strategies? We re not ready to make that determination yet, but it is an interesting outcome and atypical of our usual survey demographics.

Transcription

1 CUSTOM RESEARCH Cost-to-Serve Methodologies ANALYSIS YOU CAN T AFFORD TO IGNORE Consumer goods (CG) manufacturers require a deeper understanding and greater visibility into the cost of doing business to support decision making in several areas, including channel management, supply chain optimization, pricing, portfolio optimization, sales force effectiveness and promotion spend. Cost-toserve methodologies analyze costs, and as a result, profit margin, which can be applied and attributed to various business activities, customers and/or business segments. This month, CGT and Accenture explore the use and scope of cost-to-serve methodologies, and what we found was intriguing: while there is general recognition that such analysis can be extremely valuable, there is plenty of opportunity to improve the way it is performed. One interesting note: 80 percent of the respondents for this survey represent large CG companies with more than $1 billion in annual revenue. Does that imply that midtier companies are not actively pursuing costto-serve strategies? We re not ready to make that determination yet, but it is an interesting outcome and atypical of our usual survey demographics. Project Drivers Cost-to-serve analysis can be applied to many business processes, but seems to be most prevalent (see Figure 1) in customerfacing areas, with 71 percent using it for specific customers and customer segments. In contrast, less than half are using it for product categories, distribution channels or geographies. Ironically, it is more often supply chain (61 percent) or finance (48 percent) that leads such initiatives, with sales following in third. The cost components included in the scope of profitability analysis vary widely, with freight costs leading the list. Warehousing and manufacturing costs are included a majority of the time. Slightly less than half also include inventory expenses, marketing and trade promotions in the cost-to-serve analysis. Profitability analysis is used to address many strategic business challenges (see Figure 2), with the majority (67 percent) leveraging it for overall supply chain optimization. Almost half also use it for resource allocation, with slightly fewer citing customer negotiations and portfolio optimization. The top benefits companies are seeking with current projects are improved operating cost efficiencies, improved profitability through restructuring of terms and discounts, and increased influence and performance at retail. Expected business benefits for new implementations over the next three years follow similar trends, with half of respondents planning on implementing costto-serve strategies for custom pricing by segment or channel. Again, general improvements To read the research in its entirety, visit: EXPERT PERSPECTIVE BY MILTON MERL, SENIOR EXECUTIVE, ACCENTURE MARKETING SCIENCES ENTERING THE ERA OF PROFIT-TO-SERVE Consumer packaged goods (CPG) companies may be overlooking cost-to-serve as a way to increase profits at a time when they can least afford to do so. As economic uncertainty continues to erode sales, and competition challenges price, it is imperative that CPG companies seek alternatives to boost revenues. Companies that understand the total end-to-end costs of serving customers from raw materials to store deliveries through the entire extended enterprise, including sales, marketing and merchandising can use the process as a tool for profitability. They must explore balancing where to reduce costs that have the least impact on customer demand and where to invest more to get the most value out of dollars spent. Best-in-class, profit-to-serve practitioners are recognizing the value across the supply and demand chain. For example: Menu pricing decisions reflect supply chain cost savings as well as investment in wholesale price discounting to promote volume buys. Promotion budgeting considers both the incremental cost to deliver the goods as well as the lift factors unique to different retailers. Portfolio and new product introductions include an understanding of the incremental cost-to-serve of new items and cannibalized existing sales as well as incremental profit from new items. Retail assortments and portfolios are developed and optimized based on consumer needs, reflecting the categories and items they buy, and the profitability of the customer being served and the items themselves. Direct store services and delivery are adjusted based on store and retailer cost-to-serve and profit. Manufacturers ability to respond to demand insights is enhanced as the tools enable segmented supply chain strategies. For more information, visit: 24 CGT JUNE 2009 CONSUMERGOODS.COM

2 BY KARA ROMANOW are anticipated, with 42 percent looking to model what-if scenarios to verify improvement strategies and 38 percent looking for overall supply chain optimization. FIGURE 1 For which of the following business areas does your company perform cost-to-serve analysis? Note: Multiple responses permitted BUSINESS AREA Specific Customers 71% Opportunities Despite the prevalence of cost-to-serve strategies in the CG industry, there are challenges to overcome before it becomes ubiquitous. The most commonly cited is lack of data the availability of the data throughout the company, lack of data from customers, and accessibility of supply chain data for pricing and promotion purposes. Lack of ownership within Customer Segments/Channels Product Categories Distribution Channels (direct store delivery vs. warehouse) Geographies Transactions/Orders 25% 46% 46% 46% 67% Profitability analysis is used to address many strategic business challenges with the majority (67 percent) leveraging it for overall supply chain optimization. FIGURE 2 For which of the following processes is your company utilizing cost-to-serve analysis? Note: Multiple responses permitted PROCESS Overall supply chain optimization 8% 67% senior management was also a challenge for one-third of respondents, followed by the need for actionable information. About one-fifth of those surveyed also cited the existence of multiple cost-to-serve models across the organization with conflicting results. Within key departments, however, there is often a common methodology. This was found most commonly within supply chain (63 percent), sales (54 percent) and finance (42 percent). Another improvement opportunity exists with the technology used to conduct such valuable analysis, as a whopping 79 percent use spreadsheets to create cost-to-serve models. In-house applications were developed by 17 percent, with the same percentage leveraging existing ERP solutions. Only 21 percent use network or inventory modeling software. Resource allocation by channel, geography, etc. Customer negotiation/investment planning Portfolio optimization/assortment Custom pricing strategies for customer segments and channels Structuring of trade terms for different categories/customers Measure results of business process/functional groups Model what-if scenarios to verify improvement strategies 42% 38% 38% 33% 33% 29% 29% CONSUMERGOODS.COM JUNE 2009 CGT 25

