Transcript

It started in the thirties with an article that I couldn’t tell you where it was published, by a person by the name of Carlos Clark, who at the time was the controller of the J.L. Hudson Company in Detroit. And he was really commenting about the infatuation with gross margin, gross margin percentages, in particular. And what he said was, you know, when a sale took place, you had to recognize there was such a thing that had nothing to do with—little to do with percentages, but the dollars of cost of goods sold. And then the dollars of cost, which was necessary to sell the item, which varied significantly by item, in relationship to selling price. And, therefore, what you really needed to look at was the contribution that an item or a department made to the selling space which it occupied. So it was contribution dollars which was important. . . . .

Then Mac took that further, with this article I think you’re referring to by Mac, and Eleanor May in the Harvard Business Review called “Profitability and Merchandising Decisions.” And then I worked on it more, and introduced the idea that you should consider interest cost, interest as an expense related to an item, in relationship to the cost of the item, and to the amount of time it was going to spend in inventory, and made a contribution. . . . .

Slowly, the concept of product profitability and merchandising decisions was changed into direct product profit, which I think was associated with some of the work that I did.

And then Bob Kaplan came along, with activity-based costing, which was a furthering, if you wish, and a further development in direct product profit. And Bob, after he came, said, “You know, this isn’t a hell of a lot different than—activity-based costing isn’t a hell of a lot different than direct product profit.” But Bob then went on to apply it to the profit sector, and the nonprofit sector, and applied it—we had confined its use to retailing, and he really expanded its use, expanded the concept, and promulgated it into an academic—almost an academic discipline of its own, and certainly a successful consulting firm, in addition.