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Understanding cost-to-serve in the supply chain operations

Do you understand the true cost of serving each one of your customers? 

To determine a customer’s actual value to your business, you need to know the cost of serving that customer. Not all customers are equally profitable, taking an “average” approach to your supply chain costs is misleading. 

What is cost-to-serve?

Cost-to-serve is an accounting method used to calculate the total cost of providing goods and services to a customer. It enables an organisation to gain cost visibility on which to base strategic decisions.  Cost-to-serve includes costs such as manufacture or assembly, storage, handling, packaging, delivery, and customer service. The handling of each product and the sales channel used create differing cost drivers within the supply chain.  Cost-to-serve analyses measure the profitability of servicing a customer, i.e. the value of that customer to the business.

The benefits of cost-to-serve analysis

Knowing your cost to serve each customer means you have the opportunity to improve any activity in the supply chain that may be incurring a loss or where the process is inefficient. You can compare the cost of serving different customers as well as track the cost of serving a given customer over time. Retaining customers that can be made profitable is better than searching for new customers.  The overall benefit of the cost-to-serve approach is the perspective gained, not just for day-to-day management but for future innovation. Cost-to-serve analyses can be used to identify areas of inefficiency and waste and to help inform strategic decisions.  Insights will provide an understanding of how to improve customer service and how to optimise pricing models.   

The power of data

Without data, you may not be able to accurately track customer-related costs, identify areas of inefficiency and waste, or compare the cost of serving different customers. The sheer volume of data cannot be handled manually with spreadsheets. Understanding the cost drivers in the supply chain is made easier with the aid of technology. hCloud-based software tools provide fast and accurate analyses that provide information on which to make informed decisions. Inaccurate data can lead to inefficient pricing strategies and reduced profitability The goal is to have fast, visible, and reasonably accurate (not 100%) data without delving too deep into the detail which may lead to analysis paralysis. The cost-to-serve approach aims for a balance between providing useful, actionable information and limiting the use of resources, time, and effort in data collection.  c

Focus on the customer

Knowing your cost-to-serve per customer lets you decide on your approach to sales and revenue. A key customer that is profitable overall may be unprofitable for some items but you may decide to accept that. If your profit from that customer starts to decline, the data can reveal what has changed and action can be taken. 

Sustainability and the cost to serve

The cost-to-serve approach can support a range of sustainability initiatives. Pricing can be tailored to match customer needs while adhering to your own sustainability goals such as reducing energy use and limiting waste. Analyses can also be used to compare the cost of serving customers with different sustainability requirements, whether environmental or social. 

Impact on profitability

By understanding the costs associated with serving different types of customers, you can adjust your pricing strategies to provide the best outcomes. Profitability is increased through identifying areas of inefficiency and waste and by providing insights, for example, into seasonal peaks of customer demand.  Logistics costs are often a major contributor to the overall cost-to-serve. Setting prices without understanding the logistics costs has a direct effect on profitability. An expensive transport solution (e.g. courier) for a low-margin item makes no sense.

Best practices include:

1.

Having a clear understanding of the costs associated with serving each customer.

2.

Establishing an accurate system for tracking and recording customer-related costs over time.

3. 

Comparing the costs of serving different customers.

4.

Identifying areas of inefficiency and waste.

5.

Adjust operations and pricing strategies as circumstances change.

6.

Selecting the right partner and software solution

There are some potential risks to assuming that there is a “blanket” cost to serve your customers. You may offer a high level of service to a key customer without considering the overall cost.  It is possible to sell to customers at a loss if you do not have access to reliable data. Understanding the value each customer brings using this holistic approach will ensure business continuity. Cost to serve means adding in all costs: warehousing, freight, customer service, sales, quality assurance, and product development. All relevant costs including the cost of returns must be included.  

Call to action

SCCG has a history of helping clients develop a detailed understanding of how Cost-to-Serve, functions as a prerequisite for any organisation looking to manage its profitability.


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