A deep dive into Cost to Serve

 
Cost to Serve or Cost to Deliver has been a concept that we have explored in the past, you can find the last post we published in this link: The importance of Cost to Serve in Supply Chain.

In this post, we are going to deep dive further on this concept and shed some light around the different components that can impact cost to serve.

First things first, a quick reminder of what is cost to serve; It is the total cost of providing a product or service to a customer including all direct and indirect costs.

Direct costs are those that can be directly traced to the production or delivery of the product or service, while indirect costs are those that are not easily traced to the specific product or service but are still incurred in the process of providing it.

Now onto why understanding your cost to serve is important.

By understanding how much it costs to serve each customer, companies can segment their customers and identify potential areas for cost savings. It can also be used to evaluate different pricing strategies and understand how changes in price may impact overall costs ultimately helping organizations to transform unprofitable customers into profitable ones.

But what is the best way to determine cost to serve, and what are the different elements that make up this metric?

There are several elements and categories that need to be captured to be able to analyse cost to serve and have some meaningful data to work with:

1- Customer: Customer services overheads, order management, customer specific services, presales costs etc

2- Sourcing and manufacturing: Sourcing and procurement, cost of goods, production costs, manufacturing costs etc.

3- Warehousing: Picking packing and storage cost.

4- Delivery/Transportation: Transport, last mile delivery, returns and reverse logistics etc.

Finally, how do we put everything together and calculate cost to serve?

This is the easiest part, providing you have managed to do the hardest part which is to identify all the different costs impacting your operations. Once this information is ready, it´s just a question of subtracting from the customer sale price all these different elements, leaving you with a data point that can be compared across all customers in your organization.

Logistionary: Demurrage and detention

Demurrage is a fine to the buyer which is enforced by a freight provider if they do not take their goods away from a port or terminal. Often ports and terminals allow importers to store goods or containers for a number of ‘free’ days, after which charges are applied.

As an example, let’s say a container is being shipped from a supplier in China to a port in Amsterdam. The port normally allows 7 free days of storage, after which they will start charging.

Detention on the other hand is a charge that can be enforced by a transport provider for not returning an empty container to a container yard or port after an agreed time.

As an example, if the buyer of goods takes a container to their factory for 14 days to unpack, and the shipping port allows just 10 days to return the box, then the shipping line will be charged ‘detention’ for 4 days.

The main difference between demurrage fees and detention fees is that demurrage fees are charged when a container is still full and under the control of the shipping line whereas detention charges, on the other hand, occur when the buyer holds on to a container outside the port beyond the specified free time given by the shipping line.

In very simple terms, demurrage charges relate to full containers while detention charges apply to empty containers.

The world busiest ports

An estimated 90% of world trade is handled through maritime shipping, and as trade volumes continue to increase, the world’s busiest ports continue to grow.

Only five of the top 20 ports in the world are now located outside of East Asia, and only three European ports made the cut.

It´s not a surprise that China continues playing a critical role in the global supply chain, and as a result, over the past decade, China has emerged as the heavyweight champion of world shipping.

In 2006 only three of the top 10 busiest ports were in China, nowadays, seven out of the 10 busiest ports are located in China, and an estimated two-thirds of container traffic now passes through Chinese ports or ports that have received Chinese investment.

 

Amazon, the business that made Supply Chain a real competitive advantage

It´s no secret that Amazon is one of the most relevant companies ever created in the last century and it´s also no surprise that Supply Chain is at the core of what they do.

Amazon is by definition, the company that has scaled operations to levels we never saw before, and its Supply Chain have reached the status of almost being unbeatable.

The one project that has put Amazon´s Supply Chain capabilities on the spot once more is their latest endeavour to start using drones to manage their deliveries in the very near future.

These automated machines that are not limited by traffic or other mundane constraints that traditional delivery methods face, can once more demonstrate that Supply Chain can be a competitive advantage for those companies willing to invest the time and resources on developing these capabilities.

Decoding The Supply Chain Crisis

 

It is no secret that these are unprecedented times and that the current situation is putting a strain on most Supply Chains regardless of how mature or advanced these are.

The next video ilustrates the ripple effect since the outbreat of the COVID 19 pandemic and the devastating consequences this has had for the millions of goods and containers that are transported like a clockwork on a daily basis.

We don´t know for how long this situation will last or more concerning, for how long supply might continue uninterrupted, but we know that we are navigating a perfect storm that has lead to increases in prices for the end consumer.

Extreme engineering: Container ships

One of my favorite programs of all time is Extreme Engineering; I have been fascinated by the mega structures humanity has been building all over the world!

Thinking about it, this will be the first time we talk about this in the blog, and it´s surprising considering how relevant Supply Chain is in any of these humongous projects.

To unveil this new section, I thought that the best episode to share with you is the third episode of the second season "Container ships.

This episode examines the docking of a container and the operation of the water front, where thousands of containers need to be unloaded and loaded in 48 hours. Also covered in the episode is the building of the Adrian Maersk, the world´s largest container ship, and the challenges faced by the engineering team.

Enjoy!

Extreme Engineering: Container Ships