Model the decision before you make it.
Scenario simulation tests a business decision against your cost model before you commit: re-price a customer tier, change the mix, consolidate orders, then compare the projected margin against today's baseline.
TRY IT · ILLUSTRATIVE
Your numbers
A rough shape, from averages. A real model attributes this down to each customer and order.
Scenario vs baseline
Why simulate at all?
A cost model tells you where you stand. A scenario tells you what happens if you move. Once cost is attributed properly, you can copy a baseline, change the assumptions, re-price a tier, drop a product line, consolidate a customer's orders, and see the EBITDA outcome side by side. The numbers your finance team can stand behind in a board meeting, before the decision is taken rather than after.
This is how one distributor worked: the model wasn't a list of customers to cut, it was a roadmap of decisions, each one tested and revisited as the model updated.
Read the case study →Common questions
What is profitability scenario modelling?
Is the calculator a substitute for a model?
Sources
Canonical works behind this method. Each opens in a new tab.
- PaperScenarios: Shooting the RapidsWack, P. (1985). Harvard Business Review 63(6).Companion piece on using scenarios to test and rehearse decisions.
- PaperScenario Planning: A Tool for Strategic ThinkingSchoemaker, P. J. H. (1995). Sloan Management Review 36(2).Step-by-step method for building and using a small set of sharply distinct scenarios.
- BookThe Art of the Long View: Planning for the Future in an Uncertain WorldSchwartz, P. (1991). Doubleday / Currency.Widely cited practitioner guide to scenario construction.
- PaperTime-Driven Activity-Based CostingKaplan, R. S. & Anderson, S. R. (2004). Harvard Business Review 82(11).The founding article defining TDABC and its two-parameter model.
Run your real numbers, not the averages.
Proof
A distributor in New Zealand. €1.335M of cost-to-serve made visible, then halved, and 830 loss-making customers brought down to 295.
Read the case study →Who you would be talking to
Miguel Guimarães, Founding Partner
Cost and profitability practitioner for 25+ years. Presented the Damco cost-to-serve case at Managing for Profit (Amsterdam RAI, December 2009), on the same programme as Robert S. Kaplan.
Call +351 910 313 731