
analysis – Introduction
219
In many cases, there are a lot of options that you can consider. For simplicity,
you want to limit the options and get down to 1-5 representative elements. 220
There are usually 2 main ways to use the representative element
analysis
Average 3 options
221
Thanks to the representative element analysis you can achieve a lot of
interesting things
Compare different solutions and

Create benchmarks
decide which is better
Compare different offers and

Plan & Forecast
decide which is better
Find the optimal solution Do the segmentation
222
In the next lectures, I will show you how to use the representative
element analysis in practice
Analysis of tariffs in a
convenience store
223
Convenience stores – Analysis of
tariffs – Case Introduction
224
Now we will analyze tariffs used by a Retailer operating chain of
convenience stores
Analysis to be
Discrepancies in tariffs
High costs of delivery to points of Comparison of costs of delivery and its

Transport
sales components for different regions
Lack of unified tariffs/methods of
calculating tariffs
Data needed:
▪ Tariffs charged for each and every region
▪ Number of points of sales
▪ The average length of a route, the average number of points of sales per route, the average number of newspapers delivered
to a point of sales
225
Now, we will analyze tariffs used by a Retailer operating chain of
convenience stores
Introduction:
▪ You were employed by a company that distributes newspapers and FMCG goods to around 36 thousand small convenience
stores.
▪ Company consists of 18 virtually independent entities linked to regions.
▪ Each and every entity uses a different way of setting tariffs for delivering goods
Tasks:
▪ Figure out a way to compare costs and try to estimate in which region costs are the lowest
▪ Estimate current costs of distributing to points of sales
▪ Estimate savings provided that you manage to lower costs to the level equal to the average of 3 lowest tariffs
226
The Retailer is using different formulas in different regions
Fixed fee per

Fixed fee per day for Fee per
Point of allocating Fixed fee per allocated
delivery newspapers route Fee per km newspapers
▪ Region 1 ✓
▪ Region 2 ✓ ✓ ✓
▪ Region 3 ✓ ✓
▪ Region 4 ✓ ✓ ✓ ✓
▪ Region 5 ✓ ✓ ✓ ✓
▪ Region 6 ✓ ✓
227
In order to be able to compare the results, we will have to create 2
typical routes
Parameters of a typical city route: Parameters of a typical rural route:
▪ The average length (km) 31 ▪ The average length (km) 124

▪ Number of Points of delivery 21 ▪ Number of Points of delivery 29
on a typical route on a typical route
▪ Newspapers allocated in pieces 9 000 ▪ Newspapers allocated in pieces 3 000
228
We will use the following general formula. Different Regions will use
different elements of the formula
Fixed cost
Fee for distance covered

(in kilometers)
Fee for servicing Point

of Sales
The Total Cost per
average route
+
Fee for delivering
newspapers
Daily fee for preparing

newspapers for a route
Fee for preparing

newspapers
229
For most of the elements, we will have 2 drivers: How often we did something
and how much they charge per 1 execution
Fixed cost

(in kilometers)

of Sales
The Total Cost per
average route
+
Fee for delivering
newspapers

Fee for preparing

newspapers
230
Let’s look at the fee for the distance covered. It will depend on the fee per 1 km
and the length of the route
Fixed cost
Fee per 1 km
X
(in kilometers)
Weighted average
length of the route
of Sales
The Total Cost per
average route
+
Fee for delivering
newspapers

Fee for preparing

newspapers
231
The Fee for servicing PS will depend on the fee per 1 Point of Sales and the
number of Points of Sales on a specific route
Fixed cost

(in kilometers) Fee per 1 Point of Sale
(PS)
Fee for servicing Point X
of Sales
# of Point of Sales (PS)
The Total Cost per
average route
+
Fee for delivering
newspapers

Fee for preparing

newspapers
232
In a similar manner, we estimate the fee for delivering newspapers
Fixed cost

(in kilometers)

of Sales
Fee for delivering 1
The Total Cost per
average route
+ newspaper
Fee for delivering
X
newspapers
# of newspapers
delivered
Fee for preparing

newspapers
233
And the fee for preparing the newspapers for routes
Fixed cost

(in kilometers)

of Sales
The Total Cost per
average route
+
Fee for delivering
newspapers

Fee for preparing 1
newspaper
Fee for preparing
X
newspapers
# of newspapers
delivered
234
Convenience stores – Analysis of
tariffs – Solution
235
After we have done the calculations, we got the target to which more
expensive regions should strive The weighted average for 3 least
expensive regions
Average daily cost per Point of Delivery – City route
in EUR per day per 1 Point
6,0
5,5 5,3 5,4 5,2 5,4
5.4
Region 1 Region 2 Region 3 Region 4 Region 5 Region 6
Average daily cost per Point of Delivery – Rural route

in EUR per day per 1 Point
9,5
7,6 7,5
6,6 6,4 7.6
6,3
Region 1 Region 2 Region 3 Region 4 Region 5 Region 6
236
If we renegotiate the contracts, we can get significant savings both for
the city and rural routes
City routes Rural routes
Current weighted average cost per Point of 5.39 7.57

