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Cost to Serve Analysis
Understanding Cost to Serve is essential for any organisation
that wishes to:
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improve the efficiency in the way that they service
customers (cost reduction), or
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change the method in which they service customers
(service strategy change).
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AdvisorBases's methodology can allow you to quickly
come to grips with your cost to serve and allow your
organisation to achieve real efficiency improvements
as well as challenge your current way of doing business.
Cost to Serve analysis can be undertaken in-house by
your personnel as a coached project.
We define Cost to Serve as the chain of activities
that are required to get your products into you customers
store and onto their shelves. This includes all facets
of order taking, picking and freighting the order, arranging
promotions by sales reps, processing credits, merchandising
the product and the like - essentially the cost of doing
business with your customers.
By understanding what drives costs you can improve
the efficiency in the way you service customers with
two approaches:
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Incentivise customers to change costly ordering
behaviours by introducing cost-based and supply
chain trading terms, such as volumetric discounts
and discounts for full pallet picks.
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Re-align service infrastructure or adjust the
commercial arrangements of your supply chain to
better suit the needs of your customer base. For
instance, is your freight contract best structured
for the nature of your business? This may be indicated
by a high proportion of orders shipped at your
carrier's minimum freight charge. Should some
of your foodservice call cycles be reduced to
fortnightly visits?
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Cost to Serve also highlights where a service strategy
change may be appropriate. High field sales cost for
a Foodservice channel may raise the question, are sales
reps visits to this channel necessary at all? Could
orders to this channel be more efficiently handled by
an alternative arrangement such as outbound call centre?
So what drives Cost to Serve?
For most FMCG companies order size is the principle
driver of Cost to Serve. Generally speaking, the larger
a particular order the more likely economies of scale
are achieved. Large orders are more likely to qualify
for the 'best' freight rates, have a higher proportion
of full pallet picks and being able to cover the selling
and transaction processing costs associated with the
order. Do you know what size orders contribute to your
business and what size orders actually cost you money?
To understand how different customers drive servicing
costs within your business we utilise a modified form
of activity based costing (ABC) to produce customer
contribution statements. This method allows for a meaningful
understanding of how the organisations resources are
deployed to service customers and relative cost to serve
of each customer, and more importantly identifies what
levers will bring about the most improvement in your
business.
AdvisorBase is highly experienced in producing cost
to serve analysis and activity contribution statements
using our in-house activity based cost model. Our methodology
is supported by proven data gathering templates including
surveys for measuring warehousing, field sales and customer
service activity. The template nature of our approach
ensures you do not get 'bogged down'.
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