Cost to serve analysis provides visibility into a company's true supply chain costs to serve different customers and products. It can uncover surprising variations in costs and customer profitability. By analyzing actual order and activity data through activity-based modeling, cost to serve insights help companies improve pricing, product portfolio decisions, identify cost savings opportunities, and enhance business processes like budgeting and cost allocation. The presentation provides examples of cost to serve outputs and discusses how to design and implement an effective cost to serve model.

1. DAVE HOWORTH
FEBRUARY 1, 2018
a leading international consultancy

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AGENDA
What is it, and why is it important?
What does “good” look like?
What insights can it provide?
Q and A

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COST TO SERVE
Understanding the true cost to
serve at the customer and product
level through activity-based analysis
& modelling based on actual
order/delivery/activity data.
Shining a light on blind
spots in organisations in
order to get better value
and improve profitability.

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WHY COST TO SERVE?
• Ex works supply chain costs = a significant element of total company costs.
• Significant variations in cost to service differing customers and channels.
• Whilst most companies have strong visibility on ex works product COGs few have visibility
thereafter and costs can vary significantly.
• When servicing costs are analysed they often uncover surprising customer profitability
results.
• Consumer behaviour & market developments are making CTS increasingly important.
• There appears to be a surprisingly low level of capability.

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CUSTOMER PROFILE/BEHAVIOUR
IMPACTS ACROSS SUPPLY CHAIN COSTS

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SERVICE DIFFERENTIATION –THE NEW BATTLEGROUND

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ROUTE TO CONSUMER – BRAND
OWNER E.G. DOMESTIC APPLIANCE
CONSUMER
European Factory Full Vehicle Loads UK Retailer NDC
European Factory BO UK NDC Drop Shipment
PRODUCTION

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ROUTE TO CONSUMER & SERVICE PROPOSITION –
GROCERY RETAIL
Route to Consumer
SupermarketDC
Home Delivery
Manufacturer
Dark Store

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GROCERY CHANNEL GROWTH – KNOWINGYOUR CTS WILL BE CRUCIAL
Euro pallets
UK pallets
17.7% growth
49.8% growth
53.8% growth
9 in 10 shoppers visited a
convenience store in
the last month.
4 in 5 shoppers have
visited a variety
discounter for grocery
shopping in the last month.
40% of British shoppers
have bought some of the food
& groceries online.
Source – IGD study June 2017
2017 - 2022

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CUMULATIVE CUSTOMER CONTRIBUTION (NET MARGIN)

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A UNIVERSAL LAW (KNOWN AS THE
HOOK CURVE/WHALE CURVE/ULURU CURVE)

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WHAT DOES “GOOD” LOOK LIKE?
Systemised analysis
Based on real order/activity data
Based on activity based costs
Ongoing regular review (Monthly, Quarterly, Half yearly)
Physical logistics costs (primary & secondary transport, warehousing)
Customer customisation eg labelling requirements, co-packing
Product returns – collection, handling, re-work, write-off
Product – inventory, waste
Customer service, sales
Formalised input to customer pricing & therefore profitability
Identify cost efficiency opportunities
Improved product portfolio management
To support customer order governance (& efficiency incentives)
To support budgeting, accrual process, invoice verification
To support internal charging eg brand, sector, division
How?
What?
To do?

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COST TO SERVE: MAKING A START
What issues are you
trying to solve?
• Determine product/service costs?
• Understand product and customer profitability?
• Identify impact of customer behaviour?
• Improve processes?
• Internal charging for services?
• Rolling forecasts and budgeting?
Probably a mixture of the above, but key priorities determine the approach
to the model structure, data collection and analysis.
And the choice of software tool should have the flexibility and functionality
to mirror the reality of the organisation and its cost flows.

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PROCESS IDENTIFICATION AND SETUP

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BASIS OF THE CTS MODEL
Masterdata
• Product data
• Customer data
• Cost data
Actual Activity Data
• Sales orders/deliveries
• Inventory
A powerful review model capable of capturing all activity and cost layers attributable to the Logistics Cost
to Serve with capability to allocate and review at all data layers….
By Customer, Delivery/Despatch point, SKU etc…
Defined Activity
layers
• Primary transport
• Inbound warehousing
• Storage
• Picking
• Customisation
• Loading
• Distribution
• Returns
• Customer Service
• Inventory
Cost performance
data at….
• Product level
• Customer level
• Activity level
Inputs Outputs

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ANALYSIS THROUGH DIFFERENT LENSES
Customer
Activity
Product
Activity
Product
Delivery
Point
Customer
Activity
Delivery
Point
Customer
Product
Delivery
Point

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CTS – HIGH LEVE DESIGN: OUTPUTS

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EXAMPLE – HIGH LEVEL OUTPUTS
Customer Cost Comparison Trends over time
Cost as % of Sales Case Pick % by Customer

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EXAMPLE – GROCERY MANFUFACTURER
Scope
• UK/Ireland
• Physical logistics costs
• All customers
• Logs costs for co-packing
Intricacies
• Single & double stacking
• Customers – flat pallet, matrix, PCC,
special arrangements
• Differing storage rates mechanisms
for different 3pls
Accuracy level of
95% on all categories
• Primary Transport
• Warehousing
• Secondary Transport

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TEMPLATED PROCESS FLOW

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STARTING POINT IS SALES TRANSACTIONS
What do I know about
this product?
What do I know about
this customer?
What do I know about
this activity?

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COST PER CUSTOMER

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Cost per case + breakdown in storage/distribution/inbound
COST TO SERVE

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COST PER CUSTOMER
Broken out by
• Delivery point
• Cost per case
• Type of cost

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COST PER SKU

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KEY INSIGHTS
• Even for similar customers – surprising difference in the cost to serve
• End to end customer cost to serve understood – customisation, co-packing as
well as “traditional” logistics costs
• Some customers not behaving as thought or supposed to
• End to end understanding of costs at sku level – inventory, co-packing

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WHAT-IF SCENARIOS

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ACTIVITY COST IN GRAPHS

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COST TO SERVE
Understanding the true cost to serve at the customer and product level
through Activity Based Analysis & Modeling based on actual
order/delivery/activity data, enabling
- Better pricing decisions, driving better margin
- Better product portfolio decisions
- Cost efficiency opportunities
- What if analysis (pro-active/reactive)
- Enhanced business processes eg budgeting, cost allocation, accruals…
Crucially in an accurate but low effort & sustainable way