Delivery
In EUR per 1 visit at a point of delivery
Targeted weighted average cost per Point of 5.26 6.47

Delivery
In EUR per 1 visit at a point of delivery
Number of Points of 24 828 10 829

deliveries
Estimated annual savings

1 064 3 729
In thousands of EUR
237
Decision Tree Analysis
238
Quite often you have to make important decisions faced with uncertainty.
In those situations, it is very useful to apply the so-called decision tree. 239
Let’s have a look at an example. You are to build a chocolate factory. You have
to decide on the size of it. Outcome
In M USD
60%
Big Demand ▪ 50
(EBITDA= $100 M)
Big Factory
(Invest $50 M)
40%
Small Demand ▪ -30
(EBITDA= $20 M)
What factory you
should build?
60% Big Demand ▪ 20
(EBITDA= $50 M)
Small Factory
(Invest $30 M)
40% Small Demand

▪ 0
(EBITDA= $30 M)
240
Once you have the outcomes for each and every option, it is time to calculate
the expected value for both decisions
Probability of Probability of
Expected Value = Outcome 1 x + Outcome 2 x
Outcome 1 Outcome 2
Expected Value for

= 50 x 60% + - 30 x 40% = 18
Big Factor
Expected Value for

= 20 x 60% + 0 x 40% = 12
Big Factor
241
Once you have the outcomes for each and every option, it is time to calculate
the expected value for both decisions Outcome
In M USD
60%
Big Demand ▪ 50
(EBITDA= $100 M)
Big Factory
18
(Invest $50 M)
40%
Small Demand ▪ -30
(EBITDA= $20 M)
What factory you
should build?
60% Big Demand ▪ 20
(EBITDA= $50 M)
Small Factory
(Invest $30 M) 12
40% Small Demand

▪ 0
(EBITDA= $30 M)
242
Lean manufacturing
243
Lean Manufacturing is a philosophy of working with little waste and the
highest quality. It consists of many techniques that should be gradually
mastered
5S* Kanban Kaizen Poka Yoke Nested

Production
Just in time SMED TPM** OEE*** Zero defects
Process mapping Continuous flow Standardizing

management Heijitsu box
work
* Sort, Set, Shine, Standardise, Sustain

** Total Productive Maintenance
*** Overall Equipment Efficiency 244
Overall Equipment Efficiency
(OEE)
245
The OEE we use to calculate to what extent we are using machines. It tells us
what percentage of the time of a machine is used to produce valuable goods 246
Let’s look at the OEE for a plywood-cutting machine
Total time
Preparation and
Maintenance =0 Total available time
100% 100 %
Set-
Idle time due to Operating time
ups
organizational issues x
54% 54 %
Idle
time Cutting
x
70% 70 %
Percentage of good
products
98% 98%
OEE = 37% 247
Overall Labor Efficiency
(OLE)
248
In the case of machines, you can measure Overall Equipment Efficiency (OEE). A
similar concept can be used to measure the efficiency of people
Open hours
Maintenance Machine uptime
60% 60 %
Idle time Uptime utilization x
60% 60 %
Percentage of good quality

x
products
98% 98%
OEE = 35%
249
Similarly, to OEE which is designed for machines, you can define the
Overall Labor Efficiency (OLE) for people
OEE OLE
▪ Estimated for machines ▪ Estimated for people

▪ Shows you what percentage of the machine ▪ Shows you what percentage of the people is
is used to create value for which you are paid used to create value for which you are paid
by the customer by the customer
▪ It makes sense to analyze it, especially for ▪ It makes sense to analyze it, especially for
expensive machines and bottlenecks people that are representative of a big group
of your employees
250
Let’s check the results of the OLE analysis for sales representatives
working at a store
Sales advising 31%
Shelf replenishment 29%
▪ Only sales advising and shelf replenishment

are added-value activities for which
Transport and 21% customers are willing to pay
movement
▪ This means that the OLE for a sales rep is
equal to 60% at most
Others 18%
Total 100%
251
The Overall Labour Efficiency shows how much work there is in the work ☺
Workday
The time that you can devote to work
100% 100 %
No work due to
Lack of any work organizational The time left for real work
issues x
54% 54 %
Movement Work
x
70% 70 %
Work done well
98% 98%
OLE = 37% 252

Removing Bottlenecks
– Theory of Constraints
253
In every complicated system, you will have a bottleneck that stops you from
achieving more. You can remove them by using the so-called theory of constraints. 254
The Bottleneck is always at the place where you have the lowest
capacity. Have a look at 3 examples x Stage
capacity
x Bottleneck
Example 1
7 5 7
Example 2
5 10 20
Example 3
5 5 3
255
The theory of constraints originally was created for production. However, you
can use it as well for services. Let’s compare 2 examples
Production Retail offline stores (e.g., DIY)
▪ Throughput of the whole system (a specific ▪ Throughput is measured in the number of

factory) customers served
▪ Inventory (raw materials, work in progress, ▪ Inventory (products in the store)
and finished products in the factory) ▪ Operational costs of the store
▪ Operational costs of the factory (or the whole
supply chain)
256
The aim of the theory of constraints is to increase the throughput in
bottlenecks. For this. you can use
1 ▪ Identify the bottleneck
2 ▪ See how you can use in a better way the time of the bottleneck
3 ▪ Everything should be aligned with the bottleneck
4 ▪ Increase the capacity of the bottleneck to meet the full demand (add machines, people,
resources, increase the time of work)
257
Content marketing agency
258
Your friend Ivan works in a content marketing agency and wants to
improve the work of his team. Help him use the bottleneck framework. 259
A few things about Ivan’s team
He manages 4 people
Every person specializes only in 1 area
You measure your success in the

number of posts produced
260
Below you can see the production capacity for each and every stage. 1
person works on 1 stage only
# of posts that can be done
xx in a week by 1 person
Edit and modify posts,

