Due to the nature of our customers, and the requirements for confidentiality, we do not name our customers. However, should you wish to speak to our existing customer about the Magic Orange Solution, please contact us to request that we facilitate such communication

Delivering cost transparency in a large retail environment

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. This value includes every phase of ownership, from acquisition through operation, and includes the softer costs of change management that follows the initial acquisition, such as documentation and training.

In the retail space, it is therefore important to have a robust and repeatable system that enables the business to calculate the TCO of its IT, Logistics and Property costs. One particular customer in this vertical market needed a robust granular model to charge back these costs to more than 20 different brands. The requirement for doing so was new, and existing systems did not provide this capability.

In addition, the client also required a more accurate return on capital employed (ROCE) per brand, such as determining Earnings Before Interest and Taxes (EBIT) after allocations divided by capital, rather than simply EBIT divided by capital. Thus the retailer turned to Magic Orange to assist it with both an implementation and consulting services.

The customer had no cost transparency solution and no charge-back model to its various brands. What was required was both the right solution and the relevant expertise to introduce an effective cost transparency discipline into the enterprise.

In order for a cost transparency solution to be implemented, the retailer first required a complete product and service catalogue. We were able to assist the client to build this from scratch.

Furthermore, there was no existing model for the allocation of costs 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, education on how defendable and fair these drivers were, was also required as part of the implementation. Finally, the many disparate and distributed source data sets needed to be drawn together and this required the engagement of over 30 cost centre managers in the project.

Ultimately, the key demand from the customer was for a secure, robust and repeatable cost allocation solution and framework, one that provided a complete audit trail of changes and a BI front end that was capable of assisting in self-service for IT, Logistics and Property and Brand stakeholders.

A rapid delivery

The solution to these challenges was the implementation of the Magic Orange Cost Transparency Solution. The first phase focused on the customer’s IT & Logistics budget stack – an individual stack that nonetheless had a substantial budget. This phase was delivered in a mere eight weeks, despite being driven from a zero base.

As part of the project, Magic Orange created an entirely new product and service catalogue for the customer, as well as a new end-to-end service value chain. New drivers were also identified and mapped and, finally, a set of powerful BI analytics was delivered to all IT, Logistics, Finance and Business stakeholders across the enterprise.

Thanks to this new system, an accurate TCO of the IT and Logistics and Property Services items was established. In addition, individual brands received a pro-forma allocation of specific costs for the first time.

Magic Orange’s powerful Analytics (BI) tool also enabled customer stakeholders to answer any questions they may have had on a self-service basis. Reciprocal charging was also 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 to be loaded – such as a range of different budgets, actuals and forecast data – which assisted the retailer in making both strategic and tactical decisions.

Apart from its solutions, Magic Orange’s advisory capabilities and strong expertise in this field were critical, as the customer was moving into completely new territory with this and thus required a partner that had the skills to enable such a shift.

Magic Orange followed up the implementation with a period of education and evangelising, in order to ensure success. The company also introduced the technology business management (TBM) framework into the engagement, which made it much easier for the client to sell its allocation model to the 20+ brands that were required to utilise it.

The importance of the TBM framework to the overall project was such that it was introduced into the discussion right from the outset, while the ability to price both logistics and transport costs accurately was also crucial.

In the end though, the two biggest game changers for the retail client were the manner in which Magic Orange brought the cost, revenue and balance sheet together into ROCE, and the fact that the organisation was able to price the three different ways (cross docking, hold back and pass through) in which stock items were packed in the distribution centres. This valuable information can now be used by the customer to change the way in which items are ordered from suppliers, which will enable it to continue to optimise costs.