Sharing the magic of cost transparency

When it comes to determining total cost of ownership (TCO), it is vital for organisations to be able to place a single value on the complete lifecycle of a capital purchase. In the retail space, this means implementing a robust and repeatable system that enables the business to calculate the TCO of its IT, Logistics and Property investments.

As one of South Africa’s largest retailers, the Foschini Group (TFG) found that the size and complexity of its businesses required a particularly robust, granular model to charge back the shared service costs for its various brands.

The Foschini Group currently offers an impressive portfolio of 28 retail brands covering clothing and footwear (including brands such as Foschini, Markham, Exact and Due South), jewellery (Sterns, American Swiss, Mat &May), sportswear (Sportscene, and Totalsports) and homeware (@home, @homelivingspace) and retails through over 2 600 stores across sub-Saharan Africa.

It was essential for TFG to gain visibility into a more accurate return on capital employed (ROCE) per brand, such as determining Earnings Before Interest and Taxes (EBIT) after shared services cost allocations for each of the 28 brands, rather than relying on this metric at a consolidated Group level alone, explains Marlize van der Westhuizen, Head of Finance: Infotec and Logistics Divisions at TFG.

“Since TFG had no real cost transparency solution and a very limited charge-back model to its various brands, the group clearly required not only the right solution, but also the relevant expertise to introduce an effective cost transparency discipline into the enterprise. For this, we turned to Magic Orange, which was able to assist us with both consulting services and the actual implementation of the chosen solution,” she says.

“The first requirement was to create a complete product and service catalogue, which the Magic Orange team assisted to build from scratch, based on relevant business input from the various areas in scope. Furthermore, the existing models for the allocation of costs were very limited and not consistently based on operational drivers. This meant that every product and service required a driver to be sourced and incorporated into the Magic Orange model. In addition to the development of these drivers, the implementation included training ensuring employees understood both the nature and fairness of the drivers.,” explains Malcolm Stewart, Business Development Manager at Magic Orange.

“The first phase focused on the customer’s IT and Logistics budget stack – an individual stack that nonetheless had a substantial budget. This core model was delivered in a mere eight weeks, despite being driven from a zero base,” Stewart states.

Van der Westhuizen adds that reciprocal charging was properly modelled and catered for, and fully loaded and accurate TCOs for products and services across the organisation were also made available. Finally, scenario modelling was also implemented, which enabled multiple scenarios, including a range of different budgets, actuals and forecast data, to be loaded. This will assist TFG in making both strategic and tactical decisions.

“In the end though, the two biggest game changers for us were the manner in which Magic Orange brought together the cost transparency and a credible recharge model based on consumption of services opposed to just a cost allocation model. This will further assist us in optimizing costs and an important step to calculate ROCE at a brand level. The Magic Orange team fully delivered on our challenges and exceeded our expectation in the way their experts understand and care for our business success,” concludes van der Westhuizen.