What is a Cost to Serve?
When a customer places an order online or checks out their goods through the till, they’re not only paying for the item itself but the cost of all the ‘behind the scenes’ activity getting the item into the customer’s hands.
A Cost to Serve analysis makes sense of what it actually costs to serve customers, bringing with it valuable insights and opportunities for improvement.
Cost to Serve is one of the primary supply chain metrics and is used to assess and compare the performance of a company’s supply chain.
Calculating and monitoring your cost-to-serve is an important step in supply chain optimisation.
Areas of your supply chain to consider including in the calculation are:
- Warehouse activity: Cost of resources (people and automated solutions), MHE e.g. forklifts, rent, …
- Logistics: Vehicles, drivers, fuel, …
- Retail: Staff, rent, …
- e-Commerce: IT infrastructure, courier costs, …
- Management staff
- Returns processing and stock write-offs
However, every business is unique with different processes, a full process mapping activity is recommended in the first stage of calculating your Cost to Serve.
Typically, the Cost to Serve is given as a percentage of the cost of goods sold (CoGS). If the Cost to Serve is calculated as 9% this means that for every £1 sold, 9p of activity has happened in order to complete the sale.
How to do a Cost to Serve Analysis
Calculating a Cost to Serve consists of aligning the high-level costs captured by the finance team with the volume of units handled by each activity.
It is then easy to instantly identify high cost per unit supply chain activities which can be analysed for potential cost reduction opportunities. Another extremely valuable aspect of this modelling is to break down the Cost to Serve by categories valuable to making business decisions, for example:
- Sales channels (in store, online, drive thru etc.)
- Geographies: Countries, Regions, or even single stores,
- Product categories: Low-value high-demand items, awkward to handle items etc.
- Customer types
Cost to Serve modelling can be undertaken for businesses of every shape, size, and type, some of the categories listed above may not be of interest and therefore would be excluded from the model, likewise other key categories not listed above could be included.
What are the benefits of a Cost to Serve Analysis?
A Cost to Serve model makes it easy to identify the most and least profitable sections of the business and therefore where to focus attention on generating the greatest improvements.
It can be pivotal in turning conversations 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?’
Based on outcomes from a Cost to Serve model calculated on the categories listed above, businesses can start to answer valuable questions such as:
- What delivery solutions can we offer to still be profitable but also entice more customers?
- Which stores are the most profitable? Are there any learnings to be taken from these locations? Are there any stores that are unprofitable?
- Which product ranges should we look to extend?
- What would be the impact of reducing delivery frequency to stores furthest from the distribution centre?
Trym Consulting would love to help you build your Cost to Serve model, identify improvement opportunities, and/or assess the impact of various scenarios on your Cost to Serve.
Latest Cost-to-serve PROJECTS
Growth Forecasting for a National Pharmacy
Optimising E-commerce Returns for a Global Fashion Retailer