Learn more about Cost to Serve here:
Cost to Serve – A Smarter Way to Improved Supply Chain Profitability
Hi! This is Rob O’Byrne from Logistics Bureau and let me explain a very simple concept to you using the traffic behind me. So I am just outside of our office here in Parramatta. I was looking at the traffic and thinking, this is like your orders going through your distribution network so put that thought in your mind, all of these vehicles going past me in the background are orders.
If you look at the different types of vehicles that are passing through the junction, down the roads, we got cars; we got motorbikes; we got vans; we got buses and think of the people in those vehicles as being products.
Now think of the cost of delivering those orders: we’ve got cars going past with one person in them; we’ve got an SUV just gone past with about four people in it; we might see a bus go pass in a minute with about 37 people in it.
Think of the cost per passenger to deliver that order. If we got a car with a one passenger, cost $10 for example, we can put two extra passengers in the car, it doesn’t cost us $30 to deliver them to their destination, does it? It’s a very small incremental cost.
Now think of that in terms of the products going through your warehouse: the picking, the packing, the dispatch and the transport. Don’t just think of these vehicles as being vehicles but orders going through your supply chain.
Every single extra passenger you can put into that order almost travels free; it’s a very small incremental cost to deliver the order. That is the easiest way to save cash in your distribution network.
Encourage your customers to order just a little bit extra because every single component, every product that you can get into the order almost travels free. When you do the numbers, which is called ‘cost-to-serve’ analysis, you’ll find that the cash savings that you get, some of that you can pass on to your customers as incentive to actually get them to order in bigger quantities.
So think of it as traffic, every person in one of those vehicles is like a product going through your distribution network.
How can you get more passengers into vehicles? That’s the secret.
Yes. Such example makes it very easy to understand the importance of volume per order. Proper understanding and action will benefit both supplier and customer.
Hi Jyoti, You would be amazed at the number of companies that still have a chance to save a huge amount of money, just by getting this right.