A Few Tips to Help You Leverage Your Cost to Serve
Published on Apr 8, 2020
As meeting customer demands continues to become a bit more competitive, businesses are looking to save every penny possible. This is called leveraging the cost to serve.
Having the ability to quantify every expense involved in supply chain retention gives companies better historical financial data, allowing them to better serve their customers in the future while also optimizing their ROI and to an extent, their ROX. From raw materials to manufacturing, right down to fulfillment, all phases of the shipping operation need to be accounted for.
However, the cost associated to get those products to customers is what really matters. This is a company’s cost to serve (CTS), a relatively new profitability management process that ultimately impacts the bottom line, but also ensures sustainability.
The first step to getting started quickly is to reach out to Redwood Logistics. Our team will help you better understand and track your spending in order to drive inefficiencies out of your supply chain.
Defining Cost to Serve
The days of monitoring the cost of goods are long-gone... and they have been replaced by the cost to serve those goods.
This method of lowering expenses involved in catering to growing customer demands is based mainly on a proven activity-based costing process. This is a method that provides a detailed, and most importantly, accurate cost analysis of a product once it makes its way to the customer.
The primary objective of cost to serve is to determine the best methods for fulfilling a customer's order.
This includes multiple, independent costs such as:
The costs associated with shipping finished products to the end-user.
That final section is where most of the focus in business is today. Smart businesses are discovering the value of selling products online, from manufacturing down to selling directly to the end-customer – all without the middleman, multiple distributors, or retailers.
However, there is so much more that goes into the cost to serve.
Are there costs associated with product development, marketing, sales, that impacts customer satisfaction?
What are the logistics costs?
How often are items returned and what is the cost for freight returns, restocking fees?
The main pain-point here is that it’s nearly impossible to group all customers and situations in one category. Therefore, it’s so crucial to outline the cost per product and per consumer group to better provide an accurate cost to serve.
How to Leverage Your Cost to Serve and Improve Profitability
Once you’ve determined your overall cost to serve, leveraging the CTS for maximum profitability and service is the true talent. When you’re able to break down your CTS per consumer type, retail platform, or fulfillment method, you’ll be in a better position to leverage the cost to serve.
This methodology puts the power of optimization in the palm of their hand. They can determine which methods are effective – and which are not. It also opens opportunities to classify areas of improvement, that – with some changes to processes, procedures, vendors or methods, might prove to improve the CTS.
As such, here are a few tips for leveraging your cost to serve.
Restructure your Distribution Channels
It’s a simple concept – the more cooks you have in the kitchen, the higher your overhead will be. The same thing applies to the operation of multiple distribution channels.
For example, let’s say that you’re a manufacturer of a car part. In order to sell the part to customers, you need distributors in various regions, who sell to smaller retail locations and ultimately to the customer.
While this might improve sales, it also includes another step in the process, which contributes to the overall cost to serve. By restructuring your distribution channels, you can cut a vital step from the process, which saves money and gets the product to customers quicker.
Negotiate Better Shipping Rates
If you ship products directly to consumers from 3PL facilities or your own warehouse, a major cost to serve involves shipping.
While some companies pass this cost to consumers, a growing trend in eCommerce fulfillment is free shipping to customers. At this point, having the best possible shipping rates, without compromising service makes a huge impact.
In fact, being able to negotiate improved shipping rates improves the cost to serve more than most areas.
Consider Removing Items that are Not Cost-Effective
If you’ve analyzed your CTS, and completed due diligence to improve these numbers, but discover some items are simply not cost-effective, removing them might be the best option. However, it’s crucial to determine customer dissatisfaction in making this decision.
In conclusion, having a solid understanding of CTS practices can make or break your business.