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Cost to Serve Analysis

Understanding Cost to Serve is essential for any organisation that wishes to:

improve the efficiency in the way that they service customers (cost reduction), or

change the method in which they service customers (service strategy change).

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:

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.

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?

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'.