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MAKING TOTAL COST DECISIONS

The purpose of developing a marketing/supply chain model is to provide companies with a fact-based tool that can be used to assess the true cost of performing certain marketing projects or pro­grams. Managers can make fact-based business choice decisions driven by identifying the incre­mental sales from the program and both the mar­keting and supply chain costs of the program. Marketing managers must understand the effect of the decisions on other parts of the business process.

One approach to gathering information is to implement an activity-based costing (ABC) model that identifies the cost of all activities as­sociated with the marketing project. However, ABC is a difficult and costly process to imple­ment. A model is needed that aids in the evalua­tion of marketing decisions based on estimates of incremental sales, marketing costs and the cost of various supply chain activities. An ac­tivity-based management tool can be created that analyzes the value to the company of performing a given project. The model should be ca­pable of answering what-if questions during the promotion or adver­tising planning process. For instance, what if weekly sales estimates from the promotion vary from the forecast? Or, what if different meth­ods of meeting demand are used by the supply chain, such as building inventory in advance versus working overtime? The final result should be the expected net value of the marketing initiative considering all planned costs required to meet the increase in demand. In addition, the model should be capable of evaluating the project after its completion to measure the true profitability of the promotion.

Models can range from spreadsheet tools to sophisticated decision support tools available with ERP systems. These tools should capture the planned incremental sales volume by week, the projected market­ing expenditures, and projected added costs from the supply chain not included in the product's standard cost. At the same time, the supply chain limitations that force added cost to meet the demand can be iden­tified. By recognizing the limiting factor or constraint in the supply chain, efforts may be made to remove or reduce the limiting factor.

The model must be based on the concept of balance described ear­lier. The supply chain is balanced by customer needs. When marketing activities tip the balance or customer needs exceed supply chain capa­bilities, added costs are incurred by the company. The concept of the model is that the value of the marketing initiative includes not only the income generated by the initiative, but also all of the costs associated with it. Figure 1 summarizes the calculations a company must con­sider when evaluating the success of the initiative.

The methodology to develop the model should include the following:

1. Identify the proposed marketing activity, the projected volume in­creases, and the projected revenue from the promotion.

2. Define the projected revenue the company might expect without executing the marketing activity.

3. Identify the marketing costs associated with the activity. These costs are the typical marketing costs of running an advertising campaign or promotion such as media, printing, commercial production, etc. 4. Detail the added supply chain costs required to meet the incremen­tal demand. The supply chain costs could be grouped by nodes along the supply chain such as supplier costs, supplier transportation costs, plant conversion costs, finished product transportation, distributor costs and retail costs.

The model should include costs along the supply chain that may be incurred by other nodes (other companies) but are not added cost to the manufacturer. Companies must recognize that other costs incurred along the supply chain may not get charged to them but get passed along in higher prices to the consumer and reduce the overall effectiveness of the supply chain. The future of competing is supply chain versus sup­ply chain, and those that are unable to improve their supply chain's capability to meet demand will be at a competitive disadvantage.

BALANCE THROUGH IMPROVING CAPABILITY

The development of a capable supply chain depends on a number of factors. These factors include the following: the organizational struc­ture of the chain, internal process improvements, and measures to drive improved performance.

 

Implementing supply chain improvements means changing the struc­tural design of the organization and its relationships with partners. Those changes may include changes in the organizational structure, reduc­tion of layers, changes in reporting relationships, and changing where work is done. The list of changes includes

      reducing the number of suppliers

      relocating plants

      revising product assortment

      creating focused versus multifunctional plants

      selecting new distributors

      reducing the number of distributors

      reassigning activities to different nodes

      changing process design.

These changes may result in lower costs across the supply chain and improve the ability of the supply chain to meet demand and in­crease overall sales.

 

In addition to changing supply chain structure, companies must improve internal processes to ensure that each node is capable of meet­ing each day's demand. Changes may include improving production line capability, reducing changeover times, ensuring reliability at each process, and implementing in-process quality improvement. Develop­ing process maps for major supply chain processes may be necessary to understand the internal supply chain.

 

Once supply chain objectives have been set, measures must be estab­lished to evaluate supply chain performance to the objective. Key per­formance indicators (KPIs) are measures used to determine the supply chain's ability to effectively and efficiently deliver value to the customer across companies. Measurements drive behavior. Human resource sys­tems must be changed to align KPI's with strategic imperatives.

To Be Continued

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 11


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