The importance of cost to serve in Supply Chain

In this post, we are going to shed some light on one of the most critical concepts in Supply Chain that most times is not being given the importance it deserves; cost to serve.

Cost to serve is a process that will allow you to identify the total cost of servicing your customers at a customer and product level in order for your business to provide the appropriate levels of service to achieve its business goals.

Cost to serve is critical as it shows that each product and customer demands different approaches and has a different cost profile. Many businesses today still adopt a one size fits all service policy.

Different customers drive different supply chain and logistics costs; large customers, small customers; large orders, small orders, frequent orders, less frequent orders, strict delivery time windows, detailed invoices required in triplicate, constant account management needs etc

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.

If you can identify the characteristics of your customers and products or services that drive your cost to serve, you will be able to identify low margin customers, low margin products and services and high cost processes so that you can make sure all of your customers are more profitable by providing the right service levels to the right customers.

Overall, understanding Cost to serve will enables your business to focus on both long-term decisions and the prioritisation of short-term actions and will make you able to reposition customers and services, and how they are served to improve overall margin.

The video below explains in a very graphical form the importance of cost to serve and how airlines have been able to make the most out of it!