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.

The Carbon Footprint of the Food Supply Chain

 

The quantity of greenhouse gases generated by our food can vary considerably across the global food supply chain.

The difference types of food we could eat can have a significant impact on greenhouse gases emissions on the environment.

Across all foods, the land use and farm stages of the supply chain account for 80% of the emissions.

On the other end of the spectrum is transportation. This stage of the supply chain makes up 10% of total emissions on average.

Worldwide, there are approximately 13.7 billion metric tons of carbon dioxide equivalents (CO2e) emitted through the food supply chain per year. Unsurprisingly, beef and other animal products have considerably greater effect on emissions.

For example, one kilogram (kg) of beef results in 60 kg of GHG emissions, making beef the greatest contributor to greenhouse gases. In contrast, the same weight of apples produces less than one kilogram of greenhouse gases emissions.

When it comes to plant-based foods, chocolate is among the highest GHG emitters. One kilogram of chocolate produces 19 kg of greenhouse gases. On average, emissions from plant-based foods are 10 to 50 times lower than animal-based types.

Hoshin Kanri: translating strategic plans into actionable items

Many companies struggle with translating strategic plans into actionable items on a daily process, luckily, among the most powerful tools in the Lean arsenal for effective strategic management we can find Hoshin Kanri.

Similar Jidoka or Just in Time, Hoshin Kanri has its roots in the Toyota Production System and as a tool, it can be very helpful, when implemented properly, in bridging the gap between strategy and execution.

Hoshin Kanri has a Matrix shape with four quadrants each devoted to a specific task.

1-     Set the strategic vision & goals (3-5 year breakthrough objectives):

 

The long-term goals is the starting point In Hoshin Kanri, normally in the frame between 3 and 5 years.

 

List them at the bottom quadrant of the matrix template and have in mind that every initiative will have many smaller tasks that will need to process before achieving the goal.

 

2-     Define key mid-term objectives (annual objectives)

After your long-term goals are all set, prepare the most important objectives that you aim to achieve in a shorter time frame and put them in the left quadrant of the Hoshin matrix.

 

3-     Set short-term actions and metrics (improvement priorities)

 

You will need to fill the top quadrant with the most important activities that need to be completed to achieve the short-term goals, this is basically the to-do list for the upcoming months.

 

4-     Agree on key performance indicators (targets to improve)

Agree on the most crucial metrics that need to be improved and list them on the diagram.

 

Following this line of thought, right next to the key metrics, you need to list the key stakeholders responsible for leading the completion of the activities in the matrix's top quadrant.

 

Finally, you should complete the picture by specifying the dependencies between every listing in your matrix.

How Domino's Became The World's Biggest Pizza Chain

Robots, self-driving cars, artificial inteligence...the new frontier for most companies, including fast food.

This is what has taken Dominos to become the biggest pizza chain in the world.

Logistionary: Decoupling inventory

 

Decoupling inventory is the process of setting aside extra parts or raw materials to ensure there aren’t any delays or disruption in the production of finished goods in the event of a supply shortage or machinery breakdown.

In simple terms, decoupling inventory is a type of safety stock, but what it hedges against is slow production and stoppage, not unseen fluctuations in demand, acting as a buffer that allows to continue fulfilling orders even as production issues are happening.

The main benefits of decoupling stock are:

Increased efficiency: Can increase efficiency across production lines and supply chains by allowing each stage of production to work autonomously even in the event of a disruption.

Increased flexibility: Helps mitigate the effects of unforeseen circumstances helping businesses become more agile and ready to respond to unexpected disruptions in the supply chain.

Perform spot maintenance on parts of your manufacturing equipment: Decoupling inventory is particularly advantageous in the event of a facility outage for repairs or machine maintenance.

Provides Protection During Periods of Uncertainty: When manufacturers are unable to obtain sufficient raw materials to finish producing a product, decoupled inventory offers protection to continue production without any delays.

How are Supply Chain issues reshaping fast food value menus

If there has ever been an indicator of inflation, it is fast food value menus. These items or menus have always been the last to reflect changes in prices and have been the last resource indicating whether the economy was at a serious risk.

