Demand planning is a tool widely-used by manufacturers for forecasting revenues, maintaining inventory to meet demand, and enhancing overall profitability. However, demand planning activities support multiple customers and take multiple contracts, per-unit costs, volume discounts, and purchasing frequencies into consideration when arriving at operational costs. Without a clear understanding of the fixed and variable costs by customer and product, manufacturers can be misled by demand planning numbers.
The Advantages and Cautions of Cost-to-Serve (CTS)
CTS bridges the gap between demand planning and supply chain details by quantifying all supply chain activities and costs incurred to fulfill specific customers’ product demands. CTS focuses on four essential cost factors—product, transportation, program/service costs, and financial operating costs—to better align per-customer costs, discount negotiation, and value-added services pricing to achieve higher short- and long-term profitability. However, even this granular analysis can be flawed as the timing and application of certain soft costs within these four areas can skew end product pricing:
Product: Accurate numbers on outside costs like anodized painting, plating and other services are sometimes difficult to capture. As a result, “guesstimates” are often used, which can unintentionally erode profits
Transport: Transportation costs are not always included in the final product price, which can result in companies giving this service away
Program and service costs: Like transportation, these costs are not always consistently applied and could be a deal breaker if competitors offer a better approach to handling these costs
Financial operating costs: Generally standardized, these costs lack volatility and are the least likely to impact CTS calculations
How ERP Systems Enhance CTS and Demand Planning
On the whole, CTS data is valuable in bringing costs, customer net revenues, and profitability into balance. ERP system nimbleness can further refine and enhance outcomes.
The majority of standard ERP systems now offer integrations and analytics tools that drill into customer profitability and purchasing habits over time, producing data that provide historical, big picture snapshots of each customer relationship, reinforced with measurable KPIs, that determine customer net revenues. This nimbleness can further refine and enhance CTS outcomes, and also equip sales and service teams with accurate information to use in contract re-negotiations—both fundamental to increase overall profitability.
Armed with this information, demand planning becomes an empowered decision-making process based on detailed per-customer analysis, achieving maximized profits through maximized revenues. Reach out to one of Wipfli’s manufacturing experts to start a conversation about how a deeper dive into data can improve your bottom line.