accenture c2s

8/2/2019 Accenture C2S

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NACDS Cost to Serve

March 16th, 2009

2009 Accenture. All rights reserved.


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Ken Silbert Accenture

Managing Partner, Supply Chain Practice

1 2009 Accenture. All rights reserved.

Introductions

Milton Merl Accenture

Partner, Accenture Marketing Sciences

Global Lead Merchandising & Trade Marketing


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4 Key points to takeaway from todays session


Nowadays, supply chains need to be dynamic and able to deal with permanentvolatility

In challenging economic times, the best companies look for both short term andlong term initiatives to position themselves for the eventual economicturnaround

Companies need to look across the entire value chain as they best determinewhere to conduct various activities

Cost to Serve (C2S) is a proven / efficient strategy to maximize overallprofitability and make informed business decisions


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Agenda


Strategic Context

C2S Overview

C2S in Action

C2S Approach

C2S Key Success Factors

Questions


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In todays economic environment where most retailers and manufactures alike are facingcontinuous pressure to maintain competitive prices and profitability the importance ofdeveloping a deep understanding of the true and complete cost of serving a customer is

not only necessary, but a strategic differentiator of high performers

Why Focus on Cost to Serve (C2S)?


In the current economic environment, it is increasingly difficult to obtain credit orfinancing for working capital and operating expenses

Organizations are seeking opportunities to more efficiently deploy limited resources

and funding Supply Chains are becoming increasingly complex, and while companies capture

vast volumes of supply chain data, they often lack the processes, organizational skillsand the technology to translate this data into actionable/insightful information

Not enough manufacturers, distributors or retailers have been able to develop and

institutionalize a comprehensive view of the supply chain costs incurred indelivering a product end to end (vendor to store shelf)

Incomplete or worse yet, incorrect information, can often lead to organizationsestablishing and promoting profit eroding behavior amongst its supply chain partners

. . . Cost to Serve is a capability enabling companies to make better informed decisions


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Strategic Context historical perspectiveIn 2008, Accenture conducted a major supply chain research effort with the goal of definingthe strategic and operational differentiators of high performers

Masters invest in capability regardless of the business cycleand reap the rewards

The first step was to look at historical performance of companies that had investedselectively in Supply Chain capabilities in different parts of the business cycle.

Performance comparison followingthe 1990 1991 recession

Relative Market Cap CAGR(percentage points)

LeadersIndustry Avg.

Transformers

Decliners

Laggards

19941997 19972000

Supply Chain

Performance Category+20%

+10%

-10%

-20%

+30%

Impact of supply chain performanceon companys valuations

Source: Accenture research, 1998-2006


AverageROICRelativetoIndustry

5


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A Volatile Market - In 2008, the price of oil changed 5% or more from its previousclose on 39 days, making it the most volatile year since 1990.

Source: D. Simchi-Levi, MIT

Strategic Context 2008. . . A Year of Volatility

2009 Accenture. All rights reserved. 6


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Strategic Context an era of permanent volatility

Volatility wont disappear companies that mismanage it will

Of all the challenges facing companies today, it is clear that this new era ofpermanent volatility is driving the largest number of SCM failures.

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

2005 2006 2007 2008 2009

Year

CNY

EUR

GBPJPY

BRLSOM A

LI PIRATES

HIJACK

SAUDI OILT

ANKER

RUSSIASHUTS

OFFALLGAS

DELIVERIESTO

EUROPE

1 9M ILLION TOYSSH IPPED FROM CH IN A RECALLED

Expectations are up, lifecycles are down, and supplychains are not prepared to respond

Global economic forces affect everyone Nearly instant commoditization of worthwhile innovations Increasing ability to rapidly leverage low-cost labor Rapid swings in availability of key resources

(energy, metals, etc.)

