One of the more interesting sessions at Manhattan's 2011 conference was on their Total Cost-to-Serve offering. Organizations looking for ways to increase profitability may want to take a look.
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Manhattan Associates has done an excellent job moving beyond the warehouse to become a full supply chain suite provider. In the process, they have created the pieces needed to calculate total cost-to-serve. Frank Tomany, Senior Director, spoke about this capability at Momentum 2011.
The Art of Calculating Total Cost-to-Serve
It is well known that each customer’s behavior and specific demands drive many aspects of cost and, therefore, profitability for a company, and that a small percentage of a firm’s customers drive most of the profits. In spite of this, most businesses still don’t really know what it costs them to serve each individual customer on a customer-by-customer basis. In order to calculate the total cost-to-serve (TCS), a firm needs to be able to capture direct and indirect costs across departments and allocate those costs down to individual SKUs, customers, and/or brands. Part of the art of calculating TCS is knowing which costs elements to include—those costs within your control that reflect the true variability in cost-to-serve for various sourcing, fulfillment and ordering patterns.
A tool like Manhattan’s can include any costs, fixed or variable; however, there is always a scoping decision of which costs you should include in the model. This will be based on which cost elements constitute the largest percent of the total cost and whether the cost of those elements varies greatly based on decisions under your control vs. cost elements that will be pretty much the same regardless of what you do.
Manhattan’s total cost-to-serve capabilities include not just the total landed cost, but the additional downstream costs, such as warehouse labor costs (receiving, putaway, pick-pack-ship), outbound freight, customer rebates, inter-branch transfer costs, fuel surcharges, and allocation of various costs such as inventory, as well as fixed warehouse and headquarters costs. Manhattan's TCS tools support both periodic/longer-term and ad hoc/real-time analysis.
Periodic/Longer-Term TCS Analysis
Some types of cost-to-serve analysis are done periodically in order to make decisions about how to run a company to serve customers more profitably. Examples of some of these analysis decisions include:
Distribution Strategy/Flow Paths—comparing various SKU flow paths to decide which products to stock in DCs, which to cross dock, which to ship direct-to-store or direct-to-customer, and so forth.
SKU rationalization—when trying to reduce the number of SKUs, measuring which ones are most profitable, and also looking at the interdependencies (Product A is not profitable, but without it you can’t sell highly profitable Product B).
Supplier Cost—measuring the costs you incur because of the way a supplier is delivering their products to you. This could include how they package and pack it, how they communicate with you (EDI vs. web portal vs. fax), how they transport, and many other aspects. That information can then be used to negotiate a better price or collaborate with the supplier on changing their practices and processes to help lower total costs.
Logistics Responsibility—for example, deciding whether moving from prepaid to collect is the right move.
Often, these types of longer term analysis are done on a monthly, quarterly, or annual basis, depending on the type of analysis. Many companies do these by extracting P&L and other information from ERP and other systems into Excel, then manually cleaning and normalizing, writing formulas to look for opportunities. A solution like Manhattan’s saves much of this manual labor and allows more frequent analysis, if desired.
Ad hoc, Real-Time Analysis
Here, analysis is done in near real-time to make decisions about the best way to execute individual transactions. This might include things like where to source a PO, how to transport it, or where to fulfill a customer order. Without a TCS tool, this might require reviewing your periodic top-down analytics, talking to people in the DC and logistics about their current costs, and then potentially creating a spreadsheet to do these ad hoc calculations. The high level of manual effort required will limit the cases in which it is worth the effort.
Manhattan provides what they describe as a ‘continuous, real-time, bottom-up’ view of total costs: the ability to look at POs, shipments, DC labor, store and DC inventory levels and overhead in real-time on a per transaction basis, or periodically along a number of dimensions. Their tools enable you to apportion cost according to the attributes that most directly impact the cost. For example, what drives the labor cost in a DC may be the number of units on a pallet. The cost of transportation may be based on weight or volume. If you know these attributes, you can build out the total cost of delivering specific SKUs to specific customers by allocating the cost in each area according to the attributes of the SKU (weight, packaging, dimensions, number of cases or items per pallet, and other attributes).
