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Cost to Serve Modelling

Cost to serve is a predominantly process-driven financial analysis used to calculate customer account profitability against actual business activities; when overhead, and service costs are also taken into consideration.

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. Commonly used metrics such as logistics cost per unit, or cost as % of sales, do not differentiate adequately between customers / products. 

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.

However, having this knowledge can allow businesses to achieve optimum profitability by effective targeting of cost reduction initiatives, renegotiation of commercial terms and route to market changes.

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?

Cost savings can be made, by focussing on better managing unprofitable business areas – whether it be reducing the frequency of deliveries to high-cost-to-serve groups of customers, remodelling the distribution network to reduce costs; or moving high-cost-customers to a distributor model.

These cost reduction initiatives can enable clients to enter commercial negotiations armed with a clear understanding of the cost to serve a particular customer type or product group.

Our specialist consultants offer a tailored price-to-service model based on known cost to serve –for instance – discount for full pallet orders. Go Supply Chain has produced tailored cost to serve models for customers in retail, FMCG and Non-FMCG. 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?

Potential Risks

• 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

International Supply Chain Considerations

  • What is the right supply chain infrastructure (e.g. hub locations)?
  • How do we achieve supply chain security?
  • What international freight solutions are available?
  • Are the rates we are paying competitive?
  • How do I mitigate unexpected freight cost increases?
  • Can we reduce or eliminate our customs duty liability?
  • Are we using the correct Incoterms?
  • What’s the best way to pay suppliers and mitigate currency risks?
  • Are we fully compliant with all relevant laws and regulations?
  • Should we go for Authorised Economic Operator (AEO) status?

Potential Risks

  • Poor service to international customers
  • Loss of competitive advantage
  • Shrinkage in the global supply chain
  • Too slow to market
  • Unnecessary costs incurred in customs duty
  • Working capital tied up in duty and VAT
  • Currency movements reduce profitability
  • Prosecution for non-compliance
  • Goods are held up at customs, impacting customer service