Boosting Effectiveness is next level controlling where your organization monitors financial performance by holding line management accountable for revenues and costs under their control. This ensures that management receives actionable, controllable numbers that they can take responsibility for. But first, it’s necessary to clearly define the domain of responsibility as well as the data stream providing valuable insights into the company’s true cost drivers. At delaware, we use our responsibility accounting framework (RAF) to help our customers define these elements.
Using the delaware RAF, we group and assign costs and revenues to functional areas, such as manufacturing, sales and distribution, purchasing and logistics. This enables a meaningful P&L for each responsibility center that only includes manageable costs and revenue streams, containing customer and product insights, down to the gross margin level for a selection of responsibilities. Costs and income not assigned to specific functional areas are centralized on a case by-case basis according to their nature.
To pinpoint the full profitability of products or customers across the supply chain, net margin analysis, also known as cost-to-serve (CTS), can help. This is a modeling technique that offers insight into every cost an organization incurs in the process of delivering a product or service to a customer. Unlike traditional accounting methods, which calculate gross margin by subtracting the cost of goods sold from the net sales value. CTS unveils the cost of every customer-driven action – all the way from order receipt and product delivery to the customer’s shelf.
Introducing net margin analysis into your accounting and control processes enables you to provide a full P&L down to the net margin by business dimension. As a result, it’s the ultimate data source for advanced profitability analysis. Use it to draft an action plan to turn unprofitable products or customers into profitable ones. Modify manufacturing or logistics processes to optimize efficiency. Adapt commercial strategies by modifying pricing and discounting, renegotiating contracts, restructuring distribution channels or abandoning specific products, services or customers.
CTS analysis is not a one-off exercise. As businesses today are changing at lightning speed, it is key for you to continuously review the outcomes of the actions taken and reassess and adjust them wherever needed.