Research topics for a
Write a post Create illustrations add illustrations, and
post
schedule
20 5 7 10
261
Content marketing agency
– Solution
262
Your friend Ivan works in a content marketing agency and wants to
improve the work of his team. Help him use the bottleneck framework. 263
Just as a reminder let’s see what we know about the content marketing
agency
He manages 4 people
Every person specializes only in 1 area
You measure your success in the

number of posts produced
264
Imagine that you are working in a company working in a content
marketing xx
# of posts that can be done
in a week by 1 person
Edit and modify posts,

Research topics for a
Write a post Create illustrations add illustrations and
post
schedule
20 5 7 10
▪ Speed up the writing process (faster typing, 10

20 8 7
better tools, shortcuts for the most popular
words)
▪ Make the researcher do also par time 10 9 10 10
writing and making illustration
▪ We have almost doubled the production of posts with the same resources
▪ The same principles would apply if all the activities were done only by you – in this case, it would mean that you
should not do too much research and illustration but rather improve the typing speed and match the number of
illustrations and research to your capacity in writing
▪ If you have no impact on the process (you are one of the guys above, just doing his own part and your boss does not
want to listen to you then simply do less – identify the bottleneck and adjust your speed to his speed.
▪ On the other hand, if you are the bottleneck then speed up because the whole team depends on you.
265
Production Capacity Improvement
266
Now imagine that you were asked to increase the production capacity of a
factory. Try also to calculate the financial impact of the proposed scenarios.
267
A few things about the firm
The product has to go through 3

stages
1 ton of product generates USD 30 of

margin after variable costs
You want to see to what level you can

increase production
Try to also estimate the impact on the

annual EBITDA of proposed changes
268
Before we look at specific scenarios, we have to discuss 2 issues
What does the How to calculate the

production capacity monthly production
depend on? capacity
269
What the production capacity
depends on?
270
First, let’s see what the production depends on assuming there is just 1
production stage
Total number of # of hours when Units produced per

units produced
= we were producing
x 1 hour of work
# of hours when Available time in % of Time used for

we were producing
= hours
x production
Total number of Available time in % of Time used for Units produced per
units produced
= hours
x production
x 1 hour of work
271
Let’s calculate a simple example
units produced
= hours
x production
x 1 hour of work
Total number of
units produced
= 24 x 50% x 10 = 120
272
Now, let’s imagine that we increase the % of Time used for production to 70%
units produced
= hours
x production
x 1 hour of work
Total number of
units produced
= 24 x 50% x 10 = 120
Total number of
units produced
= 24 x 70% x 10 = 168
273
The same results can be achieved by increasing the units produced per 1 hour
of work
units produced
= hours
x production
x 1 hour of work
Total number of
units produced
= 24 x 50% x 10 = 120
Total number of
units produced
= 24 x 70% x 10 = 168
Total number of
units produced
= 24 x 50% x 14 = 168
274
Finally, let’s see what other names we can use for these drivers of capacity
units produced
= hours
x production
x 1 hour of work
Total number of Available time in Overall Equipment Throughput per 1

units produced
= hours
x Efficiency (OEE)
x hour
275
How to calculate the capacity for
the whole month
276
We have said that the production depends on 3 drivers
units produced
= hours
x production
x 1 hour of work
Total number of Available time in Overall Equipment Throughput per 1

units produced
= hours
x Efficiency (OEE)
x hour
277
Now, let’s see how it looks like for the whole month
Total number of units

Available time in hours Overall Equipment
produced during the = During the month x Efficiency (OEE) x Throughput per 1 hour
month
Available time in hours # of days during the # of working hours per

During the month = month when we work x day of work

# of days during the # of working hours per Overall Equipment
produced during the = month when we work x day of work x Efficiency (OEE) x Throughput per 1 hour
month
278
Let’s have a look at a simple example

month
800 = 20 x 8 x 50% x 10
279
You can increase production by changing different drivers
month
800 = 20 x 8 x 50% x 10
1 200 = 30 x 8 x 50% x 10
1 200 = 20 x 12 x 50% x 10
1 200 = 20 x 8 x 75% x 10
1 200 = 20 x 8 x 50% x 15
4 050 = 30 x 12 x 75% x 15
280
Production Capacity
Improvement – Scenarios
281
Just as a reminder a few things about the firm
The product has to go through 3

stages
1 ton of product generates USD 30 of

margin after variable costs
You want to see to what level you can

increase production
Try to also estimate the impact on the

annual EBITDA of proposed changes
282
In previous lectures, we said that the monthly production depends on 4
drivers
month
283
Let’s instead of hours and throughput per day use hours and throughput
per shift
month

