Cost to Serve: From Accounting to Operationalizing

By: James Snyder

Cost to serve is a potent methodology to help businesses understand the true cost of serving their customers. It considers all the costs associated with fulfilling customer orders, including materials, manufacturing, transportation, warehousing, customer service and other related allocated expenses.

As a result, it is effective at providing insights into the profitability of different products, customers, and channels, allowing businesses to make data-driven decisions that can increase their bottom line. However, taking cost to serve beyond a reporting and accounting perspective and operationalizing it in a business's supply chain is easier said than done. 

Painting the Picture

The first step is to assess your current available data and ask yourself: Do we have what we need? 

For many businesses, the answer may be no. If this is the case in your operations, it shouldn't dissuade you from embarking on this journey. Many businesses will start with what they have and use allocations as a starting point. From this beginning, you'll begin to see where the initial opportunities are and where to invest time.

Following this, you should publish the analysis to cost center owners. This is partly to show them what you found, but also to solicit feedback on assumptions made and determine how to improve the analysis. Accountability is a great motivation for improvement. This will be an iterative process, but is an ideal method to uncover what the costs of your decisions are, and whether the costs yield bottom line results.

Operationalizing Cost to Serve in a Supply Chain

Now comes the hard part: You have these costs, but how do you weave them into your decision making? We worked with one of our clients to approach this in a unique way. This client is a retailer with over 1,200+ stores that was looking to build out cost to serve as part of a business case to determine whether to pursue certain options.  For example, the retailer wanted to know whether to expedite late shipments to stores or return goods to the warehouse.

The beauty of this project was that requestors would now know the framework they needed to work in, and there would be a way to centrally collect these requests and measure the outcomes. This ultimately had the effect of sharpening their saw on investing. Instead of having a series of spreadsheets flowing around with mini-business cases, the companyh now has one central repository built in Anaplan to collect the inputs and evaluate results.

This is just one instance of how this was operationalized, but the important lesson here is the addition of speed and agility. Once you have established a view of cost to serve you can then use this as a basis for annual planning or ongoing forecasting activities (weekly, monthly, etc.). Overall, when you begin on this journey it can become a cultural shift to have better control over costs and the implications of your decisions.

Our Recommendation

Cost to serve is a powerful metric that can help businesses optimize their supply chain operations and increase their bottom line. However, moving beyond reporting and accounting for cost to serve to operationalizing it in a supply chain requires a cultural change in the approach to business, tools (Anaplan) that can flex with your business and partners (Allitix) to help structure and challenge your organization. By taking these steps, businesses can unlock the full potential of cost to serve and achieve greater supply chain efficiency and profitability.