Interview with the father of gross margin flow analysis, Jörg Link
The world’s first seminar on gross margin flow analysis was held on October 17, 2006 in Nuremberg, Germany. Managers from Audi, Nordsee, Sanitop and wolfcraft shared their experiences with this innovative method of deviation analysis. The father of gross margin flow, Professor Dr. Jörg Link, held the key note speech. Dr. Nicolas Bissantz sat with Professor Link after the seminar to discuss his textbook theory as well as its role in real-life business.
Bissantz Professor Link, your first article on gross margin flow was published in the ZfB journal (German academic magazine for Business Administration) back in 1979. At the time, you were employed as a controller at Henkel and had to explain a DM 2 million deviation to the board of executives.
Link That was when I discovered the significance of the structural effect. The profit margin had changed, although volume, price and costs had been constant. This was caused by a massive internal shift of volume to products that delivered a lower margin.
Bissantz Your department at the University of Kassel has conducted multiple studies on the status of deviation analysis in companies. What have you found?
Link That about half of the companies use a completely unsuitable method of deviation analysis. The most common method is the cumulative method which arbitrarily adds the complete mixed component to either the volume or the price component. That is nonsense, because in each case the calculated results are completely different.
Bissantz Some participants of our seminar asked how to deal with dynamic product lines that have no historical values.
Link In general, that is not a problem. If you determine variances by comparing time periods, the problem only arises in the initial period. If you compare budget to actual variances, the problem does not even occur, because budget values are also given for new products. Still, if you don’t have any comparative values, the variances are added to the structural effect, which also leads to a logical conclusion.
Bissantz I often see slight variations to gross margin flow analysis being discussed in different types of business literature. ZfB was even filled with discussions between you and your colleagues, Albers and Kloock, for quite some time (see Link 2004, page 128 ff.).
Link Two things are relevant: First, Kloock and I always shared the opinion that the cumulative method is not suited for gross margin flow analysis. Second, we simply debate whether the mixed components can or can not be divided into parts.
Bissantz Price and volume are related through price-demand-functions, but the effects on gross margin flow are observed separately. That’s why some people suggest to incorporate price-demand-functions in the model.
Link I generally view gross margin flow analysis as a starting point for further discussion. The advantage of automated solutions such as DeltaMaster is that they give business professionals access to all relevant information for a given discussion at a click of their mouse. I find it fascinating that a person can calculate the gross margin flow for every possible combination of reference objects and then navigate through this network. A large company will want to make the effort to collect data for price-demand-functions – and I even recommend it. For mid-sized companies, however, it is completely different. Audi’s presentation at the seminar illustrated the relationship between man and machine very well.
Bissantz You mean it is good practice that the controllers at Audi gather the relevant data from their gross margin flow so that they can visit and consult “their” customers?
Link Exactly. That’s how this approach should be implemented in practice. Only when you have learned something from a deviation analysis can you leverage it to make better decisions in the future.
Bissantz I find that gross margin flow is a prime example of how useful textbook methods can be leveraged to solve real-life business problems. On the other hand, it seems to take longer than necessary.
Link Sonor, a mid-sized company, was able to achieve phenomenal successes in its battle against larger Japanese competitors by using textbook methods (see Link/Weiser, page 333 ff.). That example always makes my students more courageous. Business studies are not based on impractical theories. If you are consequent in using your findings, success is inevitable.