There are some technical challenges that need to be addressed:
Understanding what factors really drive the cost, whether it is weight, value, distance to move, likelihood of theft, and so forth—this can be tricky, and it takes astute analysis and the insights that come with experience.
There is no single unifying transaction for measuring or allocating costs. The user needs to decide whether to use the PO, manifest, bill of lading, pick ticket, or some other transaction.
The same item may take different routes, and therefore incur different costs per transaction.
There are challenges to managing very different types of costs in the same model, such as ocean freight, labor, inventory carrying costs, and normalizing the basis.
Elements of Manhattan’s TCS Solution
Manhattan’s solution consists of a number of interlocking elements. Some of these elements, such as optimization, are not yet available but will be in future releases:
Data Acquisition—The system retrieves data from many different systems including external systems. The system can thereby capture actual costs as they happen. It is pre-integrated with a number of Manhattan applications such as:
WMOS/WMI (Manhattan’s Warehouse Management Systems)—incorporating labor for receiving, putaway, pick-pack-ship, loading, manifesting, inventory control
TP&E (Transportation Planning and Execution)—incorporating shipment costs, including line haul, spot charges, demurrage, accessorial, fuel surcharges, stop charges, etc.
SCV (Supply Chain Visibility)—incorporating average inventory balance
APC (Audit, Payment, & Claims)—incorporating claims from carrier and supplier
Item Characteristics—capturing all the item-level attributes used in the cost estimation, such as weight, dimensions, handling requirements, and packaging levels from individual item to cases up to a pallet.
Cost Apportionment—for allocating various costs, you can setup multi-level apportionment rules.
Dimensional Costing—being able to look at different dimensions of cost together.
Estimation/Modeling—modeling the costs before cutting a PO in order to make more intelligent decisions about where to source and how to transport. Shows side-by-side comparisons to evaluate the alternatives. These can be viewed graphically on an MS Bing map.
Optimization—provides feedback and optimization into the estimation process in order to get better results.
Aggregation—allows aggregation of costs at various levels up to corporate-wide level, by time periods, product class, style, organizational unit, attribute of the item (brands, frozen vs. fresh vs. canned), packaging level (case, pallet), and location.
Analysis and Visualization—slicing, dicing, and visualizing cost data. For example, you could analyze cost by DC or by types of costs (labor, transportation, supplier costs, for example) company-wide and drill down. Calculates both landed cost and cost-to-serve. Filter and sort by product class, item, financial period, location, by PO, supplier, or route. Cost analytics are done via SCI (Supply Chain Intelligence) and displayed via FieldVision, Manhattan’s supply chain visibility solution, using MS Bing technology (Figure 1) to overlay locations and routes on a map. For example, suppose you are considering whether to source from India vs. Mexico. The system will display the total costs for different scenarios and let you see the choices side-by-side. (Click on the map to view larger.)
Figure 1 - TCS Geo Spatial Analysis
Recently Released Capabilities
The latest version of TCS includes several new capabilities:
TCS dashboard is now integrated within the Manhattan Dashboard, where it can sit alongside other Manhattan portlets.
You can now take reductions in cost—such as claims, chargebacks, rebates, and other credits—and apply them to the specific products to which they correspond.
Cost-to-serve can be calculated by case, pallet, style, department, or brand.
TCS is integrated with the latest 2011 versions of other Manhattan modules and products.
Tomany said because this is a focused product, it makes it easier to implement. In setting up TCS, the main effort required is integrating non-Manhattan data sources. Beyond that, configuring rules for allocating costs, setting up different supply chain routes, and other setup is relatively straightforward.
Building a More Profitable Company
There are many strategies to increasing profits, such as pricing and various cost reduction and efficiency improvements. TCS can be a very important tool in initiatives to identify and realize additional cost savings and profits.
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