How to develop a high-level business case in SCM? (Part 2)

Published by Ngoc Tran on

In the previous post, we have gone through an example of a high-level business case called “Expansion?” along with a few initial steps of how to build up the foundation for our case. This post therefore continues to discuss step 2, especially focusing on cost analysis: what are the cost components, and how to calculate them. Before starting, I highly recommend you revise the previous post for more thorough understanding.  

Continuing with step 2 (the application of forecasting methods, Figure 2 in the previous post), let’s quickly move towards the fourth bullet point “New markets” (see the previous post) where we’re going to determine sales forecast for new markets for the next year. On which data is your forecast based when you don’t have actual sales yet? One of the answers is that you can communicate with the product development team and the sales & marketing team in order to know the estimated market demand. Another way is to consult similar products which were sold in those new markets before. The business case “Expansion” applied the latter method, together with seasonalized forecast technique. After finishing calculating forecast for existing and new markets, combine them to get the whole forecast for all markets, which is the fifth bullet point. An important tip is the comparison of the following three scenarios: base case, best case, and worst case. This is due to forecasting risk which you want to minimize as much as possible.  

Establishing the forecast can give you an indication of your revenue forecast (units*price). This leads you to the next step: Calculate estimated total costs. In this business case, total costs of three scenarios are considered, which are the current situation, solution 1 and solution 2 (bullets 6, 7 & 8). It is essential to have the same cost factors (inbound costs, outbound costs, etc.) for all scenarios to be able to compare them. Let’s look at the template of total costs of the current situation below. 

Business case in SCM example Total costs of the current situation part 2-figure-2

Figure 1. Total costs of the current situation (made by the author)

As shown in Figure 1, inbound, manufacturing & storing, outbound and stock costs are typical costs in logistics, divided into lower sub-levels (see Legends). These typical costs cover costs of lower levels. 

To compute the numbers for the other two scenarios, you should use the same layout and cost factors shown in Figure 1. Then, consider changes in cost factors: Which one will be increased/decreased/stable? Since this case aims for market expansion, the first thing is to add the costs incurred from the new markets. Now, how about solution 1 “Remote shipping to existing and new markets from the UK”? It is expected that most of the costs will go up, especially transportation costs and the number of shipments. Regarding solution 2 “Rent a manufacturing facility in Germany and ship to all markets from Germany and the UK”, firstly you should calculate extra costs for the relevant products such as: 

  • Cost of production: fixed costs (e.g. rent), personnel costs, training costs, variable costs (e.g. operational expenses, carrying cost, hiring/firing cost, overtime cost, etc.) 
  • Cost of sales: costs of product improvement, costs of promotion

Then, use the layout in figure 1, add one or more columns for “Manufacturing facility in Germany” besides the one in the UK, fill in with the data you computed. It would make sense that some production and variable cost of the facility in the UK go down as the idea is to lower the capacity in UK and shift it to the capacity in Germany. Sales in German regions are also expected to rise significantly. For clearer visualization, you can find an illustration of the financial results of solution 2 below.

Business case in SCM example - Results of solution 2 - part 2 figure 3

Figure 2. Financial results of solution 2 (made by the author)

As result, you have the total costs of the three scenarios where you can quickly analyze the trend (up, down or stable) by highlighting the data in Excel for example.  

To sum up, the key lesson today is that we have learnt how to make a cost analysis for a business case, and how to use a general template for cost computation. Please note that there can be other cost components that are not mentioned as it depends on your organization or the type of projects. Therefore, feel free to use this template creatively.  

In the next post, as promised, I will show you a way to make a simple yet effective trade-off analysis and give you some tips when presenting a business case to top management.  

Thank you very much for reading and please share if you find it useful! 

*It is a fictional case for training purposes only.

Series Business case in Supply Chain Management


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