Understanding Supply Chain Cost to Serve
When we think about what is cost to serve, it can be a daunting project to wrap your arms around – Right? Well, sort of. Since the process of developing a cost to serve model is cost accounting based, you are able to produce a model that can span from a high level overview of certain costs to get guidance on your supply chain spend, to the minutia of transaction detail by customer. Anyway you slice it, understanding where you are spending your money to serve customers, relative to the profitability those customers produce, is always good to know.
What is cost to serve? As you google this terminology you will find some consistent answers and some varying answers. Here is how we define it.
Cost to serve: Using activity based accounting to measure how much it costs a company to move product from origination supply point to customer destination.
Sounds simple right? In distribution channels the formula could be as basic as:
Advanced Metric: Cost to Serve
Cost to per case to pick up the product by a carrier and deliver to distribution centers (DC’s) + The labor cost per case to receive the product at the DC + The overhead cost per case to store the product + The cost per case to pick the product + The cost per case to transport that product to a customer = A high level version of your supply chain cost to serve. Additionally, you can add in spoilage, reverse logistics (returns), and many other unique things to your industry.
(This can also be done on a per mile basis vs a cost per case; but we do prefer the cost per case or unit as a fundamental basis. You can also look at total supply chain profitability by case.)
It gets more exciting when you look at your costs vs the total supply chain margin $ you have to work with. Honing this into a customer cost vs margin to achieve a total profit by customer, brings a heightened awareness to the customers you really need to work with more, and the customers you are thankful for.
Simplified Metric: Cost to Serve
The more units, cases or SKUs you add; the less your cost per case will become. This is why, using this metric alone is not always telling. Like all business guides, balance in metrics are important. It is important to know what SKUs are driving profitability, what SKU’s are driving your warehouse efficiency and delivery efficiency, what SKU’s are important to your brand supply chain and what SKU’s add to your overall new growth. Knowing more about your inventory and it’s impact on customers, new growth, handling and distribution will allow you to make the right decisions.
We hope this is helpful. This is by no means a complete picture of Supply Chain Cost To Serve…. But hopefully it gives you an idea of the power it can generate. If you want to approach this at a higher level, you can look at this is a simplified way as well:
Inbound logistics costs per case + Staffing salary & benefits costs in the warehouse DC’s per case + Outbound logistics costs per case = Your high level supply chain costs per case. It tells you on a high level what your supply chain is spending. You can then have your VP of Supply Chain dig into YOY analysis to drive profitability through cost reductions.
To assist you, we have provided some links to other companies and their view of cost to serve.
We can help you set up the model that is right for your business and simplify your supply chain metrics. Thank you for taking the time to read this article. We hope it was helpful. www.linksupplychains.com.
Other POSTS you may like: The Powerful Brand Supply Chain
About Link Supply Chains, LLC:
Link supply chains, LLC is one of the fastest startup product information management companies in the USA. Ready to store everyone’s product information in the cloud for easy access to all distribution channels. You and I both like one point of contact, and your product information does too! Product information management made easy! The company has a mission to simplify supply chains and reduce costs.
In addition, they offer supply chain consulting, coaching & business strategy with expertise to reduce supply chain costs, add depth to business strategy and create engagement through their “Supply Chain Team” training methods. Their CEO, Wade Wickus has a very popular podcast called “Supply Chains… The Secret Sauce” Link supply chains is quickly becoming the “go-to” in the supply chain community. To join the link supply chains movement, go to www.linksupplychains.com.