The concept of Cost to Serve has been around for many years (to my knowledge at least 20) and is an important tool in consumer packaged goods industries. Cost to Serve is a method of identifying profitability of individual products and customers. It is also used to unravel the complexity of multiple supply chains and channels to market. The analysis of the cost of each activity across the supply chain also provides data and insights to enable supply chain optimisation.
The focus of Cost to Serve is usually the in-market or post-launch costs of serving a product to a customer. Cost to Serve rarely looks at the development and launch costs of new products, which is the focus of this article. Yet product development teams can gain benefit from Cost to Serve methodology.
With consumer demand for more choice, and retailers’ demands for differentiation, consumer goods manufacturers are tailoring their products to individual customer’s requirements. Businesses are also seeking to leverage their successful brands. The combined effect is product fragmentation, shorter product life and increased pressure to recover product development cost over lower volumes. New products frequently fail. The Grocer (16/12/2011) reported “Only one in five fmcg launches could be considered a success.”
One way to mitigate the risk of failure is to have an effective stage gate process. (Readers may be interested in a series of articles, ” How to Implement and Enhance a Gate Process“.) Most consumer goods manufacturers have one, but how many understand the true costs of product development?
Stage gate process is used to control individual product developments, manage the product portfolio, and assign resources across product developments. Stage gate process should, in my view, have embedded metrics to drive process improvement. However, businesses where product development and launch is marketing-led may have little regard for the optimisation of the development process.
For consumer products, the cost of product development is often a secondary concern and may not be tracked at all. Where costs are allocated to products, a typical approach might be to allocate average costs by function or sub-process. Then there are the omissions – waste and product redundancy are usual suspects – where the internal politics of the organisation, “It’s not my cost” attitude, and arguments about overhead allocation, get in the way of tracking the true costs. By applying the principles of Cost to Serve, the cost of activities throughout the development process can be identified for each product and (where appropriate) each customer. So, as Cost to Serve attempts to understand the true costs of serving a product to a customer, similar analysis might be used to identify the true costs of innovation for tailored and bespoke products.
In addition to tracking the progress, performance and cost of individual projects, the overall performance and cost of the development process can be tracked.
The potential benefits are as follows:
- An understanding cost and time of activities within the development cycle, and the impact of additional sub-processes, iterations, delayed decisions and u-turns.
- Improved ability to find right balance between speed to market, product features, quality and cost.
- More efficient and effective use of development resources.
- Increased likelihood of product success decisions when it comes to pricing, promotional spend and product mix/rationalization.
- Reduced cost to be recovered over shorter product life cycles.
In the same way that Cost to Serve enables the optimisation of the replenishment supply chain, the methodology can be used to unravel product development options and optimise the development process.
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- How to Implement and Enhance a Gate Process – Part 6: Summary and 7 Top Tips (includes links to the other articles in the series)
Insightful post with a unique focus on the use of cost to serve analysis in product development and launch as opposed to the identification of low margin customers and products in an effort to increase their profitability or abandon them altogether.