# of days during the Overall Equipment
produced during the = month when we work x # of shifts per day x Efficiency (OEE) x Throughput per 1 shift
month
284
In the case study, we have 3 stages, not one. So first we have to
calculate the potential capacity per stage
# of days during the

Total # of units going # of shifts per day for Throughput per 1 shift
through Stage 1 = month when Stage 1 x Stage 1 x OEE for Stage 1 x for stage 1
works

through Stage 2 = month when Stage 2 x Stage 2 x OEE for Stage 2 x for Stage 2
works

through Stage 3 = month when Stage 1 x Stage 3 x OEE for Stage 3 x for Stage 3
works
Total # of units Minimal # of units

Produced = going through every
stage
285
Let’s look at an example
Total # of units going

through Stage 1 = 30 x 2 x 60% x 12


Total # of units Minimal # of units

Produced = going through every
stage
286
After calculations, we get that we can produce at most 432. This is the
capacity of Stage 1

through Stage 1 = 432


Total # of units
Produced = 432
287
In the 1st scenario, we assume that you will increase OEE for stage 1
The bottleneck is Stage 1 of the

production
We want to increase the production

by moving OEE
Assume that you increase OEE from

60% to 70%
The change will require a Capex of

USD 20 K
288
In the 2nd scenario, we assume that you will increase the throughput for
stage 1

production
We want to increase the throughput

per shift
Assume that you increase throughput

from 10 to 16
The change will require a Capex of

USD 30 K
289
In the 3rd scenario, we assume that you will increase the number of
shifts for stage 1

production
We want to increase the number of

shifts when we work
Assume that you increase the number

of shifts in stage 1
The change will require an additional

Opex of USD 20 K
290
In the 4th scenario, we assume that you will combine all improvements

production
Combine all improvements from

scenarios 1-3
Remove the bottleneck in stage 3 –

increase the throughput
The change will require an additional

Opex of USD 20 K & a Capex of 80 K
291
Critical Chain
292
One of the biggest problems with efficiency is the so-called Parkinson’s Law. It
claims that work expands so as to fill the time available for its completion
293
People when asked to evaluate the time certain things will take build-in buffers.
Afterward, the buffer is wasted. The idea of having a buffer makes you less productive.
294
Let’s look at an example of 3 activities: A, B, C, and let’s compare the estimated
time of completion (with buffers) with the real-time needed to complete those
3 tasks
Declared time
A B C Buffer time
Real execution
A+B+C
A+B+C
295
It’s a much better idea to ask them for estimations without a buffer and create
one central buffer. Shorter deadlines will make people more productive
Declared time
A B C Buffer time
Real execution
A+B+C
A+B+C
A B C Central buffer
296
Intermediate tools
– Summary
297
Just to summarize this section, let’s have a look at what we have
learned
Rankings Scenario Analysis
analysis
Theory of Constraints
Decision Tree Analysis Critical Chain
and Bottlenecks
Lean Manufacturing
298
Advanced tools used by
299
Advanced tools
– Introduction
300
In this section, we will discuss the basic tools techniques, and
Simulations Feasibility Analysis Sensitivity analysis
Decomposition Analysis
301
Simulation Analysis
– Introduction
302
The future is pretty difficult to figure out. You can use scenario analysis,
or you check ALL the potential options and see which is optimal. 303
Imagine for a second that you have a small bakery trying to decide what is the optimal
number of cakes that you should bake. You want to use simulations to find out. 304
For the producer of cakes that at the same time can bake from 1 to 10 cakes,
using the simulation to find the optimal production batch would entail
calculating the costs for all options
305
There are plenty of things you can do thanks to simulations
Test the boundaries of the

Find optimal solutions
system
Carry out sensitivity analysis Find weak spots
Plan & Forecast
306
In the next lectures, I will show you how to use simulation in practice. I
will be talking about 2 examples
What will be the effect of the Simulation of the whole

price increase Logistics System
307
What will be the effect of the
price increase – Introduction
308
The impact of the price change on your profit will depend on a few
factors
How big the increase is Price sensitivity
What does your competition The role of the product you

do? are increasing the price
How aware of prices are the Components of the average

customers? basket
309
Imagine that you want to estimate the price change impact for a small
chain of local coffee shops
20 locations in Poland
Sell coffee, cakes,

sandwiches, and quiches
3 different motives for

going there
310
What will be the effect of the
price increase – Solution
311
Imagine that you want to estimate the price change impact for a small
chain of local coffee shops
Sell coffee, cakes,

3 different motives for

going there
312
If we look just at the coffee gross margin, we should increase the price of coffee
by 9%. If we take into account the total gross margin, 4% would be a better
choice
Gross Margin – Only for Coffee vs price increase
In thousands of USD
10 000
8 000
6 000
4 000
2 000
0
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
Gross Margin – Coffee and Cakes vs price increase

