FINANCE & MANAGEMENT

COST MODELING

Ensuring more efficient Go-to-Market, Product Portfolio and Commercial Policy strategy through a deep understanding of costs at client and product level

What challenge(s) do our clients face?

ROI optimization at client and product levels requires granular cost modeling that can be difficult to implement and hard to sustain.

Businesses are in constant evolution and all organizations have created their own ways to monitor costs and profitability. Over time however, organizations have become increasingly complex; operating with wider portfolios, larger client bases, more service channels, and different Business Units, further complicating the competitive landscape. Often organizations turn to their GTM Strategy, Product Mix and Pricing Strategies to seek efficiency and ROI optimization but lack the means to trace the impact of the changes implemented.

From our experience, organizations face the same challenges across industries and geographies to trace costs and improve results. These may include:

  • Not operating at the necessary level of granularity: Setting the right allocation criteria to understand what drives bottom line profitability at a client and SKU level
  • Failure to truly reflect the Cost-to-Serve a client: Analyzing profitability within the current GTM model to identify distortions from discounts, product mix and execution times
  • Not evaluating the impact of production volume oscillation in product costs
  • Lack of systems or governance to guarantee a strong foundation of capabilities and tools: Ensuring that the allocation criteria, validation governance, and systems are in place to enable core financial processes such as Revenue Management, Portfolio Optimization and ROI

Without a sophisticated cost modeling process, organizations may struggle to map out and capture opportunities at product and client level, limiting the ability to improve the efficiency of commercial strategies and profitability.

How do we help?

We help organizations to deepen their understanding of the costs at a client and product level and have a more informed discussion on how to improve profitability

We use the principles of Activity Based Costing (ABC) to deliver our cost modeling projects to meet the specific needs of each of our clients. Most commonly, we support our clients in two areas:

  • Cost-to-Serve: Assessing profitability at the client level, to support Go-to-Market and Commercial Policy decisions.
  • ABC Modeling: Used to negotiate contract fees, assess performance at product level, and identify possible mix optimizations.

In both cases, we work with you to deliver:

  1. Financial simulator generating detailed P&Ls through a cube of channel, client, region, category and product angles or with specific views reflecting your needs
  2. Profitability analysis providing you with important insights from a granular view of performance and identifying opportunities to support decision-making
  3. Assumption book detailing how the simulator was built, with the main assumptions (allocation criteria) to keep the process alive internally after our project is finished, and support future waves.
  4. Optional ‘What-if scenario’ simulation built into the tools so the company can analyze the impact of the proposed solutions

What are the benefits?

In clients across all industries we have seen tangible benefits resulting from Cost Modeling improvements:

Cost to Serve:

  • Empower decision makers, increase client contribution margin: Providing a clear understanding of costs and performance at client level, enabling decision makers to adjust service models effective
  • Decrease costs: Identifying negative margin clients and main “offenders” cost lines, implementing targeted actions
  • Improve product mix strategy: Using granular cost information to optimize product mix and drive efficiency

ABC Modeling:

  • More effective decision making: Deeper understanding of value-adding activities, improving efficiency and quality of decisions
  • Minimize distortions in product costing: Removal of arbitrary allocations of indirect costs
  • Increase efficiency in business processes: Knowledge of the true cost of a product or service, and visibility of specific drivers

How does it work?

We apply a proven methodology and our pragmatic learnings to your reality

We are convinced that our clients know their business better than anyone else. At the same time, we provide outside experience, proven methodologies and cross-industry benchmarks that can support our clients in developing these Cost Modeling assessment with speed and accuracy.

