“Customer experience, customer supply chain profitability, and supply chain collaboration are key priorities for our global supply chain”, says the Global Customer Service team at a major FMCG company. We interviewed them based on our shared journey to a Cost to Serve application.
Information is the key component for each of those priorities. A company’s data contains the building blocks of that information. That is why good quality data is so important. This FMCG company uses its data to improve supply chain cost performance while keeping their customers happy. A Cost-to-Serve model has been developed to run data-driven scenarios that help this company make informed decisions and explain these decisions to their customers backed by actual data-driven insights.
1. Data Quality - Poor Data Leads to Poor Output
The first step to increasing customer cost performances through supply chain improvements is getting your facts straight. This means you have to make sure that you know what data is available. And, what data you need to get insight and make decisions. The quality of the data that is collected in your supply chain is also important. The higher the quality of the data, the better the insights and decision-making.
2. Model Quality - Cost to Serve
This FMCG company uses the Cost-to-Serve model to calculate the supply chain cost performances of every customer and every product (or combination). Because it is process-driven and based on actual business activities, you get a complete overview of what it costs to get a product to the customer and what these costs are for every step of the supply chain.
When calculating the actual cost to get a product to a customer, the cost to serve model also takes into account things like overhead. There are overhead costs all through the supply chain: order management, customer service, procurement, production and materials planning, returns, quality, security, security, to name a few.
This FMCG company worked with its operating companies to get a clear understanding of what scenarios each of its operating companies needed, and what the cost dynamics of the key customers, products, and routes to market were.
Through a modular approach, these scenarios are built into the model, making it more easy for this company to implement the model in more countries and markets. Each market has a unique route to market, which makes the total supply chain operation very complex. The GCS manager elaborates: ”We realised that one size fits all did not apply to our situation. We needed a more modular solution that brings us to the next level with quick sprints.”
The FMCG company now works with a core model that is 90% the same for all its operating companies. The remaining 10% can be modified in a very flexible way to adapt the model to local circumstances.
3. Decision Quality - decisions based on data-driven insights
There is a huge potential for an increase in efficiency and a decrease in cost in your supply chain if the decisions you make are based on the data-driven insights from a cost to serve model. Cost to serve is not only a tool, but it is a capability that needs to be developed in your supply chain teams. Having good data and a cost to serve tool is one but having the knowledge to correctly interpret the results from different scenarios and come to the right insights and decisions is something else.
From Negotiating to Collaborating with Customers
Coronavirus/Covid-19 has a huge impact on your business. It may force you to move production locations, close warehouses, or change vendors. This can have an effect on your customers as well. Using insights from a cost to serve model, you can explain the reasoning behind certain business decisions. At first glance, they may seem negative, but an open fact-based discussion based on results from running scenarios on their own situation can help you convince your customer of the validity of your decisions.
When you understand how a customer’s behaviour impacts the profitability of your company and of theirs you can move from negotiation to collaboration. Based on data-driven analysis it is possible to have fact-based conversations with your customers. You can show what the behaviour is of customers, like time to process orders, cost to deliver orders, or route to market for example. You can point out to customers that they are overstocking on certain SKUs and need to order more from other SKUs. This proactive approach, enabled by the cost-to-serve tool, changes the relationship with your customers to a collaborative one, where you work together on a common goal: driving down supply chain cost, and making it more sustainable. Without facts, it is difficult to change Customers behaviour.
From Silos to Cross-functional Cooperation
The insights you get by using the cost to serve model can also improve the cooperation within your organization. The same data-driven factual approach that can be used to convince customers, can be used to convince other departments of the need to change processes or take a new approach. If you look at Sales and Logistics there can be conflicting trade terms. A small increase in revenue through a new trade term agreed with a customer by the sales department, can lead to much larger costs in logistics offsetting the increase in revenue. With a cost to serve approach all costs and trade terms are taken into account. Trade terms can be aligned with the full supply chain, increasing profit and enabling close cooperation between Sales and Logistics.
From Becoming Capable to Becoming Able
Having a Cost to Serve Tool is not enough. It does make you capable of doing scenario analysis, but the garbage in is garbage out rule can lead to bad decisions. You need to develop the ability to work with the tool, the ability to interpret results, the ability to translate these results into actions. This means understanding what data you need for the scenarios you want to run. It means being able to determine the quality of your data. And finally, it means being able to correctly interpret the results and take the right decisions. For that, you need well trained people.
The Benefits of a Cost-to-Serve Tool
- A more efficient supply chain where decisions are based on actual costs based on an advanced model and high-quality data.
- Lower cost throughout the supply chain for your company and your customers
- Insight into how customer order patterns impact supply chain cost.
- More profitable customers. Increased customer profitability
- Focus on developing profitable customers. Use data-driven insights to change customer behaviour and create a win-win situation.
- Happy customers. A well-informed customer is a happy customer.
- Increased internal efficiency due to a data-driven cross-functional approach
Interested in the business case? Get in contact with us.