Matt Woodcock, RVP of Supply Chain Strategy for EMEA & APAC at Coupa, explains how a cost-to-serve model can help bring clarity to operations.
Understanding how to meet customer demands while maintaining profitability can be challenging, especially when companies take into account changing customer preferences, fluctuating trade policies and managing complex supply chains across borders.
Matt Woodcock, Regional Vice President of Supply Chain Strategy for EMEA & APAC at Coupa, has a clear perspective on these pressures. He recognises that boosting and even maintaining profitability in today’s fast-changing supply chains is far from an easy task – even for the most experienced businesses.
Here, Matt tells us how a cost-to-serve model can help bring clarity to these aforementioned variables and their associated costs in a company’s operations.
Why is it so challenging these days for companies to meet customer needs while maintaining profitability?
I believe the key reason some companies struggle to maintain profitability is because, in recent years, the global economy has undergone a fundamental, structural change. So many different factors, from increased customer expectations driven by an on-demand economy, through to the impact of external events, have shaped the way businesses across the globe operate.
This shift has made business’ supplier relationships with third parties increasingly complex, which, in turn, creates higher levels of risk and compliance issues which continue to disrupt fragile supply chains.
At the same time, businesses are struggling to accommodate innovations like AI. On one level, AI has created significant new opportunities. Yet the way that it has drastically accelerated the pace of change has made it very tricky for companies to keep up and utilise it in an efficient way.
Overall, businesses are grappling with enormous new pressures on their operating models and their margins are being squeezed to breaking point. Many are banking on existing technology to help see them through, but many operating models, IT systems and processes were built for a different era and are becoming complex to manage.
Companies need to urgently reassess their approach to technology and their operating models. They need to get a grip of increasingly complex supplier relationships, continued disruption to fragile supply chains and ballooning risk and compliance issues that threaten to overwhelm.
I would also encourage them to think again about AI, but not just about the technology itself. They need to ensure that the data it’s trained on and the insights it provides are high quality, relevant and valuable.
These are challenging times for businesses, but, by harnessing the right technology, companies can boost productivity, efficiency, sustainability and resilience enough to get their margins back on track to deliver growth.
What is a cost-to-serve model?
There are several different analytical frameworks companies can use to determine the actual costs associated with delivering products or services. I believe cost-to-serve is the most effective paradigm for companies to see how costs are allocated at the most granular level. I see it as a framework for profitability.
Cost-to-serve focuses on the supply chain and takes into account the cost of sales, services and last-mile logistics and how those impact the bottom line. This includes all the direct and indirect expenses involved in the entire supply chain and customer service processes, notably procurement, warehousing, transportation and after-sales support.
This provides a better understanding of which products or customers are profitable, which ones are not and how current priorities influence performance across the supply chain.
Cost-to-serve is different, but also complementary, to other measurement metrics. For example, ‘total costs’ adds marketing, research and other indirect costs to the cost-to-serve model.
Alternatively cost-of-goods-sold (COGS) calculates all direct costs associated with producing a product, including materials, labour and overhead expenses.
Traditionally, cost-to-serve is calculated using spreadsheets or financial models based on profit and losses (P&L) and an allocation of actual costs to products delivered over a certain period of time.
However, increasingly, cost-to-serve models use digital twins and advanced algorithms to analyse and optimise supply chain activities – from procurement all the way to delivery.
What benefits can adoption of a cost-to-serve model bring to operations?
Businesses benefit in many ways by instituting a cost-to-serve model. There are three key enhancements that have the biggest impact on a company’s relationships with its partners and, ultimately, its bottom line.
Perhaps the major one is that cost-to-serve models deliver improved visibility across the entire supply chain.
The problem for many businesses is that they are coping with highly-complex supply chains with many touch points that can be negatively impacted by external factors. Changes made at one touch point – like expediting shipments at a production facility – inevitably impact touch points downstream, like a distribution centre, and this can affect overall costs.
A cost-to-serve model gives complete visibility into how those changes impact operations and how to avoid or optimise them for better outcomes.
Another core benefit of cost-to-serve models is they enable faster and more informed decision-making. The 360-degree view that cost-to-serve delivers means business leaders can pinpoint what are the biggest cost areas in the delivery of their goods and services and, armed with that information, make changes that will have the greatest impact on profit margins.
Cost-to-serve models can benefit not just the companies but also their customers. The clear picture that cost-to-serve models deliver enables companies to better align their supply chain planning to customer demands and expectations. Innovations like improved product mixes, new sales channels and realignment of the supply network to improve delivery times are all ways in which customers can be surprised and delighted.
Ultimately, cost-to-serve models deliver the information required to ensure informed decisions are taken, customers demands are met and profitability levels maintained.
How crucial is it for leaders to identify and eliminate low-margin products and high-cost processes?
No business can survive if its executive team isn’t constantly monitoring and tweaking its cost base. This is especially true today when disruption to supply chains or inefficient distribution channels don’t just impact delivery processes, but can also cause costs to rise in an unexpected way.
It’s pivotal for business leaders to be fully aware of their costs – especially those that might be hidden or overlooked. In my opinion, cost-to-serve delivers the overview that empowers executives to take stock and ultimately make the big calls.
The number-one driver is that controlling costs is the main route to long-term profitability and sustainability. Low-margin products and high-cost processes erode profitability.
In identifying and then addressing these discrepancies, leaders can then focus resources on more profitable products or services, directly boosting the bottom line.
