cost-to-serve

An 8-point Guide to Understanding Your Cost to Serve

An 8-point Guide to Understanding Your Cost to Serve

The concept of cost to serve is very simple but I am always amazed at how few businesses and supply chain managers really understand it. Let’s start with an uncomplicated example: Company A is in the business of distributing whiteboard markers. Among other colours, they have green ones and they have blue ones. If they are going to understand their cost to serve, they need to know the cost of shipping, for example, the green one to a customer. They operate in Australia, so they may have customers in Sydney, Darwin, Adelaide, and/or Melbourne. They also need to know the cost of shipping the blue one to a customer. Let’s say the blue one is not the same product as the green one but a much bigger item with different characteristics. In a nutshell: It’s understanding at a detailed level what is the cost of serving, or delivering, all of the different types of products to all of the different types of customers. Why Understanding Cost-to-Serve is so Important In my 20 plus years of experience in doing cost-to-serve analyses with clients, I have found that in 99% of cases at least 10% of their products and customers are not profitable. I can say that with extreme confidence because normally the number is above 20%. What does this mean? If you haven’t carried out an analysis of your cost to serve, probably at least 10% of your products and your customers are non-profitable. Let me, through my eight-step guide, show you how you can more easily see which products and customers are losing you money. Step #1 Have a look at your customer profile. Try to differentiate your customers in terms of, for example, location and service requirement. Everybody has customers who buy by the pallet-load or the truckload. Maybe you have customers who are based in the metro area and others who are in remote areas. Step #2 Do the same for your product profile. What are the characteristics there that make your products more costly to deliver? Maybe some products fall into the category of dangerous goods, maybe some need special packaging. Step #3 Look at your order profile. How many large orders and small orders do you have? I’ll let you into a secret here. The easiest way to save money in the supply chain is to encourage customers to order in bigger quantities. I know...

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