Cost Knowledge: A Foundation for Improving Supply Chain Relationships

Imagine the reaction of your company's sales force when you tell them they are losing money selling to Wal‐Mart. To counter their objections, you explain the final delivered product cost exceeds the revenue generated by Wal‐Mart sales. The scenario may seem unrealistic based on the sales volume of mass merchant discounters such as Wal‐Mart, Kmart, and Target; however, manufacturers frequently do not know the cost to serve these merchants or the cost of the functions being shifted backwards in the supply chain. Additional services increase the cost of serving the big retail accounts and jeopardize supplier profitability. While it is understandable that retailers want to lower their costs by eliminating tasks they perform, retailers also need their suppliers to obtain a reasonable margin to ensure the availability of product from a high quality supplier. It is necessary to ensure that selling to these large retail accounts is profitable by determining the costs of serving them.