JWI 530

The Mary Story

BACK ON TRACK

BACK ON TRACK

We caught a glimpse of Mary’s analytical skills at work. She was
honored to learn of her Division’s record breaking sales in the most
recent quarter – but she knew enough to look past the hype, and to
get down to the “real” numbers.

It truly had been a great quarter – but a lot of the revenue increase
could be attributed to pricing changes and other factors that might not
be achievable quarter over quarter. Mary realized that in her role as a
business leader, she had to study the numbers and the data with cool
precision – candidly making judgments as to what aspects of that
data represented sustainable progress vs. fleeting “feel good”
moments.

In the wake of her most recent meeting with Andrea and some other
staff members, Mary found herself sitting alone in her office. It was
getting late in the day, and Mary’s head was beginning to swim. She
had been agonizing over the launch of a new perfume, but the project
financials were projecting a negative net present value (NPV). Mary
knew this meant that the project was not showing a positive financial
return.

The NPV at a 10% discount was showing a negative $23,000. She
knew that Net Present Value is the net amount, in today’s dollars, of
the cost and benefits of a project’s cash flows. Since it was currently
less than zero, the company would be $23,000 in the red versus not
doing the project. Further, since the NPV was less than zero when
using a discount factor of 10%, she knew that the Internal Rate of
Return must be less than 10%. Given the poor project financials,
Mary knew there was no way that Jack, the CEO, would support this
new project.

She decided to send a few IM’s to Andrea about this analysis. Andrea
was leaving soon for some off-site appointments, but Mary was

determined to try to catch her before she left. Andrea was impressed
with Mary’s understanding of NPV and IRR. But Andrea’s experience
with project economics lead her to encourage Mary to alter her
approach to the reports.

Mary assumed that the negative NPV would most likely doom the
otherwise exciting project. However, Andrea encouraged her to look
at it a different way. She impressed upon Mary the need to think
positive, and use the NPV calculation not as a reason to give up, but
rather as a catalyst to rally the team and get to work revising the
negotiable elements of the project to make it work! In the long run,
this could lead to a better NPV – and ultimately, a stronger
product.
 
  She and Mary agreed that project economics are built on
assumptions and choices. Each group presents data and choices
based on their relative roles in the project.

For example, R&D had created the formula that they believed would
best appeal to consumers. Purchasing had made choices regarding
which suppliers needed to be contacted, and what needed to be
purchased from those suppliers. Operations made choices based on
product design from R&D. Marketing and finance made choices
related to pricing and brand support.
 

Each of these choices had an impact on the financials of the project.
However, each of these choices had alternatives. Both women knew
that for any hope of management support, they needed a financially
attractive proposition. They had to take a look at the assumptions
and do some sensitivity analysis to determine which choices would
have the most significant impact on the project NPV.

As they IM’d back and forth, Mary decided to make a list of things to
consider changing. One item they discussed was the formulation of
the perfume, which was a big overall cost driver. She wanted to ask
R&D if it was possible to reformulate to a slightly less expensive
design. She also planned to ask the operation manager if the product

launch proposal really needed that much inventory. She wanted to
know what would happen to consumer demand if she increased the
selling price by 5%. Finally, she wanted to know if that expensive,
fluorescent purple bottle that purchasing had selected really was the
best choice – especially in light of the fact that there were so many
other viable, cost-effective alternatives available.

Yes, the NPV is based on a set of choices and assumptions. And
Mary was even more aware of that after her IM volley with Andrea.
Modifying the original plan anywhere along the way will lead to a
different NPV. As they wrapped up their chat session, Mary spun
around in her chair and grabbed the phone. She called her assistant
and asked that a meeting be scheduled with the Perfume Division
managers tomorrow at 11AM.

Inspired by her exchange with Andrea and some further review of the
reports, Mary was as determined as ever to find a way to get the new
perfume product back on track and out to market!