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.

Pick and pack!

Pick and pack is part of a complete supply chain management process commonly used in retail distribution of goods in order to expedite the order fulfillment process.

Pick and pack entails receiving the incoming merchandise at the warehouse, disassembling it, picking the relevant products needed to fill any given order, and re-packing it before shipping it to their final destination.

In the next video you can see how “pick and pack” works

The success of the pick and pack approach relies on the organization of the warehouse space and staff. Most large companies typically use technology to manage this process, in some cases automated systems handle the process helping to reduce the time between the preparation of the package and the shipping to the final customer.

Making your warehouse pick and pack process more efficient and cost effective must be the top priority for any company. The following tips are key to increase the reliability of this process:

Item location

The warehouse layout is vital so that fast moving items are located in zones near the packing areas, this will help to reduce the idle time and increase the productivity. Another tip any warehouse manager should keep in mind is trying to locate near each other those items frequently purchased together.

Pick areas

A tidy warehouse is a more efficient warehouse, therefore bins, shelves and picking areas should always be in pristine condition in order to facilitate the pick and packing process avoiding at all cost scruffy areas that will force workers to waste their time finding the item they need. Having a neat warehouse will make a massive impact on labor productivity.

Standard packaging

Despite the inevitable time the worker will have to spend packing the product before dispatching it, having several package sizes will help to save time and cost and will avoid the packers waste of time derived from making decisions about the best box to use.