Look at your P&L closely and you will find it in the first two lines. After sales is the cost of sales. And their difference is the gross profit. So what is the big deal? Big deal is that cost of sales determines the gross profit and gross profit is the starting point for the famous bottom-line.
Cost of sales has aliases. It may be called cost of goods sold, cost of products, cost of products sold or something else similar in connotation. That is not important. What is important is what constitutes the cost of sales. Here are some explanations from the annual reports:
- From P&G’s annual report 2009: “Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacture of product, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity.”
- From Wal-mart’s annual report 2009: “Cost of sales includes actual product cost, the cost of transportation to the Company’s warehouses, stores and clubs from suppliers, the cost of transportation from the Company’s warehouses to the stores and clubs and the cost of warehousing for our Sam’s Club segment.”
- From Target’s annual report 2009: “Total cost of products sold including Freight expenses associated with moving merchandise from our vendors to our distribution centers and our retail stores, and among our distribution and retail facilities; Vendor income that is not reimbursement of specific, incremental and identifiable costs; Inventory shrink, Markdowns, Outbound shipping and handling expenses associated with sales to our guests, Terms cash discount, Distribution center costs, including compensation and benefits costs.”
Typically, almost all the components of cost of goods sold (COGS) fall within the scope of supply chain processes. COGS also makes the largest part of company’s costs. The COGS compares to 50% of 2009 sales for P&G, 76% for Wal-mart, and 70% of sales at Target for FY2009. Therefore, if you had to start looking at reducing costs, COGS fits the bill nicely. This is the largest pie of expense in an organization and even a small reduction in this will naturally generate a large impact on the firm’s bottom-line. Following are some of most common expenses included in the COGS and the supply chain process that can potentially optimize it.
So who is your CFO’s best friend? If the answer is chief supply chain officer (CSCO), you are already ahead of the pack. However, AMR reports that from about 90 organizations that they surveyed, only 38% of respondents identified a chief supply chain officer (CSCO) or equivalent executive vice president as their highest ranking official. Furthermore, of the 38% that stated they had a CSCO or equivalent, only 33% of them report directly to the CEO. This means only about 12.5% of the organizations they surveyed have a CSCO that reports directly to the CEO. (Read the AMR article: Driving Supply Chain Transformation Through the Chief Supply Chain Officer).
Perhaps, time to rethink the organization!
© Vivek Sehgal, 2009, All Rights Reserved.
Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.