Why cost to serve is the key to S&OP maturity

Mar 22, 2017
In my previous blog, I explained why Supply Chain Controlling is becoming indispensable – not only to allocate supply chain costs correctly, but also to develop new insights that allow more forward-looking decision-making. However, introducing Supply Chain Controlling comes with a couple of challenges. One of them is the need for Finance colleagues who have a thorough understanding of both the business and its entire value chain. That’s why a smart way to get started with Supply Chain Controlling is to introduce a new approach to cost to serve.

Cost to serve revisited

Traditionally, cost-to-serve analysis is initiated as a one-off exercise to get better insights in supply chain costs and - by extension - also in service and commercial costs. Eventually, this exercise should lead to a set of actions for a more profitable growth. In order to fulfill their role as ‘supply chain gatekeepers’, Supply Chain Controllers will have to take a much more dynamic approach to cost to serve. They need dependable, real-time data to be able to monitor and report on fluctuating supply chain parameters, to determine the root cause and provide insights to their Supply Chain colleagues and the business.

As logical as it may sound, organizations will have to overcome a few major hurdles on the path to this new cost-to-serve approach.
The first one is to ensure that cost-to-serve insights make their way into the periodic management reporting books and the decision-making process. To assure this, a structured approach is needed whereby financial figures and operational measures are integrated to apply differentiated (standard) costs, in line with the underlying process complexities.
The second important step is to engage Supply Chain Controlling in the Sales and Operations Planning (S&OP) process. By delivering readily available cost-to-serve insights, better decisions can be made during the executive S&OP meeting, based on both customer profitability information and insights into the trade-off costs. How much will it cost to add a new shift in plant X? How much does one extra day of safety stock of product Y cost?

Towards a more mature S&OP process

Although the goal of S&OP is to identify potential conflicts between demand and supply in the coming year so that different scenarios can be developed to resolve each one, the S&OP process hasn’t quite reached this level of maturity in many organizations. Very often, organizations are still struggling to calculate the financial implications of the various scenarios that are being considered. In case of capacity constraints, for example, it would make a lot of sense to assign products to the most profitable customers first, but doing so requires reliable customer profitability data.

By enriching the process with readily available cost-to-serve insights, organizations will not only evolve towards value-driven scenarios, but they will also dramatically increase the responsiveness of their value driven S&OP process. Furthermore, Supply Chain Controllers are well placed to facilitate an objective decision-making process in S&OP because of their more neutral position at the intersection of Finance, Supply Chain and Sales. Finally, to close the loop, cost-to-serve information should be available in the same, single system that supports the S&OP process.

It’s a networked world

In conclusion, cost to serve may well be the key to achieving a breakthrough in S&OP maturity. So is your organization making preparations for it? You should, because a more mature and truly smart value driven S&OP process is, in fact, only just the beginning. Consider it the foundation for embarking on an even more challenging journey: one where your internal supply chain capabilities are a prerequisite for you to become a trustworthy business partner in the end-to-end value chain in which your company operates, and in which the customer is increasingly in the driver’s seat. The road is still long for many companies, but it is definitely the only way to stay one step ahead in today’s networked world.
Author: Kristof De Backer. You can connect with Kristof on LinkedIn.
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