Transparent Cost-to-Serve Customer Relationships (TCR) – Part One

This article is an excerpt from the report: Transparent Cost-to-Serve Customer Relationships.
A copy of the full report can be downloaded here.

Prologue: A Tale of Profit Erosion

Sam missed his sales quota last quarter. He knows he’ll have to really hustle to make his numbers this quarter. Fortunately, the pipeline looks healthy. Unfortunately, the company is clamping down on Sam’s most effective deal-closing tool: generous discounts. With net margins falling to a new low last quarter, management has set strict limits and special approval requirements on discounting. Sam now relies even more on other sweeteners he has used successfully, such as offering expedited delivery, special handling, and flexible fulfillment (e.g., customized lot and pack sizes). Leveraging these, he closes a couple of dozen deals and exceeds his quota, as do many of his sales colleagues. Success! Everyone is happy — until the CFO crunches the numbers at the end of the quarter and discovers that while revenue exceeded goals, EBIDTA¹ declined to a new low, despite meaningful reductions in discounting. What happened?

While Sam was busy figuring out ways to close deals under the new policy constraints, major supply chain issues were occurring. Severe storms in Texas and resulting power outages forced the company to shut down its Texas regional distribution center (DC) for several days. Orders for customers in that region were fulfilled out of other DCs at substantial extra cost due to added mileage and expedited out-of-area shipping.

The same storms caused a prolonged plastic shortage (due to plant shutdowns), a vital ingredient of key products for the firm. To meet the demand for upcoming orders, the sourcing team had to scour the globe and compete with others for scarce supplies of plastic, driving up input materials costs. Simultaneously, the plastic shortage caused a surge in demand, as buyers shifted away from competitors who were facing more severe stock shortfalls. The remaining DCs all had to work overtime to keep up with increased demand. Furthermore, an increase in custom lot and small pack size orders drove additional warehouse labor overtime, causing underutilized truck space, and increased less-than-pallet excess inventory. Taken altogether, these additional costs more than offset the savings from reduced discounting.

Sam and his fellow salespeople were not fully unaware of the impact of these events. They had heard about the outage at the Texas DC but had no visibility into what products or how customer locations were being impacted. They also had heard rumors of plant production problems and were aware that additional effort was required to customize the lot and pack sizes. But in all these cases, Sam and his fellow salespeople lacked the specific data needed to make more informed decisions about what services and delivery promises to offer and to which customers. The Sales team’s primary metric of success was meeting revenue targets and, recently, a secondary focus on gross margin. But the gross margin fails to capture the variable cost fluctuations caused by supply chain disruptions or customer order-level requirements.

A Better Way is in Reach

Sam and the rest of sales were being asked to reduce profit erosion, but were not empowered with the tools to do so. They were flying blind regarding the consequences of offers and deal-level decisions on inventory and operational costs. Those consequences were made more severe during the temporary DC and plant downtime. The reality of the demand-supply imbalance was understood but not actively managed by those with the greatest influence over the profit margin and customer outcomes (i.e., the sales team crafting deals).

What if instead, the CRM system provided the sales team with visibility, right there within the context of specific customer sales opportunities, regarding the impact of disruptions or costs of specific services and requests, with steps to take at various points in the sales cycle?

Salespeople would have the information needed to more effectively partner with customers to improve profit margins in ways that were mutually beneficial. Sales would have the flexibility to support customers’ ad-hoc needs (e.g., a rushed order required) so long as, in the aggregate, costs were being reduced or recouped. Getting started can be simple. Accurate measures of cost-to-serve could be incorporated into the salespeople’s success metrics, motivating them to offer the right kinds of deals to better align customer value to service offered.

Businesses can initially get operational cost insights from supply chain teams who are well-versed in the areas of cost, risk, and efficiency. Then, insights can be further automated through data-triggered rules, planning models, external cost indexes, and cost-to-serve point solutions using company operational data (WMS, TMS, production, supply chain, etc.). Ultimately, these same insights can be translated into cost-based algorithms integrated into sales execution software, such as CPQ (configure, price, and quote), DOM (distributed order management), and ecommerce systems. This is the vision and capabilities provided by Synapsum.

Why Now? Tackling Today’s Challenges and Building Agility for What’s Next

If the tale shared above resonates with your experience, you may be considering whether now is the right time to tackle this issue. With the rise in logistics costs and mounting supply chain challenges, it is a critical time to look at better ways to manage disruptions and costs. Businesses that build better cross-functional response mechanisms will gain cost and customer advantage over competition. The trends below put the urgency of this issue into perspective.

Today’s rising costs go hand in hand with supply chain disruptions. While some of the ‘headline-worthy’ recent supply chain challenges will normalize with time, businesses should be prepared for greater supply chain volatility going forward. There have been more disruptive events in the past six months than in recent history.⁷ The trends underpinning these prolonged disruptive events are expected to persist in the future.

The rest of this series dives into how you can practically achieve these goals using actionable, profit-based insights to guide internal decision-making and create more profitable customer relationships.

In Part Two of this series, we explore potential steps for the journey to Transparent Cost-to-Serve Customer Relationships.

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