Editor’s Note: Marco Sandrone is Senior Director Analyst, Gartner Supply Chain Practice
As the supply chain organization has continued to evolve into a strategic partner in corporate strategy, it has been tasked to deliver greater value to customers while enabling profitable growth. With the onset of the pandemic in 2020, the need to balance demand and supply in a highly volatile environment has been truly tested. This has led many organizations to put a new focus on the Sales and Operations Planning (S&OP) process to help them make trade-off decisions between inventory levels, service levels and cost.
For some time now, the S&OP process has played an important role for more mature companies in chasing revenue while focusing on protecting business profitability. Yet in recent months, supply chains of all sizes and maturity have struggled to keep their materials and logistics costs under control while also ensuring they have adequate access to capacity of suppliers and providers.
This is where a cost-to-serve (CTS) analysis can add value by establishing a clear understanding of where and how costs are incurred through the organization. It is about modeling costs that are different for each customer and product, and ensuring they are allocated fairly. By identifying the true costs of their operations, companies are better equipped to make informed decisions when it comes to finding a balance between cost and service to enhance their profitability.
Often an advantage with CTS is that its findings can be used by a variety of stakeholders in the organization. Information gathered during the S&OP cycle can be used to identify opportunities to enhance the profitability of the organization and enable an informed decision-making process to close gaps with year-end objectives.
As part of our research for this year’s Supply Chain Top 25 and through conversations with clients, we identified three primary benefits for executing CTS initiatives in support of S&OP processes:
Gain Visibility into Product Profitability: CTS helps establish an understanding of product profitability beyond the direct cost of goods sold, unveiling the true net profitability of each product or product category. By understanding a product’s cost and its relative contribution to the organization profitability, supply chain leaders can have a more informed discussion on portfolio management with partners in sales, marketing and engineering groups. Organizations can use CTS as part of the S&OP product portfolio review.
The product portfolio planning (PPP) meeting is the forum in which information related to products and portfolios is made visible to stakeholders in all functional areas, including representatives from supply chain, commercial, product development and finance. Decisions about changes to portfolios, such as when to launch new products and when and how to discontinue existing products, are made during this meeting. CTS findings can be used to manage the products’ lifecycles and decide when it’s time to retire a product that’s no longer profitable.
Address Varying Customer Needs: Serving customers with different service-level expectations adds a range of complexity and costs to supply chain organizations. Examples of customer requirement complexity include the cadence and use of minimum order quantities, special warehouse service requirements, and the frequency and type of transportation services required. Many companies have found that tailoring the output of their supply chain to meet different customer requirements can lead to improvements in both revenue and profitability.
Traditionally, the objective of the S&OP demand review is to reach a consensus unconstrained forecast of any known planning volumes and compare current demand plans to volume goals to identify plan vs. budget gaps. In more mature organizations, the assessment of the gaps between demand plan and budgets extends to financials (revenue and profits). CTS inputs play a crucial role in managing demand opportunities and risks. Impact on profitability of both risks and opportunities must be understood, and actions to either capitalize on opportunities or mitigate risks need to be prioritized based on their ultimate impact.
Identify Opportunities to Streamline Logistics: A clear understanding of supply chain costs can enable improved process and resource efficiency within functional organizations such as manufacturing, warehousing or transportation. For example, at a consumer packaged goods (CPG) company, the cost to pick, pack and ship a pallet of product might vary from site to site. This information can be used to redesign the supply network for improved cost and/or customer service. This includes decisions about whether to perform an activity, such as manufacturing, in-house or outsource to a partner. All of this can be used as part of the S&OP supply review to identify opportunities to optimize costs and positively impact corporate profitability.
By leveraging cost-to-serve insights, supply chain leaders can make better decisions during the S&OP process that deliver strategic value to their organization. For supply chain leaders embarking on this process, consideration should be given to investing in dedicated CTS solutions. These solutions make it easy to gather cost-to-serve insights and are more suitable for frequent updates, as opposed to traditional Microsoft Excel-based one-off models.