04 Jan 2023 Supply chain management: Protect profits with total cost awareness
Authored by RSM US LLP, January 04, 2023
For companies that rely on global movement and sourcing of products, the undeniable permanence of supply chain impairment and disruption requires greater resiliency and flexibility in their supply chain. By implementing a broader, data-driven approach to managing supply chain changes in real-time, your company can quickly and thoroughly consider strategic choices, such as price changes, alternative suppliers, or changes to the overall manufacturing and distribution network—ultimately protecting profit margins.
RSM helps organizations take control of their supply chain through a multifaceted management strategy. Central components include:
- Understanding the total landed cost of products, including taxes, currency fluctuations, and other costs related to the movement of goods across borders
- Considering costs related to product life cycle, intellectual property, and cost to serve
- Deploying methodologies and tools that can quickly enable decision-making and scenario planning for variables such as landed cost alterations, physical network movements, and alternative sourcing
- Implementing processes to provide timely and accurate data, and to enable artificial intelligence and machine learning predictive analytics to better forecast demand and potential disruptions to supply
- Crystallizing real-time visibility into supply chain attributes using business intelligence software—e.g., to provide key metrics around the status of inbound supply and net margin performance across various dimensions—which enables timelier and better-informed decisions
Maintaining profit margins requires an understanding of the total landed cost—and that understanding depends on insight into landed cost changes.
Understanding total landed cost
Without understanding the total landed cost of products, you are flying blind. When an organization struggles with margin erosion, its management teams often are unable to pinpoint why. They may have a hypothesis, but they cannot confidently understand or bridge the factors influencing lower profitability. To some extent, this is not surprising.
Consider the variables that commonly challenge our middle market clients:
- Shifting product and customer mix
- Cost increases on materials, purchased goods, freight and labor
- Disruptions in supply
- Currency and commodity movements
- Changes to customs, duties, value-added taxes and tariffs
Maintaining profit margins requires an understanding of the total landed cost—and that understanding depends on insight into landed cost changes. Also of crucial importance is your ability to assign and obtain costs to the lowest level possible. Significant costs—e.g., purchase price and other variances and adjustments—should not just be booked to a general cost of goods account.
Supporting your management with an enhanced understanding of margin details across dimensions like product, customer, and market can lead to transformational insights and strategic pivots. It is crucial that your company’s landed cost analytics capture the changes that often transpire in the cost buildup process and accurately reflect all costs incurred along the chain.
Key data sets for analyzing total landed cost include:
- Product source costs (inclusive of all direct material, labor, and overheads for manufactured products) and any applicable inbound freight costs
- Costs of cross-border movement of goods
- Value-added taxes, or VAT
- Customs and duties assessments
- Sales and use taxes in the United States
- Transfer pricing information related to the movement of goods between affiliated companies
- Currency fluctuations
- Variances associated with direct costs (e.g., standard costs vs. actual) and potential variances in hedging activity that may not completely offset what was actually purchased
When your organization implements processes to test the quality of your supply chain data, you strengthen your ability to accurately capture the global information that heavily affects your supply chain, which enhances your understanding of total landed cost.
Many RSM clients, for example, use a standard costing methodology for most of their procured products. Making sure processes exist to regularly evaluate cost changes and potential updates of standards is very important in a hyper-inflationary environment. Waiting too long to update standards and delaying decisions around pricing and other potential mitigating activities ultimately leads to lost profit.
RSM empowers companies to accurately determine the total landed cost of their imported goods, with confidence that their systems will be responsive to global changes. We implement leading practices and technologies, and we train people on the best practices we see in the supply chain ecosystem. The result is a holistic capability across the global supply chain.
Given the growing permanence of supply chain impairment, the correlation between supply chain resilience and profitability supports investing the time and money in stronger processes and technology that deliver real-time and predictive analytics.
Deploying tools to enhance flexibility
A lag in understanding cost increases or recognizing product shipment delays can lead to permanently lost profit margins. Visibility and agility are crucial for combating such common problems.
Scenario-planning tools that capture and analyze key supply chain data with the most real-time data available will provide management with the information needed to quickly react to supply chain changes. For global supply chains, this is often not easy or even possible. The complexity in gaining real-time visibility from the supplier to port of exit, vessel, port of entry, and then the inbound OTR (over-the-road) carrier is typically unrealistic.
That said, a combination of real-time data or statuses and costs, when available, and predictive analytics when real-time data is not available, can often be a viable solution.
Many organizations do not have these tools, likely because the variability of timing and costs associated with inbound supply have never warranted the effort to adopt them. Now, however, advances in data availability due to the overall market demand on this topic have made it more realistic.
Of course, every organization wants its investments in technology to be highly cost-effective. Given the growing permanence of supply chain impairment, the correlation between supply chain resilience and profitability supports investing the time and money in stronger processes and technology that deliver real-time and predictive analytics.
RSM helps companies work through cost-benefit analyses for such investments, and we assist with instituting processes and technology to carefully review all supply chain inputs. We provide organizations with data analytics capabilities that capture both internally and externally generated data points, enabling them to anticipate supply chain impairments and react quickly to change.
Poll question 1
What are your biggest concerns for the remainder of 2022?
- 36% – Inflation
- 7% – Supply chain disruptions
- 4% – Geopolitical conflict
- 9% – Talent
- 44% – All of the above
Poll question 2
When are global supply chains expected to normalize?
- 12% – Q2 2023
- 22% – Q3 2023
- 22% – Q4 2023
- 36% – Beyond Q4 2023
- 8% – None of the above
Poll question 3
Please select the sentence below that most accurately reflects your company’s current situation:
- 23% – My company is actively considering changes to both our sourcing and our manufacturing strategies.
- 24% – My company is actively considering changes to our sourcing strategy.
- 8% – My company is actively considering changes to our manufacturing footprint.
- 46% – My company isn’t exploring changes to sourcing or manufacturing.
The takeaway: Data is key to resilience
Protecting profit margins depends on data processes designed to provide timely insight into supply chain cost variables. Whether the data reflects product source costs, taxes on the cross-border movement of goods, currency fluctuations, or numerous other factors, your organization will be more resilient with technology that enables you to see—and even predict—changes.
Fortunately, such digital solutions have become more realistic for companies as access to data has improved. With the increasing permanence of supply chain impairment and disruption, these solutions and processes are becoming central to success.
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This article was written by Mike Fletcher, Casey Chapman and originally appeared on Jan 04, 2023.
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