Business Focus 25
unlocked and help drive better, more fast moving products, there will also
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Optimizing business processes
informed decision making. Companies be a lot of surprises, both in terms of
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Benchmarking between departments/
must make decisions that continually customers/products that were thought business units/divisions
drive out lower unit costs of processes, to be unprofitable but equally those that
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Accurate cost and profit modelling for new
remove ineffective activities that add were considered very profitable who products and/or service offers.
no value, decide which products or may not be present. Those customers
services to provide and determine how who generate the largest losses and As much as we remain passionate about
customers should be segmented and help destroy profit are at the extreme the benefits this type of modelling can
serviced. Added value activities can right hand side of the horizontal axis. bring to a business’s profitability, it’s
also be identified and the cost of these Once again there will be surprises here important that for a project to succeed
understood at the customer level too. In fact, a considerable challenge it gets senior business sponsorship
— and be used to drive appropriate to the results is often the initial reaction internally. It must provide a completely
pricing strategies. to this type of analysis, as it can cross-functional view of the business,
make for uncomfortable reading. The break down silos and allow people in
At Novo Solutions, our Cost of Supply middle group of customers/products each department to see the company’s
model and methodology combines constituting the almost horizontal whole process as well as the causes
ABC techniques with a detailed, cross- line are those that contribute little to and effects of any process failures or
functional workshopped process profitability or in fact just break even. customer behaviours. The cost of the
mapping of the supply chain from idea supply model is too important for any
generation to customer delivery. It is It is clear to see that the insight gained one department to own alone and it
essentially a large assignment engine, from this understanding of customer and needs to be a top line concern for
allocating costs from the general ledger product profitability is an invaluable asset senior management and the board;
via activities to the products, suppliers in the decision making processes within otherwise it will languish in a filing
and customers. The process mapping a business. The temptation to go for the cabinet with all the other laudable
needs to be a credible reflection of reality obvious solutions needs to be avoided projects that never quite secured
so that the resulting model created will be though. It is simply not tenable to suggest business-wide acceptance.
accepted throughout the business and so that all customers or products that fall
that each function is engaged in the whole into the profit destroying category should It’s also important to remember that
implementation journey. be gotten rid of. For sure, the analysis this Cost to Supply model is not just a
will identify opportunities for product methodology but is also a customizable
In too many organizations, the missing link, rationalization and equally there may be piece of software that, once introduced
the ‘black hole’ in business management some customers we may wish to point into an organization, can be continually
information is understanding the true towards wholesalers rather than deal revisited, refreshed and updated, as
profitability by product and customer; directly with. The real value, however, the business develops and as the
however the Novo model uncovers comes from the understanding of how and product and customer dynamics
the actual indirect and overhead costs where cost is coming from and how it is constantly change.
associated with these elements. Revenue being attributed … and which processes
minus actual product costs gives us are driving those costs. We can see where
product profitability; revenue minus actual processes need to be improved and About the Author
cost of products the customer is ordering, equally where pricing and discounting
and minus the real cost of supplying those strategies may need to be rethought. With an extensive background in supply
customers, gives us customer profitability. chain planning as a practitioner and
Only when armed with this information do In this way, the analysis can quickly get consultant, particularly in the healthcare,
we have an appropriate basis on which to to the heart of the profitability issues pharmaceutical and retail sectors, Brian
compare the viability of retaining different within a business and drive the change Dooley has worked on many projects,
products and customers. initiatives required to bring improvements driving companies towards achieving the
in the bottom line. The power is enabling goal of a one number, one plan process.
One of the more revealing forms of businesses to make informed decisions Brian’s particular focus is on supply chain
analysis is cumulative profitability by on issues such as the following: planning from forecasting and demand
customer or product, ranked by the management through to requirements
amount of profit they generate (see
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Managing customer and product portfolios planning and master scheduling.
Figure 1). Customers or products to optimize profitability Novo Solutions Ltd
at the extreme left hand side of the
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Accurate pricing of products and services Tel. +44 1564 711 136
graph’s horizontal axis will be those and understanding the true impact of info@novosolutions.co.uk
who generate profit and whilst many discount strategies www.novosolutions.co.uk
will be the larger key accounts and
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Allocating indirect overheads more accurately
Launch 2007 Supply Chain Digital
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