In thousands of USD
20 000
15 000
10 000
5 000
0
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26% 27% 28% 29% 30%
313
Juice Producer – Simulation of the
whole Logistics System – Introduction
314
Let’s imagine that you have to optimize the distribution
system of a juice producer located in Serbia. 315
Let’s imagine that you have to optimize the distribution system of a
juice producer located in Serbia
Introduction:
▪ You were employed by a producer of a local brand of Cola to carry out an operational audit.
▪ The producer is located in Serbia where it has a significant market share. Currently, apart from the warehouse next to the production
facility in Subotica, it has two additional distribution centers in Novi Sad and Belgrade.
▪ Currently, the goods are collected from the distribution centers by shops
Tasks:
▪ Calculate the cost of the current system assuming that you have warehouses in all locations
▪ Assume that you use 24-tonne trucks for transportation
316
Let’s imagine that you have to optimize the distribution system of a
juice producer located in Serbia
Subotica
Novi Sad
Belgrade
Kragujevac
Prijepolje
Niš
317
whole Logistics System – Tips
318
Simulations are pretty difficult. Therefore, we will try to provide you
with certain tips that will help you understand what we do in Excel. 319
The future is pretty difficult to figure out. You can use scenario analysis,
or you check ALL the potential options and see which is optimal. 320
Imagine for a second that you have a small bakery trying to decide what is the optimal
number of cakes that you should bake. You want to use simulations to find out. 321
For the producer of cakes that at the same time can bake from 1 to 10 cakes
using the simulation to find the optimal production batch would entail
calculating the costs for all options
322
There are plenty of things you can do thanks to simulations
Test the boundaries of the

Find optimal solutions
system
Carry out sensitivity analysis Find weak spots
Plan & Forecast
323
In our case study, we will consider different options. To do the
simulation we should first estimate how many options there are. 324
Imagine that you are working for an FMCG firm that has 3 warehouses and is
wondering whether or not to cut down the number of warehouses. How many
different options you would have to examine?
325
In order to solve it, think about the supply chain system as if it was a system
consisting of 3 independent parts, and 3 warehouses.
W1 W2 W3
326
Every warehouse can be a part of the system or can be excluded from it. In
other words, we have for every warehouse 2 options: closed or open
Open
Closed
W1 W2 W3
327
This means that to calculate the number of all options we multiply the number
of options for every warehouse. Since we have 2 options per warehouse, we
get 8. Open
Closed
W1 W2 W3
2 x 2 x 2 = 8
328
You may decide to exclude the option where there are no warehouses (all are
closed). In this case, we would have 7 options we have to consider
Open
Closed
W1 W2 W3
2 x 2 x 2 = 8
-1
=
7
329
The last thing we want to do is to have an automatic generator of
options. We know we have 8 different options we can consider. 330
First, we will put 1 if the warehouse is open and 0 if it is closed
= Open = 1
= Closed = 0
331
We have 3 potential locations for warehouses.
Subotica Novi Sad Beograd
332
The following sequence of 1 and 0 would mean that Subotica is opened,
Novi Sad is closed, and Beograd is open
1 0 1
333
If on the other hand, we had the following sequence, Subotica and Novi
Sad would be opened and Beograd would be closed
1 1 0
334
As you may remember we have 8 different options for 3 warehouses. For 3
warehouses you could list them for 10 it would be very difficult
1 0 0
0 1 0
1 1 0
0 0 1
1 0 0
0 1 1
1 1 1
0 0 0
335
The number of options can be calculated using the following formula.
This means that for 10 warehouses there are 1 024 options.
# of warehouses # of options = 𝟐# 𝒐𝒇 𝒘𝒂𝒓𝒆𝒉𝒐𝒖𝒔𝒆𝒔
3 8 = 𝟐𝟑
5 32 = 𝟐𝟓
10 1 024 = 𝟐𝟏𝟎
336
To speed up the generation of options we will treat the sequence of 1 and 0
that corresponds to specific options as a binary number
1 1 0
337
Binary numbers can be converted into well-known decimal numbers. You
have to multiply the 0 or 1 by the right power of 2 (depending on the
position)
1 0 0
𝟐𝟐 𝟐𝟏 𝟐𝟎
𝟒 𝟐 𝟏
338
Let’s convert 1 0 0 in the binary system into the decimal system. As you can
see it is 4 in the decimal system.
1 0 0
X X X
𝟒 𝟐 𝟏
= = =
4 0 0 = 4
339
So, every option can be converted into the decimal system
1 0 0 = 4
0 1 0 = 2
1 1 0 = 6
0 0 1 = 1
1 0 0 = 5
0 1 1 = 3
1 1 1 = 7
0 0 0 = 0 or 8
340
In Excel, we will do the opposite thing. We will convert decimal numbers into
binary numbers. Every binary number will be a different, unique option.
Number in decimal
Binary Number A unique option
system from 1 to 8
Warehouse only in
4 100
Subotica
Warehouse only in Novi

