"Because the cost structure is vast and complex, it is critical that supply chain and operational leaders understand it and work together."Fabian Wehren, Director, Supply Chains & Operations Advisory,
Ernst & Young

Understanding the true cost to serve should be the basis for commercial negotiations with retailers.

In our experience, there are three key areas on which teams should focus to build more productive relationships with retailers.

1. Identify and address the activities that drive cost. Up to 60% of COGS, including ordering, planning, logistics, warehousing and transportation can be directly impacted by retailer behavior. Yet consumer products companies often accede to customer's demands without truly understanding the impact on cost to serve. As illustrated in the chart below, variation in customer ordering can have a significant impact on cost to serve.
   

   Assess areas	Identify potential changes	Target benefits
   Order assembly	Incentive customers to order full plallets to reduce case picking ratio through structured pricing/trade terms Identify inefficiency order demands and associated costs to drive fact-based discussions	10%-20% of budget
   Transport	Increase transport efficiency ratios via customer price negotiations/introduction of logistics terms Support transport contract renegotiation	6%-12% of budget
   Distribution center utilization	Utilize spare capacity in distribution centers Manage warehouse labor pool across distribution centers and resuce headcount	7.5%-15% of budget
   OTC processing costs	Increase average order sizes via structured trade terms that reduce processing volumes	15%-30% of budget

   
   
2. Align cost to serve with efficiency trade terms to reward efficient behavior and defend against changes that drive cost. As pressure on consumer products companies increases, there has been more creativity around innovation, trade terms and individual product promotions. Consumer products manufacturers frequently reward inefficiency by returning up to 1.5%–2.0% of list price as part of standard trade terms, without enforcing the requirement that customers order efficiently. If efficiency discounts on cost to serve are to be effective, they have to be embedded across the organization so they can form the basis of commercial negotiations with retailers.


3. Model the impact of retailer demands to enable discussions that create joint value. As retailers demand increasing levels of service in terms of frequency, flexibility or responsiveness, it is key that manufacturers can model the impact of these changes on the supply chain, so they can have proactive, balanced, fact-based discussions with customers.



Top