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Cost to serve is a method to drive understand of the logistics cost to serve at the level of customer / product interactions. This also works well for retailers – substitute the word ‘store’ for ‘customer’.
While businesses usually have an overall understanding of logistics costs, they are often not able to express these for a particular customer, product, or group of customers / products.
Achieving this can allow the business to optimise profitability by effective targeting of cost reduction initiatives, renegotiation of commercial terms and route to market changes.
Commonly used metrics such as logistics cost per unit, or cost as % of sales, do not differentiate adequately between customers / products. Following the cost to serve analysis, the logistics cost to serve each customer and product is known. This reveals the hidden profits and hidden losses behind the overall profit.
How does the model work?
The model works by breaking down all the logistics activities and assigning cost drivers to them. The activities and associated resources / costs are attributed at customer / product level using an activity based costing methodology. The model takes account of the different activities required at quite a granular level – hence we can build back up to costs by customer, customer group, geography, product, product group etc. with confidence that the costing reflects the resources employed.
What can you change?
Focus cost reduction initiatives on to unprofitable business areas – e.g. look to reduce delivery frequency to high cost to serve groups of customers, remodel the distribution network to reduce costs, or move the high cost customers to a distributor model.
Enter commercial negotiations armed with a clear understanding of the cost to serve a particular customer type or product group. Offer a tailored price to service model based on known cost to serve – e.g. discount for full pallet orders.
Go Supply Chain has produced tailored cost to serve models for customers in retail, food and non-food manufacturing. The models are well structured and we work closely with your team in development and handover.
Cost to Serve Modelling Considerations
- Are some of our customers unprofitable?
- What do the unprofitable customers have in common?
- What can we change to reduce the cost to serve for high cost to serve customers?
- Can we tailor our pricing to encourage positive customer behaviours?
- Could we be more competitive in some areas?
- Are some of our products unprofitable? Which ones?
- Can we target more business from low cost to serve customers and products?
- Assuming a blanket cost to serve per case or as a % of sales
- Expanding the business in high cost to serve areas, reducing profitability
- Giving a very high service level to customers without recouping the cost
- Negotiating prices without knowing the cost to serve, making unprofitable deals
- Losing the most profitable sales to competitors who understand the cost to serve
- Unwittingly selling and promoting products that are not profitable