Do you truly know your profitability for every customer and shipment?

With constant supply chain disruptions and inflationary costs increases, we all are feeling the stress and frustration of managing “The Now”. Not having the time and resources to plan, implement, check and adjust for the future state is truly costing us all.

Supply Chain professionals everywhere are doing their best, yet every day we read and hear from the Boardroom to the Docks:

“The problems and profitability challenges we are experiencing are ALL due to our Supply Chain issues”

What is not often understood is that many of these issues are outside the control of the supply chain operation. Demand increases, labor challenges, increases in pay requirements, equipment availability, raw material shortages, lack of capacity, increased lead times and driver shortages all contribute to these challenges. Challenges that are causing increasing costs, complexity and capacity and therefore end to end supply chain bottlenecks. The planning and execution of shipping goods from origin to final destination has a HUGE impact on your customers’ experience and your true profitability.

This problem is not going to go away any time soon. Companies are aggressively re-evaluating the entire structure of their supply chain operations. Unfortunately, many approaches being explored are relying on the “traditional” supply chain operating principle:

“Work to satisfy ALL customer demands, on time while minimizing costs!”

That mindset has to change if we are to eliminate constraints, reduce stress, frustration and maintain or even increase profitability. For most companies, a small number of customers and products drive the majority of the operating profit, while many customers and products (SKU’s) drain those very same profits directly from the bottom line. So, the question becomes:

“How do we know what time and resources are being assigned to customer shipments that are actually significantly reducing our profit?”

A sustainable solution (not so traditional for companies) is to use profit performance to address capacity, complexity and cost issues. Using your transactional data for deep dive profit analytics provides true visibility to answer the above question while empowering your team to focus on customers and products that provide the biggest bang for the buck.

The Coca-Cola Company eliminated over 200 SKU’s they traditionally produced including TAB!

UPS knows by each customer and shipment their profitability level. Do you?

To help you get started here is a step by step approach for the critical actions in assigning resources for customer and products based on their profit contributions:

Recognize that your supply chain resources should be prioritized based on profit performance and competitive advantage and ensure there is cross-functional and senior level buy-in.

Adopt a Cost-to-Serve approach to truly understand the costs and profits associated with servicing not just select customers, but ALL customers.

Build a profit performance profile for ALL customers and ALL products by segmenting by performance. The results will help drive actionable insights and organizational support! This is what it can look like:

Critical Shipment Priority: the customers and products that deliver 96% of your profit

Subsequent Shipment Priority: that deliver customers and products equal 4% of your profit

Delayed/No Shipment Priority: unprofitable customers buying unprofitable products (BTW-you won’t find these using standard cost accounting!)

Continue to build cross-functional buy-in on the Shipment Priority Plan using profit analytics as the “One True Version of the Truth” and ensure continued Executive support.

Execute the Plan and measure the profit protected on an ongoing basis.

If you like this blog, please share it or comment.

All the best,

Richard Sharpe
CEO – Competitive Insights

How to Turn S&OP into a Super Charged Profit Booster

Why Add Profit into S&OP

Whether formal or not, every organization has a Sales & Operations Planning (S&OP) program in place. S&OP is important for creating the story-of-the-business, the operational details in satisfying demand of specific units of products. “What worked” for S&OP is stretched to the limits today because of supply chain risk disruptions that resulted in significant resource constraints, capacity shortages and inflationary cost increases. These problems manifest themselves as significant internal stress and as conflict between sales, supply chain operations and procurement.

This is driving the need for S&OP to:

“Create a proactive story-of-the-business in terms of back logs, delayed service levels and sacrificed customer satisfaction”

Why doesn’t the current S&OP process of “what worked” mitigate or eliminate today’s supply chain problems? It’s simple, they are not incorporating profits into the calculation. Profits allow companies to attack resources constraints, expand capacity and reduce the impact of inflation.

“For example, if the shipment plan is constrained (as is generally the case), the Pre-S&OP Meeting and subsequent Executive S&OP meeting will call for decisions on who will get served and by when, rather than just letting systems (such as ERP) or processes (such as a FIFO) determine the answer,” said Henley. “Knowing profit by SKU, profit by customer, and profit-by-SKU-by-customer provides unmatched decision criteria as the organization ponders the next 12 months or more.”

How to incorporate Profit into S&OP

Create a proactive story-of-the-business that is fully supported and owned by the most senior executives

Create a story-of-the-business that is not based solely on historical considerations. These historical considerations often lead to missed financial objectives and growing shareholder pressures. It must be based on a foundation of increasing profitable performance.

Use of precise analytics for decisions on “Who, What and Why” that provide actionable visibility on profit contributions by Channel, Customer and Product performance.

Use profit measurement that go beyond standard cost accounting measurements. Net Landed Revenue (includes discounts, promotions), Net Landed Cost to Serve (includes Supply Chain costs from supplier to customer) and Net Landed Profits provide the missing ingredient. (click here for video on Supply Chain financials)

The COVID pandemic is the biggest challenge of our times. Some organizations will stick to the same story-of-the business. Some will innovate to profit. Will your company take its S&OP decisions to the next level?