Commodities and transport are an increasing shareof COGS, continuously shifting the total cost ofownership equation

Global footprints make companies vulnerable tovolatility in multiple capital markets

Government policies increasingly unpredictablearound tariffs, taxes, and even sustainability

Forecast error by definition, increases with volatilityfavoring responsiveness over traditional planning


Major Global Stock Indexes

0

100

200

300

400

500

J-03 J-04 J-05 J-06 J-07 J-08

Value

S& P 500 FTSE 100 N ikke i22 5 S hangC om p

-- Erosion of Asset Value --

-- Currency Fluctuations --

USD vs. Other Currencies

-- Geopolitical Events --

- Price Producer Index of

selected commodities (1960

2008)

-- Volatile Commodity Prices --

7


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Permanent volatility is one of a number of challenges that are making itincreasingly difficult to maintain/improve supply chain performance anddrive value


Accelerating Cost / Price Decline

Increased Stretch

Growing Complexity

Rising Customer Expectations

Growing Importance ofSustainability

C2S is a proven strategy to combat some of these challenges and maximize profitability

8


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Stop and Think About Your Company:

Which Supply Chain challenges have been most difficult for your team toaddress?

1. Rising Customer Expectations

2. Growing Complexity

3. Increased Geographic Stretch

4. Growing Importance of Sustainability

5. Rising Volatility

6. Accelerating Price / Cost Decline



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Seven Imperatives for High Performing Supply Chains Overview

In their deployment of dynamic supply chains, supply chain masters consistentlypursued seven actions which drive sustainable financial success.

Abilityto

Execute

Fit

with

Busin

ess

Strate

gy

Clear ValueProposition Value DeliverySystemApproach

Segmented /Aligned SupplyChain

Optimized OperatingModel Architecture

SelectiveInvestment in

Mastery

Right Analytics,Response Ability

Talent Powered ByHigh Performance

Culture


1 2 3 4

765

10


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Those Imperatives define a companys supply chain fit and ability to

execute for High Performance

Fit

Ability to execute

Dreamers

Losers EfficientUnder-Performers

High Performers

Clear valuecreation algorithm

((

Companies aspiring for High Performance must address all seven

imperatives to be successful 2009 Accenture. All rights reserved.

Value DeliverySystems Approach

Segmented /Aligned SC

OptimizedOperating Model

Architecture

1

2

3

4

SelectiveInvestment for

Mastery

Right Analytics,Response Ability

Talent PoweredBy HighPerformance

Culture

5 6 7

11


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Stop and Think About Your Company:In which of these 7 Supply Chain imperatives is your Company orDivision: 1) best positioned for success, 2) have the greatest deficiency,3) will allow your company to fair better and bounce back stronger?

1. Articulate a clear value creation algorithm

2. Approach the supply chain as a value delivery system

3. Segment the supply chain and align it with the characteristics of eachsegment

4. Optimize the global operation architecture for scale, access, andflexibility

5. Selectively invest for mastery in differentiating capability areas

6. Align the information system to support the right analytics, alignment,and response ability

7. Drive execution discipline with the right talent powered by the rightperformance culture



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Agenda


Strategic Context

C2S Overview

C2S in Action

C2S Approach


Questions


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Objective

Cost to Serve (C2S) Path to Profitable Growth

How does C2S Work?

Breaks revenue and costs into functionsand activities, which are allocated down tothe desired level of reporting granularity;

Gain insight into true customer / product

profitability through an understanding ofthe costs and drivers involved in servingour customers, at varying degrees ofbusiness granularity.

Product Customer

Channel

Time period


C2SRevenue

C2SRevenue Profit


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C2S is a strategic imperative it enables us to balance the need to

reduce cost with the need to grow demand

C2S enables strategic investment in growth

Reduce C2S investment in generating and serving demand where the savings dontsignificantly impact revenue and growth objectives

Invest in C2S where it is conducive to revenue and growth

Reallocate C2S assets to products and customers where there is greater revenue andgrowth opportunity

Portfolio/Products Supply Chain Sales/Sales support Promotion/Funds

Marketing Special programs Menu/Bracket price

C2S Levers

Business Growth

C

2S

/S

ales

C2S

Revenue

C2SRe

venue

ROA

Business Growth

C

2S

/S

ales

C2S

Revenue

C2SRe

venue

ROA

15

Profit


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The product on the left loses $7.33/week due to high store and DC space costs, where asthe second item contributes $7.38/week, despite it being 1/6th the price. This is becausethe first item turns much slower so pays more occupancy to the DC and Store


