What is 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.
Calculating 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 a cross function activity that has the power to improve communication between business units.
Cost-to-serve can be used as a primary supply chain metric to assess and compare the performance of your business’ supply chain.
The value of a cost-to-serve analysis
With a cost-to-serve analysis, it is far easier to identify high cost-per-unit supply chain activities, which can then be analysed for potential cost reduction opportunities.
Another extremely valuable aspect of this modelling is the ability to break down the cost-to-serve by categories, 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.
This insight can prove especially beneficial when making big strategic business decisions, or at times of rapid growth.
Other areas of your supply chain you could include 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.
Cost-to-serve modelling can be undertaken for businesses of every shape, size, and type. However, every business is unique with different processes, so a full process mapping activity is always recommended in the first stage of calculating your cost-to-serve.
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, 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?
Our consultants can help you map and build your own cost-to-serve model, identify improvement opportunities, and/or assess the impact of various scenarios on your cost-to-serve.
