Cost to Serve – a fresh approach

Analysing a company’s cost to serve has been a recurrent theme throughout my career spanning multiple sectors – and with good reason. Performing a Cost to Serve analysis makes sense of what it actually costs to serve customers varying in both order size and geographic location, bringing valuable insights and opportunities for improvement. However, frequently the outputs are not then translated into action for the wider business.

What is Cost to Serve?

Often the first time that a company reconciles cost and operational information in a meaningful way, Cost to Serve analysis aligns annual volumes by customer and location with the cost of each operational activity required to deliver.

Typical outputs include:

• The cost of serving smaller customers (in volume and average drop size) is greater per unit than the cost of serving larger customers
• That for large customers with a range of store sizes (think supermarkets with convenience stores / forecourts alongside their large stores), the cost of serving the smaller outlets is far larger, per unit, than the larger outlets
• Customers with a higher proportion of delivery points that are further away from the distribution centres have a higher cost of service than those closer to the DCs

Developing the Analysis

Rather than focus on the fact that, for example, forecourt deliveries cost X times as much per unit as deliveries to hypermarkets, it would be of greater value to show what is driving the cost of the (relatively) high unit costs, and what could be done to help reduce them. 

With a review of the model, it might instead be possible to answer:

• What would be the impact of reducing delivery frequency on high unit cost outlets? Maybe not feasible for convenience stores, but potentially an option for more distant locations.
• How could fixed delivery routes help with reducing delivery costs? Could a series of milk rounds be constructed for smaller customers, with a ‘fixed’ volume per drop, thereby both speeding up the delivery time, and ensuring that a known number of drops per vehicle can be undertaken each day.
• What volume could be added to a delivery network (from complimentary brands) that could change the dynamic of parts of your delivery network and help reduce costs?

Vital in turning the conversation from ‘these are the problems’ to ‘these are the ways we can create a lower cost base – which shall we take to our customers first?’