Why do you need to know your Cost To Serve?

If you don’t know your cost to serve, you are losing margin unnecessarily. Guaranteed.

Understanding cost to service in detail is one of the major Supply Chain management challenges facing business today.

Failing to identify low margin (or indeed negative margin) products, services and customers, will hamper your ability to improve business profitability across the whole portfolio.

We are not making this stuff up. Logistics Bureau’s consultants have been conducting cost to serve audits since 1997 across hundreds of companies in many countries. You might like to note some key facts about those companies:

• 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.

It is not about deleting products from the range, or sacking customers, at least not until you have the facts to hand!

Note 1: The facts above are based purely on Sales Value – COGS – Logistics costs. Overheads were not even taken into account! Note 2: The hundreds 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.

Read on to learn more about our approach and some of the resources we have made available for you. If you would like help in understanding cost to serve better, or just someone to bounce some ideas off, feel free to contact some of our key staff directly.

Related Resources

• How to Boost Profits using your Supply Chain (Video)
• Cost to Serve Introduction Presentation (PDF format)

Cost to Serve Approach

At Logistics Bureau, our consultants have a number of approaches aimed at identifying cost to serve. We have been actively involved in detailed cost to serve projects since 1997.  It could be said that ‘we wrote the book’. Our approaches include:

1. One off ‘audits’ to establish cost to serve issues and identify improvement plans.
2. Installation of specific cost to serve models and reporting software for ongoing use.

(Note that Logistics Bureau is vendor neutral in the software selection)

 

Levels of Cost to Serve

Cost to serve reviews can be undertaken at a number of levels and can target:

1. Supply Chain costs
2. Logistics costs
3. Distribution costs
4. or specific functional areas such as warehousing or transport

 

Cost to Serve Objectives

Our objectives for cost to serve assignments, subject to customer need, can include:

• Identify high and low cost to serve products.
• Identify high and low cost to serve customers.
• Re-align distribution channels to minimise cost to serve.
• Re-align service policies to maximise profits.
• Establish ongoing reporting of Cost To Serve utilising specialist ‘customer maintained’ software tools.
• Establish the cost to serve to specific customers or customer groups to support PF/FGP negotiations (see below).
• Assess the cost to serve impact of mergers and acquisitions.
• Assess the cost to serve impacts of new market entries.
• Assess the cost to serve impacts of distribution network changes.