In the current economic environment, with inflation skyrocketing driven among other things by the several Supply Chain challenges and constraints most of the world are facing, fast food chains have had no other option but to increase the prices on their most iconic menus, leaving customers with the sensation that the old prices are gone for good.

The below video explains some of the challenges fast food chains have been facing and how Supply Chains have been key drivers for the latest price increases.

How China's Covid Shutdowns Keep Hitting Global Supply Chains

It´s no secret China has been keeping a very tight approach on Covid with widespread lockdowns and a tight control on key sectors. The consequences have been felt across the globe.

The video below sheds some light on the impact this approach has had on Supply Chains.  

 

Supply Chain predictions in 2023

 

As we approach the end of the year, it is always worth reviewing the top trends that will be impacting supply chains for the coming year and beyond.

But before we continue with this “tradition” it´s only fair to review how accurate were our predictions for the year 2022.

Not surprisingly the headwinds have continued this year, following from a year 2021 that was considered by many as one of the most challenging in history, aggravated by the COVID pandemic and the continued challenges brought by the acceleration of e-commerce, Brexit or the disruptions in transport.

You can find the post with the predictions for 2022 here.

Overall, and considering the new and more severe challenges that we have faced in 2022, it´s interesting to see that some of the trends we identified last year, became a reality.

Supply Chain issues continued in 2022 and were aggravated by the Ukraine-Russia war, a turn of events that no one was predicting last year.

While logistic prices were up in 2021 driven by shortages on raw materials and transportation, this trend has continued as predicted and has impacted other areas of the Supply Chain even further with inflation skyrocketing and energy prices at an all-time high.

Finally, rightly so, sustainability has been at the forefront of Supply Chains and businesses and has gained prominence as a key indicator for decision making.

Experience should have thought us that a lot can happen in a heartbeat, therefore predicting what 2023 has for us is like a game of roulette, but here we go!

1- Inflation and the risk of recession: Preliminary data in Europe shows inflation running at 10.7% for October; this is the highest ever monthly reading since the euro zone’s formation and something we should expect to continue to a higher or lesser extent in 2023.

Raw materials, transport, energy will all be more expensive than in past years and this will continue impacting Supply Chains and pushing for more efficient and streamlined operations.

2- Globalisation in no more the panacea for business development: With the recent geopolitical challenges we are facing, the focus will be on “localization” VS “globalization” and we shall see assets being transferred from high risk, and generally low cost, areas to more stable and trustworthy locations that are also closer to the end customers.

Investment on fixed assets will be under scrutiny and decisions will not only be made on the basis of lower costs.

3- Sustainability is here to stay: Governments are increasing their demands for companies to prove that they operate ethical businesses and this is becoming not just a “nice to have” and a sign of a company´s values, but a license to operate with significant fines if companies were to fail to comply.

All in all, while predicting what 2023 will bring is an almost impossible exercise, there are certain trends that are likely to gain prominance and we are ready for whatever the future brings! 

What is AI?

Artificial intelligence has been a "buzz word" over the last few years and a lot has been said about how this new technology will have thousands of applications in fields as diverse as medicine, Supply Chain or engineering and will revolutionise the way we work.

However, it´s never been overly clear what is AI, but also, what is not.

The below video, explains all you need to know about AI, some of it´s applications and what we can expect from this technology. 

Supply Chain statistics that will likely surprise you

Different post today, where we will look into 10 of the most surprising statistics related to the field of Supply Chain.

A clear sign of how much Supply Chain has been in the spotlight over the last few months/years and how much more is to come.

- Only 22% of companies have a proactive supply chain network. Proactive supply chain management means that the end-user is always able to address shifts in supply or demand before they become critical.

- Only 6% of companies report full visibility on their supply chain.

- 70% of companies believe that supply chains play a key role in enhancing the overall customer experience.

- Data analysis (44%), IoT (39%), and Cloud Computing (39%) are the top tech priorities for supply chain professionals. 

- Cyberattacks on supply chain software are predicted to increase by 4 times in 2022 as compared to 2021 and it´s already the number one cause of U.S. supply chain disruptions.

 

 

 

Source: 17 Stunning Supply Chain Statistics [2022]: Facts, Figures, And Trends – Zippia