3 Consumer Goods Technology Cost-To-Serve May 2009

4 1. For which of the following categories does your company perform cost-to-serve or a similar type of cost/profitability analysis? (multiple responses permitted) Category % Specific Customers 71% Customer Segments/Channels 67% Product Categories 46% Distribution Channels (direct store delivery vs. warehouse) 46% Geographies 38% Transactions/Orders 25% 8% 71% 67% Specific Customers Customer Segments/Channels Product Categories Distribution Channels 46% 46% Geographies Transactions/Orders 38% 25% 8%

5 2. Which of the following cost components do you include in the scope of cost-to-serve or a similar type of cost/profitability analysis aligned to a business activity, product, customer, etc.? Cost component % Manufacturing cost of goods (design, procurement, converting manufacturing) 63% Warehousing cost of company 71% Warehousing cost of customers 13% Warehousing cost of product, product line or business segment 50% Freight cost from company to customer (direct) 75% Freight cost from company to customer warehouse 83% Freight cost from customer warehouse to store 25% Inventory expense for the company warehouse 46% Inventory expense for the customer warehouse 13% Inventory in transit between locations 33% Marketing/Branding 46% Trade Promotions 46% Sales Execution/Merchandising 38% Back Office (e.g. finance) 33% In-store labor 21% Other Retail/Customer Supply Chain costs (other than freight, warehousing and inventory In-store Labor) 38% Shelf-space/carrying cost at retail 4% 4%

6 2 - Chart - Cost Components Manufacturing cost of goods Warehousing cost of company Warehousing cost of customers Warehousing cost of product Freight cost company to customer 83% Freight cost - company to warehouse Freight cost - warehouse to store 71% 75% Inventory expense - company warehouse Inventory expense - customer warehouse Inventory in transit between locations Marketing/Branding 63% Trade Promotions Sales Execution/Merchandising Back Office (e.g. finance) 50% In-store labor Other Retail/Customer Supply Chain costs 46% 46% 46% Shelf-space/carrying cost at retail 33% 38% 33% 38% 25% 21% 13% 13% 4% 4%

7 3. Which functional groups within your company are implementing or planning to implement cost-to-serve methods, or a similar type of cost/profitability analysis, by function? (Multiple responses permitted) Implementing or planning % Supply Chain Management 61% Finance/Accounting 48% Sales/Customer Development 39% Merchandising/Pricing 17% One model for the company one source of profitability/cost to serve 17% 9% Other 9% 61% Supply Chain Management Finance/Accounting 48% 39% Sales/Customer Development Merchandising/Pricing One model for the company Other 17% 17% 9% 9%

8 4. Which of the following group(s) are utilizing a common cost-to-serve or similar type of cost/profitability analysis? (Multiple responses permitted) Common analysis % Supply Chain Management 63% Sales/Customer Development 54% Finance/Accounting 42% Merchandising/Pricing 17% Vendors 13% Customers 13% 13% Other 8% Strategic Partners 4% Distributors 4% 63% Supply Chain Management Sales/Customer Development 54% Finance/Accounting Merchandising/Pricing 42% Vendors Customers Other 17% 13% 13% 13% 8% 4% 4% Strategic Partners Distributors

9 5. Who is primarily responsible for the cost-to-serve or a similar type of cost/profitability initiative within your company? Responsible % Supply Chain Management 30% Finance/Accounting 22% Sales/Customer Development 13% Every function manages their own 13% Other 13% Pricing 4% 4% Supply Chain Management 30% Finance/Accounting Sales/Customer Development 22% Every function manages their own Other Pricing 13% 13% 13% 4% 4%

10 6. For which of the following is your company utilizing a cost-to-serve or similar type of cost/profitability analysis? (Multiple responses permitted) Utilizing Cost-to-serve % Overall supply chain optimization 67% Resource allocation by channel, geography, etc 42% Customer negotiation/investment planning 38% Portfolio optimization/assortment 38% Custom pricing strategies for customer segments and channels 33% Structuring of trade terms for different categories/customers 33% Measure results of business process/functional groups (e.g., supply chain) 29% Model what-if scenarios to verify improvement strategies 29% 8% Overall supply chain optimization Resource allocation by channel, geography, etc Customer negotiation/investment planning Portfolio optimization/assortment 67% Custom pricing strategies for customer segments and channels Structuring of trade terms for different categories/customers Measure results of business process/functional groups (e.g., supply chain) Model what-if scenarios to verify improvement strategies 42% 38% 38% 33% 33% 29% 29% 8%

