Gartner has advised chief supply chain officers (CSCOs) to implement a cost-to-serve (CTS) model to gain a clearer understanding of customer and product profitability. This recommendation comes as companies face increasing pressure to clarify true supply chain costs amid economic uncertainty.
Understanding the cost-to-serve model
According to Marco Sandrone, VP Analyst in Gartner's Supply Chain practice, many organisations fail to consider service differentiation and product attributes when calculating transaction profitability. “This oversight can result in a misleading perception of profitability at a time when leadership is leaning on the supply chain function to clarify the viability of products and customers,” he noted.
Traditional accounting practices often overlook the complexities associated with supporting customers and products, which can mask unprofitable areas of the business. “Many CSCOs already suspect that some of their products and customers are unprofitable, but they lack a structured approach to define and resolve the issue,” Sandrone added.
A six-step framework for implementation
To facilitate the adoption of a CTS model, Gartner recommends a six-step framework:
- Map out the cost components: Dissect the organisation's cost structure to identify indirect costs such as logistics, storage, and handling. Collaboration with the finance team is essential for support.
- Agree on scope: A phased approach is often most effective. Start with a defined segment, such as a specific country or product line, and focus on a smaller subset of costs.
- Link cost components to cost drivers: Understand the factors influencing each cost component. Collaboration with functional experts can enhance the accuracy of cost allocation.
- Model actual costs per activity: Quantifying costs per activity is essential for CTS analysis. While direct costs are easier to identify, indirect costs may require assumption-based estimates.
- Reveal true profitability at transaction level: Collaborate with finance to gather a comprehensive list of sales transactions. Aggregating actual costs will help uncover the true profitability of each transaction.
- Use findings to enhance business performance: With clear profitability data, CSCOs can aid the sales team in negotiations, optimise the product portfolio, and guide strategic decisions based on accurate cost data.
By adopting a CTS model, supply chain leaders can gain a more nuanced understanding of profitability, ultimately enabling better decision-making and improved business performance. As the complexities of supply chains grow, the need for structured cost analysis becomes increasingly critical. With effective implementation of these strategies, organisations can navigate current economic challenges while positioning themselves for future success.
