Cost to Serve, Cost to Market
In this Video, Rob O’Byrne of Logistics Bureau, talks about the principles of Cost to Serve in Logistics and the Supply Chain.
Why do you need to know your Cost To Serve? Logistics Bureau’s consultants have been conducting Cost To Serve audits since 1997 across 100’s of companies in many countries. You might like to note some key facts about those companies:
“Here at Logistics Bureau, we’ve been conducting cost to serve audits since 1997. And for companies that have never reviewed their cost to serve, it can deliver significant benefits. So I’d like to give you a brief view of the concept so you can try it for yourself.
What is Cost to Serve?
It is an approach that will allow you to identify the total cost of servicing your customers at a customer and product level. So the business can provide appropriate levels of service to its customer to achieve its business goals.
Why is this so important? Because many businesses today, maybe 50-60%, still adopt a one size fits all service policy that under services some customers and over services some customers and that drives high logistics costs.
Let me give you a couple of simple examples.
Your company supplies bread to the retail market. You have grocery retail customers who order bread by truck load, literally. Your logistics costs to supply that bread might be 50cent/unit. But you also deliver to small high street customers – cafes, milk bars and corner stores, they only order 5-10 units each time. It could be costing you 2 or 4x as much to service those customers. If you are able to identify the cost of activities such as order processing, picking and packing orders, delivery, invoicing the customer, you’ll be shocked to see the variation in cost to serve across your customer base.
You see, different customers drive different Supply Chain and Logistics Costs. Just think of the characteristics of your customers that might impact your cost service them – large customers, small customers, large orders, small orders, frequent orders (perhaps once a day), less frequent (maybe once a month), strict delivery time windows, detailed invoices (required and triplicate), constant account management needs. The same is true of your products, large products that take up more warehouse space, products that have to be kitted or bundled, products that need temperature controlled storage and many more.
So if you can identify the characteristics of your customers and products or services that drive your cost to serve, you’ll be well on you’re way to identifying low margin customers, low margin products and services and high cost processes, so that you can make sure that all of your customers are more profitable by providing the right service levels to the right customers.
If you’ve never tried taking a cost to serve view before, just see if you can identify the 20% of your customer orders that have the smallest value – the results might shock you! It’s not unusual to see that 30% of your customer orders are so small that once you subtract logistics costs, all margin has been eroded. Unfortunately, most IP systems don’t have the level of detail required to carry out cost to serve reporting.
Here at Logistics Bureau, we’ve developed specialist cost to serve tools over the years but you’ll be surprise at what you can do by yourself with some simple data base and spread sheet models. So good luck with your cost to serve analysis.”
Cost to Serve Facts:
Fact 1 – Up to 20% of customer orders made negative profit margins.
Fact 2 – 5-10 % of the product range made no contribution at all.
Fact 3 – Up to 12% of customers were totally unprofitable. Usually a range of large and small customers.
Cost to Serve Notes:
Note 1. The facts above are based purely on Sales Value – COGS – Logistics costs. Overheads were not even taken into account!
Note 2. The 100s of companies behind these simple facts, ranged in size (annual turnover) from $200 million – $30 billion. No one is immune.
Note 3. Of all the companies where we have conducted cost to serve audits, they all had major cost to serve opportunities to improve margin.
So if you don’t know your cost to serve, (cost to market) you are losing margin unnecessarily. Guaranteed.
See more about our Cost to Serve Services.
Rob O’Byrne is the Group Managing Director of Supply Chain Consultants – Logistics Bureau.