11 7. For the areas where you are not already using cost-to-serve or a similar type of cost/profitability analysis, where do you see the greatest business benefit to leveraging this method over the next 1-3 years? (Multiple responses permitted) Greatest business benefit % Custom pricing strategies for customer segments and channels 50% Model what-if scenarios to verify improvement strategies 42% Overall supply chain optimization 38% Customer negotiation/investment planning 33% Measure results of business process/functional groups (e.g., supply chain) 29% Structuring of trade terms for different categories/customers 29% Portfolio optimization/assortment 25% Resource allocation by channel, geography, etc. 21% 13% Custom pricing strategies for customer segments and channels Model what-if scenarios to verify improvement strategies Overall supply chain optimization Customer negotiation/investment planning Measure results of business process/functional groups (e.g., supply chain) 50% Structuring of trade terms for different categories/customers 42% 38% 33% 29% 29% Portfolio optimization/assortment Resource allocation by channel, geography, etc. 25% 21% 13%

12 8. What are the top 3 benefit areas that your organization is seeking with cost-to-serve or a similar analysis? Benefit Area Area 1 Area 2 Area 3 Improved profitability through restructuring of terms, discounts, etc. 25% 22% 9% Free-up capital by optimizing asset utilization 4% 9% 13% Operating cost efficiency improvement 50% 4% 17% Gain greater influence and performance at retail 17% 22% 9% Renegotiate terms with customers 0% 4% 26% Align investment to value (allocation of resources) 4% 39% 4% Other 0% 0% 22%

13 9. In which of the following areas do you expect your organization to invest in relation to cost-to-serve or a similar type of cost/profit analysis in the next 1 3 years? (multiple responses permitted) Invest in next 1-3 years % Focus on areas in our company where cost to serve is most needed and can generate the most short-term value 52% Organize and warehouse data/information to support future cost to serve initiatives 48% Analytics and data to derive cost standards and allocations 30% Defining the scope of activities to be tracked to enable cost to serve 22% Evaluate and acquire software to support a cost to serve build-out 13% Identify champions and an create an implementation task force 9% We don t expect to invest in cost-to-serve/profitability analysis in the next 1 3 years 9% 9% Focus on areas most needed 52% Organize and warehouse data/information 48% Analytics and data to derive cost standards 30% 22% Defining the scope of activities to be tracked Evaluate and acquire software to support Identify champions and implementation task force We don t expect to invest in the next 1 3 years 13% 9% 9% 9%

14 10. What are the greatest challenges you experience with your cost-to-serve or similar type of cost/profitability analysis? (Multiple responses permitted) Greatest challenges % Lack of data availability in the company 38% Lack of ownership/alignment at senior levels of organization 33% Not actionable information (e.g., outdated, historical view, too many allocations, too detailed, etc.) 25% Multiple cost-to-serve models used across the organization with conflicting results 21% Lack of data availability from the customer 21% Underrated value proposition of cost to serve 21% Data contained within Supply Chain functions but not accessible for pricing, assortment and promotion decisions. 21% Technology does not support 17% Customers do not collaborate so we do not have comprehensive profit model through to POS 17% Other 13% 8% Focus of performance mgmt is not on profit 4%

15 10. Chart - Greatest challenges Lack of data availability in the company Lack of ownership/alignment at senior level Not actionable information 38% Multiple cost-to-serve models used Lack of data availability from the customer 33% Underrated value proposition of cost to serve Data not accessible for decisions Technology does not support Customers do not collaborate Other 25% Focus of performance mgmt is not on profit 21% 21% 21% 21% 17% 17% 13% 8% 4%

16 11. Which of the following best describe the technology tool(s) you use to create your cost-to-serve or similar type of cost/profitability model? (multiple responses permitted) Tools to create model % Spreadsheet model with manual and/or automatic data feeds 79% Network and/or inventory modeling software 21% ERP software module 17% In-house developed database application with BI 17% 4% Other 4% 79% Spreadsheet model with manual and/or automatic data feeds Network and/or inventory modeling software ERP software module In-house developed database application with BI Other 21% 17% 17% 4% 4%

17 12. In which industry segment(s) does your company operate? (Multiple responses permitted) Segment % Home & Personal Care 42% Food & Non-alcoholic beverages 42% Fashion/Apparel 13% Consumer Health 8% Alcoholic Beverages 4% 42% 42% Home & Personal Care Food & Non-alcoholic beverages Fashion/Apparel Consumer Health Alcoholic Beverages 13% 8% 4%

18 13. What is the size of your company in terms of revenue? Revenue % Less than $250m 13% $250m to $500m 0% $500 to $1b 8% $1b to $5b 46% $5b to $10b 4% Greater than $10b 29% 46% Less than $250m 29% $250m to $500m $500 to $1b $1b to $5b $5b to $10b 13% Greater than $10b 8% 4% 0%