2 010
sad
Warehouses in all 3
7 111
locations
341
We do that to make a scalable solution. For 3 warehouses we could easily list
all options manually. For 10 warehouses it would not be possible
# of warehouses # of options = 𝟐# 𝒐𝒇 𝒘𝒂𝒓𝒆𝒉𝒐𝒖𝒔𝒆𝒔
3 8 = 𝟐𝟑
5 32 = 𝟐𝟓
10 1 024 = 𝟐𝟏𝟎
342
Juice Producer Case Study
– Steering variables
343
Since we want to use a simulation, we will have to make our calculations
dynamic. For that, we can use the so-called steering variables. 344
Steering variables act like a switch that can easily allow us to include or
exclude certain parts of the model, depending on the situation. 345
Let’s see how we would calculate the costs of warehousing for the whole
system assuming that we have 3 warehouses.
Costs of the Costs of the Costs of the

Cost of warehousing = Warehouse in Subotica + Warehouse in Novi Sad + Warehouse in Beograd
346
Unfortunately, for every option, we would have to have a different formula
Warehouse only in Costs of the Costs of the Costs of the

Subotica Cost of warehousing = Warehouse in Subotica + Warehouse in Novi Sad + Warehouse in Beograd
Warehouse in Novi Sad Costs of the Costs of the

& Beograd Cost of warehousing = Warehouse in Novi Sad + Warehouse in Beograd
Warehouse only in Costs of the

Beograd Cost of warehousing = Warehouse in Beograd
Warehouse in Subotica Costs of the Costs of the

& Novi Sad Cost of warehousing = Warehouse in Subotica + Warehouse in Novi Sad
Warehouse only in Costs of the

Subotica Cost of warehousing = Warehouse in Subotica
347
Not to have every time a different formula we will use 3 steering variables
Steering ▪ Will be equal to 1 if the warehouse in

Variable for = S = Subotica is open
Subotica ▪ Will be equal to 0 if the warehouse in
Subotica is closed down
Steering Variable ▪ Will be equal to 1 if the warehouse in Novi

for Novi Sad = N = Sad is open
▪ Will be equal to 0 if the warehouse in Novi
Sad is closed down
Steering Variable ▪ Will be equal to 1 if the warehouse in

for Beograd = B = Beograd is open
▪ Will be equal to 0 if the warehouse in
Beograd is closed down
348
Thanks to this we can create one general formula that automatically will
adjust to the situation
Costs of the Costs of the Costs of the

Cost of warehousing = Warehouse in Subotica x S + Warehouse in Novi Sad x N + Warehouse in Beograd
x B
349
Juice Producer Case Study
– the Number of trips
350
As you have probably noticed we calculate the number of trips to specific
locations in a simplified way. Let’s see what is the logic behind it. 351
Every truck has 2 limitations when it comes to how much cargo it can
take
Truck’s limits
Weight limits Cargo size limits
▪ 24 tons of cargo ▪ 24 pallets
352
The number of trips you have to do will be based on the bigger number
of trips
Truck’s limits
# of trips based on # of trips based on

the weight the size
# of trips = Maximal of
both
353
Let’s see how we calculate the number of trips based on 2 criteria
Cargo Transported in tons
# of trips based on the weight =

The maximal cargo you can put
in the truck in tons
Cargo Transported in pallets
# of trips based on the size =

The maximal # of pallets you
can put in the truck
354
In the case of juice, the weight of 1 pallet is around 0.6 tons and that is
why the # of trips based on the size will be also the maximal one
Cargo Transported in tons 1 440

# of trips based on the
weight = = = 60
The maximal cargo you can
24
put in the truck in tons
Cargo Transported in
2 400
pallets
# of trips based on the size = = = 100
The maximal # of pallets
24
you can put in the truck
355
That’s why we actually only calculate the number of trips based on the
size (number of pallets)
Truck’s limits
# of trips based on
the size
# of trips = # of trips
based on the size
356
whole Logistics System – Solution
357
In the end thanks to the simulation, we get the optimal solution. It
seems that regional warehouses don’t make economic sense
Total costs of the distribution system of finished products

In thousands of USD
3 015
2 788
2 657
2 431
1 838
1 611
1 480
1 254
Warehouse only in Warehouse only in Warehouse in Warehouse only in Warehouse in Warehouse in Novi Warehouse in all No warehouses
Subotica Novi Sad Subotica and Novi Belgrade Subotica and Sad and Belgrade locations
Sad Belgrade
358
Decomposition analysis
– Introduction
359
Decomposition analysis shows you what are the components, driving forces
behind certain phenomena. Imagine for a second that we are analyzing the
revenue growth of an FMCG company
Revenue Growth
360
We would like to break it down into the following components. This
decomposition helps us see how we managed to grow the revenues
Others
New products Increased price

New customers
Increased sales in existing customers and products
361
The Decomposition Analysis helps you achieve a lot of goals
Create a business model based on

Pick the biggest contributor
drivers and KPIs
You will know what to focus on to

Forecast & Plan the future results
get the required effect
Check to what extent you were Evaluate the business & business
dealing with one-offs unit
362
In the next lectures, I will show you how to create and use the
decomposition in practice
LFL analysis for a coffee shops

chain
363
LFL analysis
364
Imagine that you have to identify the driving
factors in LFL growth in the last few years. 365
LFL analysis is the analysis of the change in revenues for stores that have been
at least for 12 months. In this analysis through decomposition, we try to
pinpoint the most important aspects
Driving KPI
Indicators dependent on others