IBFreight

Damages

DamAllow

Obsol Shrink VendorCash

Discount

CM $INVCarryCost

DCLabor

DCSpace,Other

OBFreight

StoreLabor

StoreSpace,Other

$7.38

$-0.0

7

$-0.0

3

$-1.3

9

$0.2

0

$-1.1

8

$-0.1

1

$-0.2

8

$-.01 $

-0.0

1

$-0.3

7

$-1.8

1

Cost To Serve Profitability Metrics

Contribution Margin

= $7.38 / unit

Cost To Serve Profitability Metrics

Contribution Margin

= ($7.33) / unit

Gross Margin $+ Backend $

= $63 / unit

$29.1

8

RetailPrice

COGS

$20.2

8

GrossMargin

$8.9

0

Backend Funds

$3.4

2

$0.0

5

Gross Margin $+ Backend $

= $12 / unit

C2S enables a view of true performance it highlights the relative and

absolute performance of the disaggregated parts of a business

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C2S enables a view of true performance it supports strategic

investment and divestment decisions to improve over all corporate ROA

Absent C2S, every offering is viewed as having the same overhead costs as a result,net or contribution margin equals the gross margin minus average cost


160.0%

140.0%

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40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs

Margin $

160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

CumS

hareofMargin$

RealizedProfit

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Introducing item centric C2S, we see that every item does not have the same overheadcosts often many items actually deliver negative Contribution to Margin (CM) after allcosts are considered


160.0%

140.0%

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80.0%

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40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs

Margin $

160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

CumS

hareofMargin$

&CM

$

RealizedProfit

Profitable Unprofitable

CM $18


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Invested Cost



Recognition of where costs exceed revenue provides visibility to the cost invested ingenerating and supplying demand.


160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs

Margin $

160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

CumS

hareofMargin$

&CM

$

RealizedProfit

CM $19


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Invested CostUnrealized Profit



Recognition of where costs exceed revenue provides visibility to the cost invested ingenerating and supplying demand.

This cost is effectively being covered by profitable items or offerings, resulting insignificant unrealized profit.


160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs

Margin $

160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

CumS

hareofMargin$&CM

$

RealizedProfit

CM $20


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RealizedProfit

Invested CostUnrealized Profit

C2S enables a view of true commercial performance it supportsstrategic investment and divestment decisions to improve over all

corporate ROA

This cost is effectively being covered by profitable items or offerings, resulting insignificant unrealized profit.

The net impact on enterprise profit is significantly reduced realized profit


160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs

Margin $

160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

CumS

hareofMargin$

&CM

$

CM $21


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The net impact on enterprise profit is significantly reduced realized profit

The value of a granular C2S is to provide the insights needed to reinvest resourcesand realign the organization towards realizing greater profit


160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Cum % of SKUs

Margin $

160.0%

140.0%

120.0%

100.0%

80.0%

60.0%

40.0%

20.0%

0.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

CumS

hareofMargin$

&CM

$

CM $

We invest in C2S so we can recognize our true cost to generate andserve demand, and apply this insight to altering our investment to yield

grater return

Greater

RealizedProfit

22


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Agenda


Strategic Context

C2S Overview

C2S in Action

C2S Approach


Questions


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C2S In Action

Improving the performance of the Shampoo category

This Shampoo study suggests how poor performing SKUs in the assortment drivesup supply chain cost dramatically reducing category net profit

Slow movement is likely akey contributor


SKUs vs. ProfitsShampoo- Medium BottleBase Scenario

0.0%

50.0%

100.0%

150.0%

200.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

% of Base Scenario SKUs (items sorted by descending CM$)

%o

fBaseScenarioSales,

GM

$orCM$

Base % of GM$ Base % of CM$

66% of the SKUs C2Sexceeds their GM$ so havenegative profitability

24

34%


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C2S In Action Optimizing the demand patters through changes in assortment drivesmore margin through fewer items-reducing labor per $ sold

Optimization outlines the improved net profitability performance when fewer itemsdeliver the desired volume.


SKUs vs. ProfitsShampoo- Medium Bottle

Base vs. Optimized (20% SKU reduction)

0.0%

50.0%

100.0%

150.0%

200.0%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

% of Base Scenario SKUs

%o

fBaseScenarioGM$

orCM$

Base % of GM$ Optimized % of Base GM$ Base % of CM$ Optimized % of Base CM$

Optimization is trading

customer up to highergross margin items; a6% improvement

Significant reduction inunprofitable items by shiftingslow volume to more productiveSKUs

25

50%


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Objective Provide a consistent understanding of cost and profit across all busines functions and

silos

Provide sustainable decision support to reduce cost of operations and improved storeand merchant demand planning