To build up a cost modeling tool, we take a step by step approach that ensures we (i) understand you and your business, and (ii) develop a tailored solution grounded in reality – applying a pragmatic wisdom to discuss cost allocation, splits and trade-offs and (iii) ensure a detailed hand over for the company to keep the model alive and support future cost modeling improvements. This typically translates into 6 project phases:

  1. Baseline: to set up a more granular view of cost modeling, we work alongside the different departments to define the adequate cost breakdown in a ‘bottom-up’ approach, considering the unique client model and challenges to be addressed.
  2. Design of the model: we define with our client’s team the allocation criteria of each cost pool per product or client, ensuring to reflect business reality while reconciling management and accounting information.
  3. Allocation of costs: we build the tool according to the model designed (for Cost-to-Serve a new P&L format is built to isolate the most relevant costs).
COST TO SERVE STANDARD P&L Warehousing Freight Contracts On-Invoice Promo Off-Invoice Promo P4P Returns Invoice Taxes COGS Logistics Sales Store Activation Trade Marketing Marketing G&A Gross Revenue Net Revenue Gross Margin Margin to Serve EBITDA
  1. Data analysis: we carry out profitability analysis comparing the results to internal benchmarks (different clients, different products etc.) to identify opportunities and draw more informed conclusions. In this project the objective is give a tool for the company to pinpoint the problem, not to concretely propose a redesign / solution.
  2. Validation of results: after constructing the cost models we conduct a series of analyses and sit with managers to ensure their understanding of results and possible clues and root causes. We evaluate with different professionals the results of the calculations and correct if necessary (it can be common to find non-recurring costs that have to be segregated and are not documented accordingly)
  3. Documentation and hand over: ensuring that all the data used and process to update the tools are documented and well explained to company professionals.

The company can use our design to implement automatic systems in the future, but in our projects we construct the tools (using Excel or Alteryx / Python and other programing languages) to speed the process and also reduce investments for this first concrete final product. We can also make a formal hand over to a System developer to assure the same criteria used in our models are implemented in a new system.

SUCCESS STORIES

CHALLENGE

An international health, beauty, and personal care manufacturer with a large portfolio of brands was facing shrinking market share and profitability. This reality called for a redesign of its Go-to-Market Strategy, requiring improved visibility on the current profitability per client, channel, product and category in order to take the right tactical and strategic repositioning decisions.

APPROACH

As part of the wider Go-to-Market project, Integration built a Cost-to-Serve (CTS) simulator alongside the client’s finance team, reconciliating costs at the client-product level in order to have a clear vision of the Margin to Serve and EBITDA contribution of each one.

This simulator was built with a detailed breakdown of ‘Gross-to-Net’, COGS, Logistics, Commercial, Trade Marketing and Marketing costs, allowing to map best and worst performers among their clients and product categories, as well as identifying key performance levers.

The simulator was built four-hands involving each area responsible for each line of the P&L, gathering internal data from different systems, and making field research to gather real-life information (e.g. time spent per category by the merchandiser team).

RESULT

This detailed cost vision per client and category allowed the client to define both short-term actions, such as client transfer from direct to indirect coverage or merchandiser coverage, as well as more structural actions such as redefining the product mix per channel to improve the overall profitability.

Furthermore, a new process was developed within the client to ensure that the CTS be replicated after the project and to capture its benefits in perpetuity.

CHALLENGE

A national healthcare B2B distributor lacked visibility on how costs were consumed beyond its Gross Margin along its supply chain for each client, damaging their profitability tracking, and capability to take effective supplier and client decisions.

The main challenge in measuring the profitability at client and supplier level was driven by the different sales models that existed, involving the industry sales team using the distributor as a Logistic Operator, the field sales force of the distributor, the telesales team of the distributor and public contracts with a very singular dynamic.

APPROACH

Working alongside the FP&A, logistics, purchasing, and commercial teams, Integration mapped the different model rules, reconciling the Margin to Serve per product and client depending on the different sales models, and therefore allowing for model adjustments and renegotiation to improve profitability.

These rules were mapped for 20K SKUs and several hundred suppliers, in the different regions of the country due to the national coverage of the distributor, therefore creating a valuable cube of information for the client.

RESULT

As a distributor, the client operated with a thin margin and this detailed visibility of costs was game-changing in order to protect the company’s profitability, beyond simply the Gross Margin visibility. This visibility allowed for a renegotiation of several Logistic Operation contracts, increased visibility on the Logistic Operation remuneration and cash flow, and optimization of the supplier list, all in all improving the client’s profitability.

CHALLENGE

A national FMCG company in Argentina was facing profitability challenges and needed to identify key initiatives to improve its margins across different levels of the organization, particularly regarding Portfolio, Commercial policy and Go-to-Market. Lack of detailed P&L information with proper cost allocation meant that the organization was depending on manual, difficult to replicate processes to make decisions.

