Cost To Serve

SCL HUB February 2018

1. Dave Howorth February 1, 2018 a leading international consultancy Cost to Serve

2. Agenda What is it, and why is it important? What does “good” look like? What insights can it provide? Q and A

3. Cost to Serve Understanding the true cost to serve at the customer and product level through activity-based analysis & modelling based on actual order/delivery/activity data. Shining a light on blind spots in organisations in order to get better value and improve profitability.

4. Why Cost to Serve? Ex works supply chain costs = a significant element of total company costs. Significant variations in cost to service differing customers and channels. Whilst most companies have strong visibility on ex works product COGs few have visibility thereafter and costs can vary significantly. When servicing costs are analysed they often uncover surprising customer profitability results. Consumer behaviour & market developments are making CTS increasingly important. There appears to be a surprisingly low level of capability.

5. Customer profile/behaviour impacts Across Supply Chain Costs

6. Service Differentiation – the new battleground

7. Route to Consumer – Brand Owner e.g. Domestic Appliance Consumer European Factory Full Vehicle Loads UK Retailer NDC European Factory BO UK NDC Drop Shipment Production

8. Route to Consumer & Service Proposition – Grocery Retail Route to Consumer Supermarket DC Home Delivery Manufacturer Dark Store

9. Grocery Channel Growth – knowing your CTS will be crucial Euro pallets UK pallets 17.7% growth 49.8% growth 53.8% growth 9 in 10 shoppers visited a convenience store in the last month. 4 in 5 shoppers have visited a variety discounter for grocery shopping in the last month. 40% of British shoppers have bought some of the food & groceries online. Source – IGD study June 2017 2017 - 2022

10. Cumulative Customer Contribution (Net Margin)

11. A Universal Law (known as the Hook Curve/Whale Curve/Uluru Curve)

12. What does “Good” look like? Systemised analysis Based on real order/ activity data Based on activity based costs Ongoing regular review (Monthly, Quarterly, Half yearly) Physical logistics costs (primary & secondary transport, warehousing) Customer customisation eg labelling requirements, co-packing Product returns – collection, handling, re-work, write-off Product – inventory, waste Customer service, sales Formalised input to customer pricing & therefore profitability Identify cost efficiency opportunities Improved product portfolio management To support customer order governance (& efficiency incentives) To support budgeting, accrual process, invoice verification To support internal charging eg brand, sector, division How? What? To do?

13. Cost to Serve: Making a Start What issues are you trying to solve? Determine product/service costs? Understand product and customer profitability? Identify impact of customer behaviour? Improve processes? Internal charging for services? Rolling forecasts and budgeting? Probably a mixture of the above, but key priorities determine the approach to the model structure, data collection and analysis. And the choice of software tool should have the flexibility and functionality to mirror the reality of the organisation and its cost flows.

14. Process Identification and Setup

15. Basis of the CTS Model Masterdata Product data Customer data Cost data Actual Activity Data Sales orders/deliveries Inventory A powerful review model capable of capturing all activity and cost layers attributable to the Logistics Cost to Serve with capability to allocate and review at all data layers…. By Customer, Delivery/Despatch point, SKU etc … Defined Activity layers Primary transport Inbound warehousing Storage Picking Customisation Loading Distribution Returns Customer Service Inventory Cost performance data at…. Product level Customer level Activity level Inputs Outputs

16. Analysis through Different Lenses Customer Activity Product Activity Product Delivery Point Customer Activity Delivery Point Customer Product Delivery Point

17. CTS – High Leve Design: Outputs

18. Example – High Level Outputs Customer Cost Comparison Trends over time Cost as % of Sales Case Pick % by Customer

19. Example – Grocery Manfufacturer Scope UK/Ireland Physical logistics costs All customers Logs costs for co-packing Intricacies Single & double stacking Customers – flat pallet, matrix, PCC, special arrangements Differing storage rates mechanisms for different 3pls Accuracy level of 95% on all categories Primary Transport Warehousing Secondary Transport

20. Templated Process Flow

21. Starting Point is Sales Transactions What do I know about this product ? What do I know about this customer ? What do I know about this activity ?

22. Cost per Customer

23. Cost per case + breakdown in storage/distribution/inbound Cost to Serve

24. Cost per Customer Broken out by Delivery point Cost per case Type of cost

25. Cost per SKU

26. Key Insights Even for similar customers – surprising difference in the cost to serve End to end customer cost to serve understood – customisation, co-packing as well as “traditional” logistics costs Some customers not behaving as thought or supposed to End to end understanding of costs at sku level – inventory , co-packing

27. What-If Scenarios

28. Activity Cost in Graphs

29. Cost to Serve Understanding the true cost to serve at the customer and product level through Activity Based Analysis & Modeling based on actual order/delivery/ activity data, e nabling Better pricing decisions, driving better margin Better product portfolio decisions Cost efficiency opportunities What if analysis (pro-active/reactive) Enhanced business processes eg budgeting, cost allocation, accruals… Crucially in an accurate but low effort & sustainable way