{"id":7652,"date":"2020-12-07T07:27:41","date_gmt":"2020-12-07T12:27:41","guid":{"rendered":"https:\/\/flevy.com\/blog\/?p=7652"},"modified":"2020-12-18T12:36:55","modified_gmt":"2020-12-18T17:36:55","slug":"suffering-profit-leaks-use-cost-to-serve-cts-analysis-to-prevent-them","status":"publish","type":"post","link":"https:\/\/flevy.com\/blog\/suffering-profit-leaks-use-cost-to-serve-cts-analysis-to-prevent-them\/","title":{"rendered":"Suffering Profit Leaks? Use Cost-to-Serve (CTS) Analysis to Prevent Them"},"content":{"rendered":"

\"\"Supply chain management<\/a> across industries is being revolutionized at a rapid pace by technology. \u00a0By implementing technology systems, supply chain organizations aspire to eliminate waste, meet customers\u2019 needs at reasonable costs, and ensure profitability. \u00a0Enterprise Resource Planning<\/a> systems facilitate in processing unstructured data at an aggregated level.\u00a0 However, at workflow or micro level the data produced through ERPs needs to be further refined to understand costs.<\/p>\n

Supply chain experts need to look at their unstructured data and understand the cost of offering a product; know which product mix they should promote; and gauge the impact of service levels on transportation costs, profits, and pricing strategy.<\/p>\n

Supply Chain Executives can use the Cost-to-Serve (CTS) Analysis<\/a> approach to control distribution costs, identify negative-margin products, and prevent profit leakages.\u00a0 CTS Analysis affords the organizations the means to identify the total cost of serving customers\u2014including all the costs in a product\u2019s value chain (from raw material to delivery)\u2014at the product as well as customer levels.\u00a0 The approach helps leaders split and evaluate individual customers, geographies, products, product families, or combinations of products \/ customers.<\/p>\n

The Cost-to-Serve Analysis can be undertaken to identify costs related to Supply Chains, Logistics, Distribution, Warehousing, or Transportation. \u00a0CTSA allocates indirect cost to products\u2014overhead or fixed costs that are not easily and directly attributable to a single order, shipment, or activity.<\/p>\n

The CTS model for costing<\/a> entails detailed modeling of all the value and non-value added activities in the process.\u00a0 The approach is more precise than other methods in determining \u201cwhat-if\u201d budgets, as it accounts for all the activities and link them with their relevant cost pools.\u00a0 CTS employs an activity-based modelling algorithm\u2014which segregates the entire supply chain into multiple tasks while calculating the costs at every task\u2014to help the supply chain practitioners calculate costs at various levels.<\/p>\n

The CTS Framework entails 5 fundamental steps:<\/p>\n

    \n
  1. Obtain Buy-in from Key Stakeholders<\/strong><\/li>\n
  2. Conduct Cost Categorization<\/strong><\/li>\n
  3. Determine per Unit Cost Breakdown<\/strong><\/li>\n
  4. Develop Classification Matrices<\/strong><\/li>\n
  5. Make Joint Decisions<\/strong><\/li>\n<\/ol>\n

    \"\"<\/a><\/p>\n

    Let\u2019s delve deeper into the first 2 steps of the CTS Framework.<\/p>\n

    1. Obtain Buy-in from Key Stakeholders<\/strong><\/h2>\n

    The first step to implement Cost-to-Serve Framework involves getting across-the-board agreement and stakeholder buy-in.\u00a0 The decision to calculate the impact of cost to serve on revenue entails engagement and collaboration from multiple departments in a company.\u00a0 Multiple cost centers work in partnership across a value chain and thus profit and loss responsibility cannot be attached to a specific unit.<\/p>\n

    For instance, a decision to trim down the costs to serve a customer (or various customers) has to be agreed upon by stakeholders from the:<\/p>\n