How to develop a high-level business case in SCM? (Part 1)
Have you ever been asked to develop a business case that requires the top management’s involvement? It could be about plans to increase market share, analysis of transportation trade-offs, possibility to open a new distribution center, etc. Whether your answer is yes or no, it’s totally worth reading this post, because I’m going to show you an example of how to build a strong business case in front of your company executives.
First, let’s have a look at the case description for a bike manufacturer located in the UK (see figure 1 above, made by the author).
The first step of designing a high-level business case is to determine the goal of the business case or project using the SMART* method. In this example, the goal is to gain top management’s approval of a market expansion plan by analyzing the trade-offs of two possibilities. The two possibilities are considered, which are (1) Remote shipping, and (2) Rent a manufacturing facility in Germany. To come up with these two options, here are the points that were considered:
- Market the UK: Actual and forecasted sales of market the UK => This is separately analyzed because the UK accounts for the biggest market share of company X. Based on ABC Analysis, this market is categorized as A.
- Market Germany: Actual and forecasted sales of market Germany => This is also evaluated individually as it has been the fastest growing market and has potential growth in the future. Other than that, it is classified as A market. Lastly, it is the backbone for the second recommendations.
- Existing markets: Actual and forecasted sales of other current markets, which are segmented as B and C markets.
- New markets: forecasted sales 2023 of new markets
- All markets: forecasted sales 2023 of all markets
- Current situation: Total costs (manufacturing & storing, transportation, and stock costs) of the manufacturing facility in the UK in 2021
- Solution 1: Remote shipping to current and new markets from the UK. Here we calculate the total estimated manufacturing & storing costs, total transportation costs, and total stock costs of 1 manufacturing facility in the UK. The figure is estimated because it includes new markets (in which we don’t have sales yet) and forecasted sales 2023.
- Solution 2: Rent a manufacturing facility in Germany. Here we calculate the total estimated manufacturing & storing costs, total transportation costs, and total stock costs of 2 manufacturing facilities in the UK and Germany in 2023. A sub-step is to calculate only the total costs of renting a manufacturing facility in Germany before combing it with the costs from the one in the UK.
- Scenario 1: Trade-off analysis of solution 1
- Scenario 2: Trade-off analysis of solution 2
It is highly important that all the cost factors used to develop the business case are similar in each option/ scenario. Looking at the example, when computing the total costs, all cost factors are manufacturing & storing, transportation, and stock costs. This ensures alignment, validity, and usefulness of the business case. Despite not mentioning, lead time is another key factor to be considered in the trade-off analysis, besides costs. Depending on your company, other factors can be taken into account, namely sustainability, legal aspects, service level, etc.
Now let’s move to the second step: Understand the figures. One of the most effective ways to do it is using Excel. To start with, place every bullet point into a separate tab in Excel. Some tabs have relatively similar templates and calculations, so I will only illustrate one as an example. The first three bullet points, which are now shown as three Excel tabs, share the same working ways. Below is an instruction with three steps on how to do calculations and logics for the tab “Market the UK” (Figure 2).
Figure 2. Business case example (made by the author)
In step 2 (Apply forecasting methods), in case you don’t know the method, please search for “seasonalized forecast formula using line chart/ LINEST excel” for detailed explanation. Besides, you can also try aggregate forecast, exponential smoothing forecast, etc.. However, in practice, you don’t have to compute all these figures manually (and you’re not able to do that with thousand products of your company). Instead, you can use demand forecast software.
I hope this somehow gives you an idea on how to build up a strong business case. Don’t forget to come back next week to find out how to create a trade-off analysis, together with tips and tricks when presenting a business case to top management.
Thank you for reading and please share if you find it useful!
* SMART = specific, measurable, attainable, realistic and time-bounding. This is a popular and effective method of formulating goals.
–It is a fictional case for training purposes only.—
Series Business case in Supply Chain Management
Business case in SCM (Part 3) – trade-off analysis.
The ‘Market expansion’ business case Part 2 – cost analysis.
Building the ‘Market expansion’ business case for a bike manufacturer.