For every sale made by your supply chain company, whether it’s the sale of a product or a service, there is a set of underlying costs which to some degree eat into its profitability. If your company is large and provides a range of product lines or services, some of these products or activities will cost more than others.
These extra costs may not be accurately reflected in the prices your customers pay, meaning that it will cost your business more to service some customers than others. In other words, some of your customers may actually be unprofitable and effectively subsidized by your more profitable sales.
Get Familiar with Cost to Serve
Undertaking a Cost-to-Serve analysis will show you which of your customers are profitable and which ones you might need to take a closer look at.
In case you’re not fully familiarized with Cost to Serve modelling and analysis, here are three frequently asked questions on the topic—along with their answers, of course.
Q: Can Cost-to-Serve analysis be applied to both B2B and B2B Sales?
A: Yes, it is useful for both, but it tends to be especially pertinent for business-to-business commerce, where supplier/customer relationships are more complex and some customers bring greater bargaining power to the table than others.
Q: Is cost to serve only good for evaluating customer profitability?
A: No, definitely not. When you are able to analyse Cost to Serve, you can identify the costs for supplying a particular product type, a specific SKU or even the cost associated with each of your company’s routes-to-market.
Q: What types of business decisions can be driven by Cost-to-Serve analyses?
A: Knowing your cost-to-serve helps you to make better fact-based decisions about many aspects of your supply chain operation. For example:
- Whether it makes sense to add a certain new product line to your range
- Introduction of minimum order sizes or discounts for larger orders
- Increases or decreases in the size of your truck fleet
- Whether to outsource certain activities or keep them in-house
- Whether certain activities can and should be eliminated altogether (non-value-adding)
Cost-to-Serve: Not a One-time Exercise
As a final point to note; the Cost-to-Serve relating to different customers, products and routes to market does not remain constant. The analysis therefore, can’t be a one-time project, especially for more well-diversified companies. For this reason, you might want to consider investing in some software to automate the task or to enlist the help of a consulting company to keep your CTS analyses current.
