Knowing your costs is a challenge for many businesses but according to Lauri Kailio, Supply Chain Consultant, companies do not realise that Cost-to-Serve (CtS) is often thought to be a much more complex exercise than it actually is. Read more from The Logistics Point July edition now.
‘Tools like PowerBi and even Excel are really good enough to do the first Cost-to-Serve analysis, meaning no investments would be required. Though there are many different advanced technologies/digital solutions for Cost-to-Serve, higher investments and implementation efforts are needed,’ begins Kailio for The Logistics Point. Fully embedded and real-time access to data has proven to have much higher impact as results are right away visible.
CtS has existed for decades but recent developments in available analytical technologies have enabled it to become a critical operations tool. Now it can be done easier and provide a deeper understanding of what is happening throughout the business. Importance of understanding CtS has increased also due to the change in
customers’ and consumers’ behaviour and with requirements for different services becoming more complex. The full CtS covers all business activities, including commercial, and can be done on a smaller scale, for example looking solemnly at logistics operations. ‘CtS gives you the ability to know your exact costs and profitability in customer and product level when serving customers, taking into consideration all different activities that are needed/happening to execute the order deliveries,’ Kailio explains.
Cost-to-Serve is often based on Activity-based costing (ABC), split between fixed and variable costs. The CtS model should also include the key KPIs that are driving the costs and what can be used to identify the possible optimisation areas (e.g. cost per unit/volume per activity, order size, no of orders/deliveries). The main benefit of CtS is knowing your costs and profitability for each customer.
Where to start from
When organisations are looking at improving or implementing a CtS Model there are a few areas they would need to look at first. All these can easily be done by using e.g Excel, but there are also many more advanced ways to do it:
- Identify all different activities that are done towards customer orders (e.g. order picking, packing, handling and delivering, return management, marketing and pre-sales costs);
- Determine and allocate the costs for all different activities;
- Include in customer level the number of different activities they have used;
‘CtS is also a great enabler of increased and improved collaboration and communication across departments,’ believes Kailio. Sales and Supply Chain, for example, can use CtS in their discussion as a fact-based starting point. In addition, sales representatives will have a pool of information that can be used to convince existing or new customers when it comes to changing the level of service or onboarding. It is also a great way to keep on top of changes to customers’ requirements and how much these affect the overall profitability of the business.✷