Cost to Serve is an assessment tool to calculate the profitability of a customer account, and the overall costs incurred at each stage of the supply chain. It is analytical of all the activities involved to fulfill the specific customer demands for a product. While conducting the analysis, several cost drivers are thoroughly evaluated to study how much each individual factor is contributing to the overall costs of the supply chain process.
This technique is generally employed to gain transparency into the cost involved at each level of servicing and distribution, and helps making necessary amendments to further reduce those costs. The basic idea of the approach is grounded on the recognition that different products require different marketing channels, and their relative costs are also different from each other.
For example, you may have two different products from the same customer, which need to be delivered at the same time and place. However, they both will have different cost drivers, unique to the size and shape of that specific item. Cost to serve methods helps you identify those unique cost drivers that are pertinent to each product, thus giving you a greater visibility of true logistics cost involved in a transaction.
The application of the cost to serve method can give your organization interesting insights into supply chains, enabling you to effectively allocate resources at each level of service. It helps organizations increase their profitable income by carefully eliminating redundant costs at each level. An organization might consider a product profitable which actually is making a significant loss once the Cost to Serve methods are implemented.
Re-location, warehousing and physical characteristics are core cost drivers, which are often neglected by the organization. If handled effectively, each level can largely impact the overall profitability of the organization. Once you have implemented cost to serve methods, it will enable you to focus attention on long-term planning and prioritization of short-term measures. You will better be able to make effective use of resources at each level to maximize profitability and curtail unnecessary financial losses.