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    White Paper Cost To Serve

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    Cost-to-serve transparency White Paper Cost-to-serve transparency, a required diagnostic to cure profit erosion www.equazion.com It is amazing how few companies are able to tell what value a customer really brings to them. And very often, when they think they can, one can have serious doubts whether their insights effectively reflect the reality. It all comes down to the way traditional accounting systems are set up.

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    White Paper Cost To Serve

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    Cost-to-serve transparency White Paper Cost-to-serve transparency, a required diagnostic to cure profit erosion www.equazion.com It is amazing how few companies are able to tell what value a customer really brings to them. And very often, when they think they can, one can have serious doubts whether their insights effectively reflect the reality. It all comes down to the way traditional accounting systems are set up.

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    Cost-to-serve transparency White Paper Cost-to-serve transparency, a required diagnostic to cure profit erosion www.equazion.com It is amazing how few companies are able to tell what value a customer really brings to them. And very often, when they think they can, one can have serious doubts whether their insights effectively reflect the reality. It all comes down to the way traditional accounting systems are set up.

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    White Paper Cost To Serve

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    Surfen
    Cost-to-serve transparency White Paper Cost-to-serve transparency, a required diagnostic to cure profit erosion www.equazion.com It is amazing how few companies are able to tell what value a customer really brings to them. And very often, when they think they can, one can have serious doubts whether their insights effectively reflect the reality. It all comes down to the way traditional accounting systems are set up.

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    Cost-to-serve transparency

    White Paper

    Cost-to-serve
    transparency,
    a required
    diagnostic to cure
    profit erosion
    www.equazion.com
    Cost-to-serve transparency

    I t is amazing how few companies are able


    to tell what value a customer really brings to
    them. And very often, when they think they can,
    applying the cost-to-serve approach of Equazion
    to improve these insights, the exercise typically
    starts with a discussion with the managers respon-
    one can have serious doubts whether their insights sible for the different departments in the company,
    effectively reflect the reality. It all comes down based on the P&L accounts. This discussion al-
    to the way traditional accounting systems are set lows identifying what causes these costs to occur
    up. Typically what traditional accounting systems (what activity is being performed, related to a
    provide is a quite well elaborated product costing product, a customer, a brand…) and what drives
    system. Different however is the way traditional this activity. A driver can sometimes be derived
    costing systems deal with costs which are caused from simple transactional data that have been
    by customer behavior, typically in the sales and lo- extracted from the ERP-system, like the number
    gistics area. Looking at a profit & loss statement, of orders that a customer has placed, or can be
    typically the upper part of the statement contains more difficult to obtain and may require some
    the product-driven costs, which can be specified specific data collection.
    per product, but below the gross profit level, one
    can only find the aggregate cost of the sales and
    the logistics organizations. This point of view is
    made clear in figure 1. B ased on these discussions, a cost calcula-
    tion model is set up, in a very different way
    from the traditional product costing. Using Activity
    Based Costing techniques, the important costs are
    Fig.1 Traditional profit & loss statement
    assigned to products and customers. In order to
    Sales keep the complexity of the model at an accept-
    direct cost able level, it is important that the focus is kept on
    the important costs only. Moreover this simplifica-
    - labour tion improves the sustainability of the model for
    - material future re-runs. Translating this approach in a P&L
    - energy structure gives a completely different view com-
    Gross profit pared with the traditional accounting view (figure
    sales 2):
    logistics cost
    marketing cost
    general & admin costs
    Ebit (Earnings be-
    fore Interest & Taxes Fig.2 Cost to serve profit & loss statement
    Sales

    O ften, it is not an easy task to find out which direct material cost
    customers are responsible for the bigger product driven activity cost
    chunks of these costs, although everyone in the or- Product margin
    ganization probably has an opinion on this. The customer driven activity cost
    fact that these opinions may not always align can
    Customer margin
    be a source of dispute and frustration…
    other activity costs
    Ebit (Earnings

    T his calls for another approach that ultimately


    provides this insight which companies are
    looking for to improve their profitability. When
    before Interest &
    Taxes

    2
    www.equazion.com
    Cost-to-serve transparency

    T his type of profit & loss structure can be set


    up for every individual customer down to the
    level of the customer margin. If a customer ends
    reasons. In this graph – where every customer is
    represented by a bubble whose size is an indi-
    cation of his revenue – a split is made between
    up with a negative margin at this level, there is the costs driven by the products that the customer
    really a call for action: this means that keeping purchases (represented by the product mix margin)
    this customer the way he is will drag down your and his cost-to-serve. Customers which fall below
    profits; definitely a signal that the bleeding needs the diagonal line are loss making, but this can
    to stop… be for very different reasons, as the red bubbles
    illustrate. A customer below the diagonal at the
    left hand side of the graph is a customer that pays

    R esults coming from these exercises are very


    often real eye-openers. Whereas the tradi-
    tional view often tempts to mislead management
    a very low price for his products. Even though
    his cost-to-serve may be quite low, he simply does
    not pay enough. The customer at the right hand
    that sales costs are equally spread over the entire side may be paying a higher price, but then the
    customer base, this exercise may reveal that a service he gets may be far too expensive for the
    substantial amount of customers are simply being price he pays. This service may take different
    subsidized by the other ones. shapes: sales representatives paying too much
    attention, high allowances, coop-advertising,
    claims, high transportation costs, lots of handling
    T he real strength of the exercise comes from
    the identification why customers are loss
    making. Figure 3 illustrates customers may be
    because of ordering in small quantities…

    loss-making or profit-generating for very different

    3
    www.equazion.com
    Cost-to-serve transparency

    I t is important to gain this insight and to make


    it clear to the entire organization. As any path
    for a cure, starts with a correct diagnosis of the
    disease rather than fighting some of the symp-
    toms.

    Author : Peter Verstraeten, Managing Partner and


    Koen Cobbaert, Associate Partner S&V Manage-
    ment Consultants
    Date : 30/8/2010
    © S&V Management Consultants 2010

    Equazion, the ultimate busi-


    ness analytics solution

    Equazion provides business analytics that


    empower our customers to improve their
    return on net assets. Our solutions identify
    profit-improvement opportunities across the
    different customer and product dimensions
    from a 360° perspective. Backed by our
    innovative technology and methodology,
    we claim to offer the best decision-support
    tool for those around the executive table.
    Renowned research institutes appreciate our
    innovativeness.

    4
    www.equazion.com

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