Revenue
Average
Total # of
transaction
transactions
value (ATV)
x x
Items per Average selling

Traffic % Conversion
transaction (IPT) price (ASP)
% of the first Average first

price price
366
Imagine that you have to identify the driving factors in LFL growth in the
last few years
The firm sells coffee, cakes,

15 stores are LFL stores
367
Since in the case of the coffee shops we do not give many discounts, we will
stop at the level of Average Sales Price (ASP) and not go deeper
Driving KPI

Revenue
Average
Total # of
transaction
transactions
value (ATV)
x x

368
LFL analysis –
Case Solution
369
Just as a reminder, that you have to identify the
driving factors in LFL growth in the last few years. 370
Imagine that you have to identify the driving factors in LFL growth in the
last few years
The firm sells coffee, cakes,

15 stores are LFL stores
371
LFL analysis shows that the biggest impact was from the IPT increase.
Second in importance was the traffic
Driving KPI

Revenue
120% 5% Percentage growth
Average
Total # of
transaction
transactions
value (ATV)
20% x 12% 50% x 13%

372
LFL analysis shows that the biggest impact was from the IPT increase.
Second in importance was the traffic
Total LFL sales growth by KPI for stores existing since Year 1
In millions of USD
2 170
8 679
2 025
3 472 29 306
12 960
Revenue Year 1 Traffic Impact Conversion Impact IPT Impact ASP Impact Revenue Year 5
373
Book publisher revenues
– Decomposition
374
Let’s now try to do the decomposition of the Book
Publisher to be able to forecast his future revenues 375
Let’s start with a simple decomposition of the revenues for the book
publisher
Driving KPI

Revenue
Total # of books Average Book

sold Price
376
We can make it a bit more advanced by taking into account the
difference in behavior between old and new books
Driving KPI

Revenue
New Books Old Books

Revenues Revenues
x x
Total # of new Average New Total # of old Average Old

books sold Book Price books sold Book Price
377
Additionally, we can account for the difference between different
categories of books
Driving KPI
Revenue
New Books Old Books

Revenues Revenues
+ +
Revenues from Revenues from Revenues from Revenues from
New Books – New Books – Old Books – Old Books –
Category A Category B Category C Category D
x x x x
Total # of A Average A Book Total # of B Average B Book Total # of C Average C Book Total # of D Average D Book
books sold Price books sold Price books sold Price books sold Price
378
In the next lectures, we will try to forecast the revenues of the book publisher
using the decomposition I have shown you and 4 categories of books
Bestseller
High-seller
Medium
Low
Niche
379
Book publisher sales forecasting
380
Let’s imagine that you have to forecast the sales of a book publisher. His sales
are driven by novelties and the sales of already existing content. 381
Let’s see what we know about the publisher
New and old books will behave

differently
A book falls into 1 out of 5 categories
Bestseller, High-seller, Medium, Low,

Niche
Old books will be subject also to

seasonality
382
Book publisher sales forecasting
– Drivers
383
Let’s see what can impact the sales of new books
Quantity sold in the Average quantity # of months in the Average quantity 12 - # of months in
first 12 months
= sold in launch month
x launch period + sold afterward
x the launch period
Bestsellers
99 0000 = 30 000 x 3 + 1 000 x 9
Medium books
15 750 = 5 000 x 3 + 83 x 9
384
Let’s see what can impact the sales of old books
Quantity sold in a Basic Monthly sales 100% - % lost due to Seasonality Impact
specific month
= of an old book
x the age of the book x in a specific month
Bestseller; 3.5-year-old – in February
372 = 1 000 x 100% - 7% x 40%
Medium books ; 11-year-old – in October
106 = 83 x 100% - 15% x 150%
385
Feasibility analysis
– Introduction
386
In feasibility analysis, you want to check whether something is
possible or what are the limitations that you have to consider. 387
In feasibility analysis, you are given the goal you have to achieve. Now you
need either to find the limitation or alternative ways to reach that goal
Way to achieve
Limitation 1 Limitation 1
the goal 1
Way to achieve
the goal 2
Goal
Way to achieve
the goal 3
Way to achieve
the goal 4
388
There are plenty of things you can do with feasibility analysis
Identify the limitation you have to Find directions in which you can
remove to achieve the goal develop your company
Pick the most interesting way to

Build a strategy for a business unit
achieve the set goal
Check what are the limitation

behind alternative ways to achieve
the goal
389
In the next few lectures, I will show you how to create and use in
practice the feasibility analysis
How to increase the net profit

by 10%
390
How to increase the Net Profit by
10% – Case Introduction
391
Imagine that you are supporting a beauty salon chain in Eastern Europe in
their attempt to increase Net Profit
50 locations in Eastern Europe
They mainly do manicures
They are looking for ways to

increase profits by 10%
392
There are a number of ways in which you can increase the profit by 10%
Get new customers Increase prices
Convince existing ones to come

