accenture c2s
TRANSCRIPT
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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
2 2009 Accenture. All rights reserved.
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
3 2009 Accenture. All rights reserved.
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)?
4 2009 Accenture. All rights reserved.
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
2009 Accenture. All rights reserved.
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
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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
2009 Accenture. All rights reserved.
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 --
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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
2009 Accenture. All rights reserved.
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
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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
2009 Accenture. All rights reserved.
1 2 3 4
765
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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
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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
13 2009 Accenture. All rights reserved.
Strategic Context
C2S Overview
C2S in Action
C2S Approach
C2S Key Success Factors
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
2009 Accenture. All rights reserved. 14
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
2009 Accenture. All rights reserved.
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
2009 Accenture. All rights reserved.
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$
RealizedProfit
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C2S enables a view of true performance it supports strategic
investment and divestment decisions to improve over all corporate ROA
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
2009 Accenture. All rights reserved.
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
Profitable Unprofitable
CM $18
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Invested Cost
C2S enables a view of true performance it supports strategic
investment and divestment decisions to improve over all corporate ROA
Recognition of where costs exceed revenue provides visibility to the cost invested ingenerating and supplying demand.
2009 Accenture. All rights reserved.
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
C2S enables a view of true performance it supports strategic
investment and divestment decisions to improve over all corporate ROA
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.
2009 Accenture. All rights reserved.
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
2009 Accenture. All rights reserved.
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
2009 Accenture. All rights reserved.
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
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Agenda
23 2009 Accenture. All rights reserved.
Strategic Context
C2S Overview
C2S in Action
C2S Approach
C2S Key Success Factors
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
2009 Accenture. All rights reserved.
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.
2009 Accenture. All rights reserved.
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
30 2009 Accenture. All rights reserved.
Strategic Context
C2S Overview
C2S in Action
C2S Approach
C2S Key Success Factors
Questions
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Regardless of approach / scope, the same basic principles apply to
conducting a C2S analysis
31 2009 Accenture. All rights reserved.
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
32 2009 Accenture. All rights reserved.
Strategic Context
C2S Overview
C2S in Action
C2S Approach
C2S Key Success Factors
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
????
2009 Accenture. All rights reserved. 34