In the face of economic uncertainties, Gartner advises CSCOs to adopt a six-step Cost-to-Serve (CTS) model to gain a clearer understanding of supply chain costs and profitability. Traditional accounting practices often overlook the complexities involved in servicing different customers and products, leading to potential misjudgments in profitability assessments.
“Many companies overlook service differentiation or product attributes when calculating the profitability of their transactions,” said Marco Sandrone, VP Analyst in Gartner’s Supply Chain practice. “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 amid growing economic uncertainty.”
Gartner’s six-step CTS model
- Map Out the Cost Components: Dissect the organization’s cost structure to identify costs traditionally spread across transactions, focusing on indirect costs like logistics, storage, handling, and value-added services.
- Agree on Scope: Adopt a phased, pilot-based approach, starting with a defined segment such as a country or product line, and focus initially on a smaller subset of direct product and supply chain costs.
- Link the Cost Components to Cost Drivers: Collaborate with functional experts to understand the factors influencing each cost component, enhancing cost allocation accuracy and decision-making processes.
- Model an Approximation of Actual Costs per Activity: Quantify the cost per activity, using assumption-based estimates for indirect costs, and establish a time frame for data collection, often focusing on the previous calendar year.
- Reveal True Profitability at Transaction Level: Collaborate with finance to gather a comprehensive list of sales transactions from the past calendar year, aggregating actual costs to reveal the true profitability of each invoice transaction.
- Use Findings to Enhance Business Performance: Utilize the insights gained to aid the sales team in negotiations, optimize the product portfolio, guide strategic decisions, and highlight cost per unit for operational improvements.
Gartner’s approach underscores the necessity for CSCOs to have a structured method to identify and address unprofitable products and customers. By implementing this CTS model, organizations can achieve a more accurate picture of profitability, enabling informed strategic decisions.
