The value of a dynamic ‘Cost to Serve’ model for a CPG business

Forecasting in CPG businesses has always been tough. The last few years have been even tougher.

From ever-changing consumer demands to broader global events like Covid, the Ukraine War, and even the Suez Canal blockage, the last few years has thrown a lot of challenges at many businesses. Not least of course to those operating in the CPG industry.

And just as in other industries, it feels like there is always a new hurdle to manage. So how can CPG businesses cope with these challenges and optimise their profitability? In this article, I explore the use of Cost to Serve models, and the value that can come from utilising these in the right way within a business. And done well, they can really form a key part of the decision-making toolkit.

What is Cost to Serve?

In straight forward terms, ‘Cost to Serve’ is a method of calculating and allocating the costs of delivering products or services to customers. It considers not only the direct costs of production and distribution, but also the indirect costs of activities such as marketing, sales, customer service, and administration. It is a way of building financial plans that aids decision-making in a CPG business.

And by using Cost to Serve models effectively, CPG businesses can identify the true profitability of each product, customer, channel, and market segment, and make informed decisions on pricing, product mix, customer segmentation, and resource allocation.

Why is a Cost to Serve model a key planning tool to a CPG business?

As you can see from above, being able to use these models in the right way can really help contribute to improving financial performance. And a well-designed Cost to Serve model can provide many specific benefits to a CPG business. To outline just a few at a high level:

• It can improve visibility and transparency of costs across the value chain and reveal hidden inefficiencies and opportunities for improvement.
• It can enable more accurate and agile forecasting and budgeting, by incorporating the impact of external factors and internal actions on costs and profitability.
• It can support strategic decision making and scenario planning, by allowing CPG businesses to evaluate the trade-offs and outcomes of different options and strategies.

In a time where things change so quickly, and there is a need to use data in the right way to make more impactful decisions, it becomes extremely clear of the value of building these models well.

2 ways in which a business might use a Cost to Serve model.

Let’s bring it to life with some examples of ways in which businesses can use these types of models to guide decisions:

Company: A global beverage company

Use Case: Identify the most profitable customer segments and optimise its product portfolio.

Findings: The company discovered that some of its low-volume, high-margin products were losing money due to high distribution and servicing costs.

Outcome: The company decided to discontinue these products and focus on its core brands, which resulted in an improvement in operating profit.

Company: A regional dairy company

Use Case: Evaluate the impact of different distribution channels on profitability.

Findings: The company found that its direct store delivery had higher cost to serve than the warehouse delivery channel, due to higher transportation and labour costs.

Outcome: The company decided to shift some of its products from direct store deliver to warehouse delivery, which resulted in profit improvement.

As you can see, a well-designed model can influence decisions in the business. Really powerful stuff when done well! But of course, design plays a critical role!

4 key considerations when designing a ‘best-in-class’ Cost-to-Serve model.

Every business is different, with its own set of nuances. But there are many things that carry across lots of businesses. The same applies to when we design Cost to Serve planning models. I have outlined a few design considerations that I think are important:

1. Think about the end-users

I will touch on this point in all the points below, but any model that is designed to aid decision-making should be designed in a way that helps the people tasked with making the decisions.

It might sound like an obvious statement to make, but if the model doesn’t help those who don’t need it, they won’t use it! And that can create huge gaps in using data to drive decision making. So, at all phases of a model build, you must be sure to include those who will be using it. And in a Cost to Serve model, there can be many around the business who have an interest and need.

2. The level of granularity and dimensionality of the cost data.

Getting it right with data is so important with any model. Many will know the saying – ‘garbage in, garbage out’. And that is for sure the case with a Cost to Serve model.

The more granular and detailed the cost data, the more accurate and insightful the Cost-to-Serve model will be. But of course, this applies up to a point. You need the detail. But you don’t want to get lost in the detail. You also need to make sure the data is available in dimensions that align with the way in which decisions are made!

And then of course, do not forget the pains that can come with data collection. Collecting and processing too much data can also be costly and time-consuming.

Therefore, pragmatism should always prevail. CPG businesses should balance the benefits and costs of data granularity, but ultimately, really focus on what is most relevant and impactful for those using the output of your model to make decisions. Never forget to involve the end-users of your models in this phase.

3. The frequency and timeliness of the cost data updates.

The more frequent and timelier the data updates, the more dynamic and responsive the Cost-to-Serve model will be. Things are changing all the time, so you want to ensure that the end-users have the right information available to make decisions, when they need to make decisions.

There can often be a desire to flow latest available data to a model as regularly as possible. Always be cautious here, and make sure you understand when end-users need to interact with the model and use it for decision-making. If they don’t need to have insights daily, don’t load it daily.

And of course, updating data too often can potentially be disruptive and impractical.

So be sure to align the frequency and timeliness of cost data updates with planning cycles and business needs, and you can increase the chances of the model being embedded as part of the decision-making process.

4. The integration and alignment of data from multiple systems.

In the absence of a central data warehouse, CPG businesses can have data stored across many different systems. Sales, Operations, Finance and HR teams will often have their own systems to focus on their own key tasks. However, the most impactful Cost to Serve models will integrate relevant data from all core systems. So be sure to understand exactly where your data is stored, and work with end-users to understand what is needed for the model to aid in decision-making.

When you build with end-users in mind, you set yourself up for success. But in today’s working world, one critical enabler that increases your chances of success: Technology. I will dive into why I think getting it right with technology is a critical piece of the puzzle in a modern business.

Modern planning tools can give you the cutting edge.

More and more businesses are waking up to the opportunity that comes with modern planning technology. Whilst spreadsheets have inherent benefits such as flexibility, there comes a point when an organisation simply needs to scale up the way they model their data.

I highlight here 3 wins CPG businesses can get by adopting this type of technology:

1. Integrate data from key systems in one place.

Data is spread across an increasing number of systems in many businesses. You need to be able to take key data needed for planning and have it one place. From here, you can adopt a more connected approach to planning. Modern planning technology is your ticket to do this effectively. You save time, resource, reduce errors, and importantly, improve quality.

2. An environment to plan collaboratively.

Planning in siloes has long been a challenge for many businesses. Planning platforms get everyone working from the same place, which naturally creates new ways of collaboration. Break down the walls between departments and start working together.

3. Real-time scenario planning to enhance the quality of decision making.

Things are changing all the time. Decision makers increasingly need to understand a range of potential outcomes, based on the latest available information. Planning platforms give you this superpower. Update numbers and see the impact across your models in real-time. Done right, you can improve both the speed and quality of decision making. Powerful stuff if you ask me!

Takeaways: Cost to Serve models can play a key role in decision making in CPG businesses. The ROI when you get it right can be hugely significant

When market conditions are so formidable, businesses need to be as agile as ever. And as technology continues to improve, businesses can be more agile than ever before.

And if you work in planning, the way in which you develop your planning models can position you as key aids to those signing off on decisions. It’s never been a more exciting place to be!

By Iain Main

Iain has been working at Bedford since 2021, and partners with customers around Europe to help them get the most out of Anaplan by utilising it in new ways across their organisations. He has also implemented Anaplan with a number of customers.

Prior to joining Bedford, Iain worked in various roles across finance in both large multinationals as well as start-ups and is passionate about the role that finance teams can play in driving organisational performance.

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