The finance area decided to transform the way this company viewed the P&L; and they asked Integration to help them become a solid business partner to the organization by bringing detailed structured financial information that was standardized, accurate and easily accessible.

The main challenge though was to build accurate P&L information for a large customer base with varied operating and distribution models; defining proper cost allocation drivers that reflected the reality of our client’s operation.

APPROACH

Working together with FP&A, Manufacturing, operations and commercial teams, Integration built a complete book of cost allocation criteria based on ABCosting methodology and built a database to allow the review of detailed P&L information to cross all combinations of more than 60K clients and more than 200 SKUs.

This allowed us to build detailed dashboards, analyze and detect focused profitability opportunities across the P&L by reviewing variances by portfolio, region, channel, service model etc.

The final stage of the project aimed to implement this ABCosting methodology and make available this maximum level of detail. To do this we defined the process of gathering information, processing and displaying it live within the client’s current systems and processes.

RESULT

Two main results came from this project:

  1. We were able to identify with our client’s team more than 10 strategic profitability opportunities that could be deployed across different areas of the organization immediately.
  2. Our team was able to implement, deploy and deliver training in a very short period of time, allowing for the analysis to be translated into a quarterly routine that will continue to feed the company’s key strategic processes and projects with important information.

INDUSTRY EXPERIENCE

Integration has had the pleasure of working with many regional and international consumer goods companies across Food & Beverages, Personal Care & Homecare, as well as organizations in the Pharmaceuticals, Distribution, Real Estate, Energy, and Natural Resources.

Working across continents (South America, North America, and Europe) our professionals have developed an understanding of the market dynamics, best practices, and client/consumer needs across geographies as well as industry segments. This allows us to bring robust and customized solutions to our clients that take into consideration the internal and external context.

TALK TO US

Carolina Flores

Since 2010 Carolina has been working in our Finance & Management practice, helping our clients across industries achieve important transformations. She has often been involved in projects of large and international scale supporting organizations to achieve their financial objectives through efficiency programmes, Organizational Structure changes, Synergy Evaluation and PMI to name a few.

Hugo Ribeiro

Hugo is a Founding Partner at Integration and can count on more than 30 years of experience in consulting. Hugo, who holds a post-graduate degree in Business Administration from Harvard University, is a senior specialist in the area of Finance & Management and frequently leads projects in Organizational Structure, Strategic Planning, M&A, Improvement of Productivity, [...]

Jorge Gomes

Jorge is a highly experienced professional in our Finance & Management practice having joined Integration in 2008. Jorge has travelled to countries around the world in support of our clients, leading projects related to revenue management, strategic planning, M&A and more. He has a well-rounded experience having completed multiple projects for clients across sectors including [...]

Julian Lempp

Julian is a Manager within Integration's Munich office. He has experience both within consulting and Industry, having previously worked for a leading German consultancy and as a business development manager within an industrial goods manufacturer. Whilst he has experience across many project types, his specialism lies in supply chain, having undertaken numerous consulting projects for [...]

Lucas Tavolaro

Lucas joined Integration in 2011 and found his home in our Finance & Management practice. He has supported our clients in the creation Strategic Roadmaps, M&A synergy evaluations, Go-to-Market strategies, Cost Efficiency and Strategic Sourcing projects. His experience includes sectors such as Consumer Goods, Construction & Property Development, Education, Private Equity, Oil & Gas, and [...]

Luis Bernal

Luis is a Manager in the Marketing & Sales practice. Originally from Columbia, Luis is an entrepreneur at heart, and has worked in several start-ups in Colombia, receiving his MBA from IPADE. He has accumulated international consulting experience whilst working across the United States, Mexico, Caribbean and Central America, Colombia and Brazil in industries such [...]

Quentin Girard

Since 2013 Quentin has worked in our London and São Paulo offices specializing in Finance & Management projects. He has led engagements across a wide array of countries in Europe, South America and Central Asia. His primary experience includes projects related to Route to Market, Cost Efficiency, Cost-to-Serve and Strategic Roadmap Design, in sectors such [...]