Most companies fail to recognise the true profitability of their customer and product/services mix. Traditional reporting methods aggregate revenues and costs, to the extent that poorly performing sectors of the business are hidden from view. Cost To Serve enables companies to reduce cost and improve EBIT performance by up to 20%. Evaluating the benefits of Cost To Serve, is a ‘must do’ for those companies new to the concept.
What is Cost To Serve?
Cost To Serve can best be explained as understanding the total cost of servicing individual customers and individual products, so that the business can match service and cost, to achieve business goals. Cost To Serve is not; quantifying distribution cost as % of sales, knowing the cost of processing an order, or knowing the case/pallet throughput cost. These common measures are generally based on aggregated data that takes no account of the unique needs and cost drivers of certain customer and product types within the Supply Chain.
It is a rare business that has such a limited range of products and customers, that they can service their whole market with a generic service policy. Conversely, it would be rare for a business to incur similar costs for servicing what can be a complex matrix of customers and products. Unraveling this pot pouri of information, is what Cost To Serve is all about.
The Steps to Quantifying Cost To Serve
The critical steps in undertaking a Cost To Serve review are:
Step 1. Identify the characteristics of your customers and products. For example, typical order size, order frequency, geographic location, special handling needs, account management needs, brand support and so on.
Step 2. Identify the cost drivers within the Supply Chain. Processes and functions that will impact Cost To Serve will include purchasing, storage, transport, customer service, sales, account management as well as head office overheads.
Step 3. Determine cost allocation rules for each unique customer and product grouping identified.
Step 4. Conduct a trial data set through the model to test assumptions and results.
Step 5. Implement the Cost To Serve discipline and identify the areas of opportunity to a) reduce costs, and b) improve sales.
Cost To Serve typically highlights unprofitable products and customers This enables the company to reduce the Cost To Serve by allowing them to adopt alternative approaches to servicing their customers, such as; changing market channels, varying the service level to certain customers, utilising lower cost transport solutions for certain geographic locations, re-balancing inventory across the business to improve service and reduce costs. So the bottom line benefits can be substantial.
What Cost To Serve is not!
Cost To Serve is not just Activity Based Costing (ABC). ABC generally operates at a higher, aggregated level, and fails to identify the impact of different product and customer characteristics and service needs. ABC is often inwardly focused, Cost To Serve is market focused.
Leveraging Cost To Serve
The knee jerk reaction within many businesses when realising that certain customers and products have a negative impact on the bottom line, is to try to delete them from the range or customer base. Wrong. The opportunity is to use the knowledge that Cost To Serve provides, to turn those customers and products into improved profit.