C2S In Action

Leading Big Box specialty retailer



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C2S In Action

Leading Big Box specialty retailer (continued)

SKU Score cards used by merchants tosupport line reviews, promoting decisions,vendor negotiations

Store design scores departments for relativeprofitably and influence space allocation toimprove store performance

Distribution Center

Store

Home or office

Store Pick Up

Store Shelf

Store BackRoom

Buy at store

Buy on line

Buy from catalogue

Network planning decides the desired distribution lanes and ordering methods for differentitems



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C2S In Action

High cost to serve in HBC due to each pick, inventory and stock costs

Each picking:

Optimium order point/quantity by price

(label=min shelf capacity; CC=8%, GM=35%, LT=3.5 dy, min OP=5 dy or 3 un)

44

30

18

25

31

14

11

18

25

11

9

6

8

20

14

10

2

10

6

8

14

1

10

100

0.1 1 10

Units/store/week

Orderpointorquantity(u

nits)

OQ @ $1

OQ @ $2

OQ @ $3

OQ @ $5

OQ @ $10

Order Pt

Example:

Price: $3Volume: 1/wk

OP: 3OQ: 9

Avg inv: 7.5Min capac: 11.5Wks/order: 9.1

Save: $4.784/st/yr

Opportunity:

Optimize shelf inventory,order/pick count and frequency

to achieve lowest over all C2S

Solution:

Understanding total distributioncosts, consider inventory cost vs.labor cost

Results:

Over 60% of the items couldafford larger orders, lessfrequently replenished, reducingitem cost to serve by$5/item/store/year

Annualized savings of 50+ basispoints after adjustments forincreases in carried inventory

Each Pick HBC



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Agenda


Strategic Context

C2S Overview

C2S in Action

C2S Approach


Questions


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Regardless of approach / scope, the same basic principles apply to

conducting a C2S analysis


Identify discrete high level activities which occur along thesupply chain for in scope processes, and link thoseactivities together to create a picture of the relevant stepswhich contribute to the cost of completing the process.

Step 1: Agree on objectives, scope and desired outcome

Step 2: Identify, study and map current and new activities to in scope processes

Step 3: Determine appropriate cost drivers Step 4: Develop a conceptual model &validate outputs

StoreOcc.,OH, OtherDirectStore Labor

DC Occupancy& OH DCInventory

StoreInventory

DC- StoreTransportation

StoreOcc.,OH, OtherDirectStore Labor

DC Occupancy& OH

DirectStore Labor

DC Occupancy& OH DCInventory

StoreInventory

DC- StoreTransportation

P

ercentofR

etailS

ales

0%0%0%0%

3%3%3%3%

6%6%6%6%

9%9%9%9%

12%12%12%12%

15%15%15%15%

BaseScenario

Cost toServe

Optimize Space& Assortment

P

ercentofR

etailS

ales

0%0%0%0%

3%3%3%3%

6%6%6%6%

9%9%9%9%

12%12%12%12%

15%15%15%15%

0%0%0%0%

3%3%3%3%

6%6%6%6%

9%9%9%9%

12%12%12%12%

15%15%15%15%

BaseScenario

Cost toServe

Optimize Space& Assortment


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Agenda


Strategic Context

C2S Overview

C2S in Action

C2S Approach


Questions


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Cost to Serve Key Success Factors

Be Clear on Objectives gain agreement amongst all key stakeholders on theobjectives, scope and expected outcomes / actions

Be thorough on data availability, integrity and hierarchy

Focus on costs which can be logically allocated to products / customers and are withinan organizations control

Use a standards-based approach whenever possible to support easy what if modelingto prove value and generate constant output over time

Avoid temptations to chase granularity which can be impractical or difficult to leverage

Begin with a proof of concept, then scale as methodology and results are validated

C2S is about being approximately right versus precisely wrong



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How would C2S benefit your business?

Marketing

Differentiated customer service strategies?

More effective use of promotional space and advertising?

Portfolio

Impact on assortment decisions and pricing strategies / decisions?

Expansion / Contraction of channels?

Space Optimization?

Vendor Collaboration

Align trading terms based on true cost?

Real profitability info to leverage in discussions with vendors?

Supply Chain

Tradeoff decisions on how best to flow product to the customer?

How best to position / consolidate your physical supply chain?



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Questions

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