The evolution of priorities and working capital applied to a supply chain is typically based on a metric that points to a rationale of needed change. To achieve this, an organization must discover where to focus energy in order to get the desired outcomes to meet business goals. The purpose of the Supply Chain Total Cost to Serve (SCTCS) formula is to lay the groundwork for high-level direction. In this article, we will cover the idea and basis of what is SCTCS, some useful applications of the formula, and how to manage SCTCS as a metric within your organization.
What is the SCTCS formula? Some people refer to this as the total cost of ownership, but in this article, we explore a deeper model that is more end to end. Some also call this “cost to serve,” but again, the formula being shared here is more robust and different.
All Inbound Costs – All logistics, receiving, inbound equipment, safety, technology, full-time employees (FTE) staff relating to this area
All Costs to Procure – All inventory variance, inventory costs, tariffs, technology, FTE staff relating to this area
All Holding Costs – (Product is stationary) – Storage costs, technology, maintenance, FTE staff relating to this area
All outbound Costs – Outbound assets, routing/last-mile costs, network design, technology, FTE staff relating to this area
All Return Logistics Costs – inventory returning, costs to return, technology, FTE staff relating to this area
= Total Supply Chain Cost to Serve – Includes all the transactional costs associated with the supply chain process, after the sale of goods is complete
Excluded: Sales cost, certain leadership costs (C-Suite), marketing costs, and certain administrative costs. The rationale is that these costs are required to obtain sales and are not related to the transactional qualities of a supply chain process. This formula is dedicated to the supply chain total costs to serve, which focuses on the costs of moving product through the supply chain.
Useful Applications of the SCTCS Formula
These will be based on a specific timeframe, period, quarter or year. Organizations can gather useful information by utilizing the formula in the following ways:
1) Used as a standard metric in total to measure the overall cost dollars of the transactional supply chain.
2) Dividing the SCTCS costs by the total sales dollar amount or reflecting SCTCS totals as a percent of sales dollars.
3) Dividing the SCTCS costs by the number of cases or units sold or reflecting the SCTCS as a dollar cost per case or unit.
Directionally, when you take SCTCS as a percentage of sales, you are understanding how to leverage those costs based on sales. As the costs as a percentage decline with increased sales, you are, in theory leveraging your supply chain costs to manage more sales. Relating the SCTCS to sales, cases, or units helps to keep the relativity of your overall cost number.
Managing this Metric Inside Your Organization
Most of this information is tracked in a company on a high level. It is important to work with your CFO to determine the best use of this formula for your organization. Don’t re-invent the wheel, but use the data collection you already have in place on a high level to gather the course of the SCTCS metric. Then collaborate with your CFO to add on key components that you may be missing to build the right details pertaining to your company targeted outcomes.
Engagement, empowerment, and communication are the secret sauce to ensuring that the rest of the organization is in tune with the power of this metric. Always ensure that this is not the only metric, but rather that this metric sits with other important metrics in balance so that your vision of your supply chain is well-executed. You will need to dive into certain areas of the formula to dig deeper and resolve issues that are driving costs.
As you apply this formula to your organization, it is important to get the view of supply chain teams to create the data. This process drives engagement of the SCTCS metric as a valid tool.
While meeting with teams, be sure to discuss the empowerment process of change or transformation as new ways or new processes are generated to reduce costs. This is important to expedite cost reductions, creating a culture of continuous improvement and achieving desired goals.
Consistent and effective communication is the other important strategy to implementing this metric. Timely and accurate reporting is essential to building trust, and the use of this metric can be a northern star for your supply chain. Effective communication is listening to those empowered to carry out improvements based on data provided by the metric.
In conclusion, the SCTCS metric can be a powerful tool to help your organization get to the next level in your supply chain and creating a dynamic business advantage.
Best Practices to Implementing SCTCS
• Collaborate with your CFO by using your current cost tracking channels to formulate this metric inside your organization on a high level.
• The CFO will offer some ideas on how to dig deeper in certain areas as the SCTCS metric peels back layers of opportunity within your supply chain costs.
• Spend 30 days or less putting this formula together within your organization on a high level to get traction and focused ROI.
• Ensure you have a plan for engagement, empowerment, and effective communication.
• Ensure you have a validation process to build trust in the metric as a solid tool, along with other metrics that balance this metric so that directionally you make continuous improvements over time. Beware of knee-jerk reactions. Taper direction with further observations, communication and collaboration.
Wade Wickus is CEO & co-founder of Link Supply Chains, LLC. He has over 30+ years of experience in the distribution supply chain. He has spoken at several events including CSCMP, SCOPE, and other leading organizations. He has a very popular podcast called “Supply Chains…The Secret Sauce,” found on all major podcast outlets. Link Supply Chains, LLC is one of the fastest startup product information management companies in the USA and has a mission to simplify supply chains, reduce costs, and make B2B communication fun again. Visit www.linksupplychains.com for more information.
This article originally appeared in the January/February 2021 issue of PARCEL.