How to develop a high-level business case in SCM? (Part 3)
Previously in Part 1 and Part 2, we have learnt detailed steps of building a high-level business case via studying a business case example for supply chain management (see Figure 1 above). As promised, in this post, I will reveal a simple yet effective way to create a trade-off analysis and give you tips for presenting a business case to your top management. Before starting, for those who have been following these series of posts, please refresh your mind by re-reading the previous steps. For those who read this blog the first time, I highly recommend you start reading from the beginning via this link before diving into this one.
Let’s continue with the last two bullet points in Part 1 – “Trade-off analysis of solution 1 & 2”. A trade-off analysis is a comparison between distinct scenarios with the aim of determining the most suitable option for your situation. In logistics, it is common that trade-offs in transportation take place, for example, means of transportation meet your priority in terms of speed, sustainability, etc. For this business case example, two scenarios (solutions) are compared with the current situation to see whether the two solutions provide a better result than the current situation, and if yes, which one has a more positive outcome. The process of creating this trade-off analysis is as follows.
#1: Play with the big numbers
Basically, you compare the total revenue, total cost, total gross profit, market coverage and lead time of the current situation against outcomes of solution 1 and 2 by gathering all information and calculations resulted from the previous steps (please refer to Part 2) in one place. Highlighting changes: green = positive change, red = negative changes, yellow = changes that can still be improved, lying between red and green. Then, create two graphs differentiating total revenue, cost and gross profit of (1) current situation vs solution 1 and (2) current situation vs solution 2. Below is an illustration of how these sub-steps look like (Figure 2).
Figure 2. Current situation vs solution 1 and current situation vs solution 2 (made by the author)
The reason why we chose to show the outcomes in big numbers is that this is what the top management cares about if you want them to listen to your proposals. This analysis should be shown in the presentation for top management, preferably in one page (slide) for clearer and easier comparison.
#2: No gain, No lose
In order to strengthen our business case, it is vital to provide realistic figures and facts. One of the ways to do so is to find out the breakeven point, where total revenue and total cost are equal, meaning that you gain and lose nothing. To determine the breakeven point, you need fixed costs, selling prices per unit and variable costs per unit. Let’s have a look at the figure 3 below where the breakeven point of solution 1 is computed. The same procedure can be applied for solution 2.
Figure 3. The breakeven point for solution 1 (made by the author)
#3: Pros and cons
Obtaining all the figures is not enough. You need to understand the meaning lying behind them. Let’s investigate the pros and cons of solution 1 “Remotely shipping from the UK to current and new markets”. Before continuing reading, please take 1 minute to brainstorm the ideas yourself… So, what are the benefits of solution 1 compared with the current situation? More market coverage, boost in revenue (almost 70% growth), easier to control and implement, and lowest fixed costs are some major advantages. However, this comes along with certain drawbacks, namely higher transport costs, longer transport = more risk, the UK is not belonging to EU, high greenhouse gas emissions, etc. A presentation tip here is that you should not say out loud specific figures like 62,2%, but you’d better present it as “more than 60%”. The same goes for presenting total revenue and costs (e.g., €328.675.000,50 can simply be written and spoken as € 328M). Another tip is to be consistent with the illustration of your numbers. For example, if you follow English rule for numbers, then use all commas to separate groups of thousands and a period as a decimal separator.
Moving towards solution 2 “Rent a manufacturing facility in Germany” (again, please take 1 minute for brainstorming), the advantages are (1) shorter lead time, (2) transportation costs lower than solution 1, (3) less transportation risks, (4) more market coverage, and (5) lower greenhouse gas emissions. Nevertheless, the company may face with potential hiring/firing costs, insufficient country-wide knowledge, and language barriers.
#4: Are we all happy?
This step reminds you of analyzing the trade-offs from several department’s views on the changes. Not all changes positively affect everyone because they need to get themselves familiar with a new way of working. Looking from other departments’ views can help you to come up with a more customized implementation plan for each department. In the example, solution 1, sales team will probably be happy simply because they can sell more. Same goes for Finance (ROI is expected to go up) and HR (enjoy working with new people). In contrast, Production, Inventory and Transportation teams may be upset as they suddenly have more burden on their shoulders while logistics is already chaotic. Regarding solution 2, it seems that most of departments can benefit from the change. Sales team, especially for German region, will be super satisfied as they can sell more, be more flexible and delivery reliability is more likely to rise. The higher ROI is, the happier Finance team is. Production, Inventory and Transportation teams may also be pleased since they can reduce capacity pressure in the UK side and logistics costs can be considerably reduced. Though, settling down in a new market could bring lots of unforeseen risks, so it is important to be realistic by, for example, calculating breakeven point and performing forecasting risk analysis.
Thank you 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
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.