How cost-to-serve helps CFOs deliver true business value

Shrinking profits while sales go up?

“One of our customers recently told me: ‘All our KPIs are good, but our financial results show something different,” says Ben Reynaert, senior consultant at delaware. “That didn’t really surprise me. Revenue growth is not always accompanied by equivalent growth in profit – while the latter is key for a healthy business. In these cases, the management expects the CFO to offer insights into the operational indicators that have impacted the bottom line and then suggest remedial actions.” That’s where the cost-to-serve (CTS) methodology comes in: CTS helps the CFO pinpoint where the company is making and losing money.

Costs incurred to serve

“Put simply, cost to serve is a modeling technique that provides insights into all the costs that organizations incur for delivering a product or service to a customer,” Ben continues. “Unlike traditional accounting methods that calculate the gross margin by subtracting the costs of goods sold from the net sales value, CTS unveils the cost of every customer-driven action. This, from order receipt and the delivery of the product to the customer, and where possible, to the customer’s shelf. It’s an end-to-end cycle.”

CTS is just a start

Cost to serve brings answers by breaking down costs per resource. “It is important to highlight that CTS is only a means to gain visibility into costs and pinpoint the true profitability of products or customers. It is the next step that adds true business value: based on the CTS analysis, companies can draft an action plan to turn unprofitable products or customers into profitable ones. They can decide to change manufacturing or logistics processes to optimize efficiency, for example, or adapt their commercial strategy: by modifying pricing and discounting, renegotiating contracts, restructuring distribution channels or abandoning products, services or customers.” The CTS analysis is not a one-off exercise. As today’s businesses change at dazzling speed, it is key for the CFO to review the outcomes of the actions taken and reassess and adjust them wherever needed.

The power of teamwork

Evidently, these actions impact the entire company. It’s therefore crucial that finance teams up with supply chain, operations and sales – and even third parties like suppliers or customers – to remediate the situation. Ben: “Sales reps cannot give their customers additional discounts or make promises about service levels without taking the impact on the supply chain costs into account. Likewise, everyone involved in logistics should consider the end-to-end impact of their choices – from the carriers they choose to work with to aspects like minimum stock levels.”

How delaware can help

So, what’s the role of a company like delaware in this approach? “CTS analysis is performed based on data from the ERP, CRM or planning software. By combining our expertise in IT and finance, we can help companies kick off a CTS project. The first step is always a series of short workshops to assess where CTS can add value. We can then help decide which tools to use to automate the process, provide timely information for swift decision-making and ensure ongoing CTS reporting. The CTS Quick Scan that we launched is, by the way, a great tool to help companies get started. It quickly shows how relevant CTS is for key value chains like sourcing, production, distribution and sales.”

Real-time CTS indicators

delaware is currently coaching an innovative CTS project in Romania. One of the main objectives is to help the customer understand the impact that day-to-day decisions have on their profit margin. They do that by using real-time CTS indicators. “When the sales team receives an order, for example, they first identify the service level needed (volume, packaging, delivery time, etc.) to fulfil that order before getting a cost estimate. In this way, every stakeholder becomes aware of how the cost to serve impacts the company’s bottom line – a key insight needed to gain a competitive edge in today’s marketplace.”

Interested in learning more about how cost-to-serve can help you improve your bottom line? Contact one of our experts today.