If you like this blog, please share it or comment.

All the best,

Richard Sharpe
CEO – Competitive Insights

How to Tackle Supply Chain Stress on the 4 C’s

How to Tackle Supply Chain Stress on the 4 C's
Capacity, Costs, Complexity and Conflict

Supply Chain Executives are struggling with capacities that are unavailable, dramatically increasing costs and complexities and organization conflicts as to how to solve these problems. Product shortages, port backlogs, transportation capacity issues are building inflationary headwinds and driving actions that will have a “Bull Whip” impact that will bite into bottom line earnings.

Supply Chain Executives and their organizational counterparts must approach this problem by focusing on the 4 C’s: lowering the need for Capacity, driving the reduction of Costs, simplifying operational Complexities and adopting a common guiding light to deflate organizational Conflict.

The key to accomplishing this is a foundation of trusted Cost-to-Serve (CTS) and Net Landed Profit (NLP) performance insights by Product, Customer, Channel and Store. Having this specific financial performance information enables the pinpointing of opportunities to prioritize the use of resources and actions to protect the servicing of your most profitable customers, stores and channels and not allocating supply chain resources with a “one Size fits all” strategy.

Case in Point – by identifying the CTS and NLP for all Products being sold to all Customers, one company found the following opportunities by having performance visibility on Unprofitable Products being sold to Unprofitable Customers. They found multiple ways to reduce capacity requirements, lower costs and the complexity of the operation. Below are specific examples:

4 C's	One Example Focusing On	Total System-Wide Impact
Capacity	Reducing Inventory Carrying Cost	(28%)
Cost	Reducing Transportation Costs	(21%)
Complexity	Reducing Product Sourcing	(26%)
Conflict	Improving Profit	146%

The resources being freed up can then be focused on prioritizing service to the Customers, Products, Channels and Stores based on their contributions to the profitable performance for the company. Equally important, they could gain internal support for these actions by have a direct measurement on the impact that these actions could have on the bottom line for the company.

Please comment on this posting or email me at [email protected] .

All the best,

Pinpointing Profit Leakage

Summary: Earnings reports are a key indicator of a company’s financial health but they are an aggregation of a vast array of incurred costs and realized revenues associated with running a business. The financial impact of specific decisions in managing product and customer transactional costs and revenues is typically visible at an aggregate level such as categories of costs or revenues by customer or customer groupings.

However, individual actions or decisions in sourcing, supply chain or sales can significantly impact operating margins and create negative performance exceptions. Profit leakage exceptions can be hidden in standard financial reporting. Finding these specific profit leakage opportunities and the root cause can be like searching for a needle in a haystack.

Case In Point: On a monthly basis, a Retailer would have a team of Financial Planning & Analysis Managers perform analysis on procurement, specific supply chain activities and store sales to try and find significant opportunities associated with incurred costs or reductions in revenues. The process was time consuming and did not catch all of the significant exceptions that needed to be analyzed. A decision was made to create a scalable approach that would not only review all exceptions but would also track the progress of resolving previously identified items.

Action: To be scalable, the company recognized that the solution had to have several key characteristics. It had to provide for an approach that would ensure that the data that would be analyzed would be accurate and specific. The identification of the exceptions needed to be fast and the ones with the biggest impact prioritized. Finally, the analysis needed to examine opportunities across the entire operation including procurement, supply chain, inventory and sales activities on a recurring basis. The company selected a cloud-based technology platform that provided data governance capabilities as well as robust processing and reporting.

With the initial activation of the solution, profit leakage exceptions across every functional area were identified that totaled several million dollars. What would historically take the company weeks to accomplish was now done on a repeatable basis in a matter of days.

Takeaway: Profit improvement opportunities can be significant by having the ability to pinpoint exceptions in financial performance by product, customer, store or channel. For some, the root cause may not be something that can be easily changed. But for many exceptions, actions can be taken to minimize the future impact on margin erosion. Having this type of robust and repeatable capability insures that the company is proactively looking for all opportunities to maximize shareholder value.

I would love to know your thoughts on this. Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe is CEO of Competitive Insights, LLC (CI), a founding officer of the American Logistics Aid Network(ALAN) and designated by DC Velocityas a Rainmaker in the industry. For the last 25 years, Richard has been passionate about driving business value through the adoption of process and technology innovations. His current focus is to support CI’s mission to enable companies to gain maximum value through specific, precise and actionable insights across the organization for smarter growth. CI delivers Enterprise Profit Insights (EPI) solutions that enable cross-functional users to increase and protect profitability. Prior to his current role, Richard was President of CAPS Logistics, the forerunner of supply chain optimization. Richard is a frequent speaker at national conferences and leading academic institutions. His current focus is to challenge executives to improve their company’s competitive position by turning enterprise wide data from a liability to an asset through the use of applied business analytics.

Tag Archives: profit

Do you truly know your profitability for every customer and shipment?