Introduce new products
more often
Upsell and cross-sell customers

during their visit
393
How to increase the Net Profit
by 10% – Solution
394
Imagine that you are supporting a beauty salon chain in Eastern Europe in their
attempt to increase Net Profit
50 locations in Eastern Europe
They mainly do manicures
They are looking for ways to

increase profits by 10%
395
Let’s compare different options
Required change to increase the

Description Net Sales Margin by 10%
▪ We increase the price for manicures for all customers ▪ 5% increase in the price
Option 1 – Increase
prices ▪ Current price is 25 USD per visit
▪ We increase the frequency of visiting our beauty shop ▪ Increase from 1.4 to 1.6 visits per
the Frequency ▪ Currently, an average customer does 1.4 visits per customer
customer
▪ We increase the customer bases size – acquire new ▪ Increase the customer base from
customers 60 K to 68 K
the Customer Base
▪ Currently, we have 60 K of customers per shop
▪ We introduce new products ▪ We need 36% of our customers to

Option 4 – New
products ▪ Currently, we do not sell any additional products buy the new products
396
Sensitivity Analysis
– Introduction
397
Once you come up with an optimal solution you want to see how sensitive it is
too small changes in underlying assumptions. The solution can be pretty
stable….
Current Solution - Current Solution - Current Solution - Current Solution - Current Solution Current Solution Current Solution Current Solution Current Solution
7% 5% 2% 1% +1% +2% +5% +7%
398
… or the contrary very volatile
Current Solution - Current Solution - Current Solution - Current Solution - Current Solution Current Solution Current Solution Current Solution Current Solution
7% 5% 2% 1% +1% +2% +5% +7%
399
You want to carry out a sensitivity analysis for many reasons
Sensitivity analysis helps you manage

Volatility means risks
expectations
You want to prepare for the risk, Sensitivity analysis is the basis for
hedge against the risk managing a portfolio of projects
In some cases, you may want to

choose a less sensitive option
400
Sensitivity Analysis
– Solution
401
As you can see the revenue growth is very sensitive to changes in IPT
but not that much to changes in the conversion rate
Revenue growth between Year 5 and Year 1 depending on the increase of the IPT (Items per Transaction)
In millions of USD
15 656 16 278
14 412 15 034
13 167 13 789
11 923 12 545
10 679 11 301
9 435 10 057
8 191 8 813
7 569
0,03 0,04 0,05 0,06 0,07 0,08 0,09 0,10 0,11 0,12 0,13 0,14 0,15 0,16 0,17
Revenue growth between Year 5 and Year 1 depending on the increase of % Conversion
In millions of USD
12 234 12 390 12 545 12 701 12 856 13 012
11 301 11 457 11 612 11 768 11 923 12 079
10 835 10 990 11 146
0,30% 0,40% 0,50% 0,60% 0,70% 0,80% 0,90% 1,00% 1,10% 1,20% 1,30% 1,40% 1,50% 1,60% 1,70%
402

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Management Consulting Tools,

Techniques, and Frameworks

The bottom-up The top-down

Compounded effect Issue Trees Priorities

Benchmarks The 80/20 rule Opportunity Tree

KPIs and business Theory of constraints

▪ Assuming similar density as in Warsaw

▪ And assuming a similar proportion as in

▪ It is very good for the B2C markets

▪ You know the size of the whole market

▪ If you use this proportion for the whole market, you

x Total revenue Total Costs

% Fee of the Average

Go to the next lecture

What is meant here by “the Do you want to estimate

What is included in the Are we talking about just

B2C market connected with

B2C market connected with

# of sq. m of tiles # of years of

Average size of # of sq. m of

Take a broad look at Perform detailed

Tools ▪ Excel ▪ Word ▪ Word / Excel

Possible Reason 1 Analysis 1

Possible Reason 2 Analysis 2

Possible Reason 3 Analysis 3

Possible Reason 4 Analysis 4

Analyses to be Data required for the Formats – tables for

List of data needed for the

List of data needed for the

▪ If there they are late on feeding in the data – do it on your own

Area of analysis Suspected problems Possible reasons Analysis to be performed

Badly designed method of packaging

Cost Position 1 Cost Position 2 Cost Position 4 … Cost Position m

2 General view by stages

Cost Position 1 Cost Position 2 Cost Position 4 … Cost Position m

Cost Position 1 Cost Position 2 Cost Position 4 … Cost Position m

3 General view by type of transport – a producer of alcohol

Petrol Drivers Maintenance Frozen Capital

The firm has currently 100 stores. Each

The firm wants to 10x the business up

Estimate what LFL growth they must

Assuming EUR 1 M per store estimate

Estimate how many people they have

You want to see what are the

Time related Operations related

Average revenue per

They have 10 people. Every person

Estimate the impact of a 10%

An employee costs USD 4 000 a month

You pay USD 1 000 for rent per month

You charge your customer

Possible Reason 1 Analysis 1

Possible Reason 3 Analysis 3

Possible Reason 1 Analysis 1

Possible Reason 2 Analysis 2

Possible Reason 3 Analysis 3

Possible Reason 4 Analysis 4

Area of analysis Suspected problems Possible reasons Analysis to be performed

Badly designed method of packaging

Retail chain development The expansion model

Product Range/Category Range

Pricing HR, especially training