Introduction To Cost To Serve

By Author: Rob O'Byrne
Total Articles: 3698
Comment this article

So What is Cost to Serve? Well, its 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 customers; to achieve it Business goals. And 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 other 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 the Truck Load, literally! Your logistics costs to supply that Bread might be 50c/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 4 times as much to service those customers. If you are able to identify the costs of activities such as: Order processing, picking & packing orders, delivery, and invoicing the customer, you will be shocked to see the variation in cost to serve across ...
... your customer base.

You see; different customers drive different supply chain & logistics costs. Just think of the characteristics of your customers that might impact your cost to service them. Large customers; small customers; large orders, small orders; frequent orders, perhaps once per day, and less frequent, perhaps once a month. Strict delivery time windows, detailed invoices required in triplicate, constant account management needs.

And 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 will be well on your way to identify, low margin customers, low margin products or services and high cost processes. This will help you make sure all of your customers are more profitable, by providing the right service levels to the right customers.

If you have 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 ERP systems do not have the level of detail required to carry out Cost to Serve reporting. Here at Logistics Bureau we have developed specialist Cost To Serve tools over the years, But you would be surprised at what you can do yourself with some simple database and spreadsheet models. So Good luck with your Cost To Serve Analysis.