Have you carried out cost-to-serve analysis?

Fraser Ironside
posted by Fraser Ironside
23 September 2015

In today’s complex global supply chain, pressure from growing competition and complexity are adding to the requirement for visibility, especially when it comes to making informed decisions and bringing hidden costs to light.

For this reason, regular cost-to-serve (CTS) analysis is essential in providing the intelligence needed to improve pricing, channel and logistics strategies.  

There are many challenges for organisations to overcome. Under pressure from the competition, many of today’s brands are releasing a steady stream of new products. For the supply chain, the resulting proliferation of product lines adds complexity and can also magnify existing inventory problems.

Meanwhile, in high-volume FMCGs and other organisations where margins are already tight, many sales teams will also make new deals and make pricing decisions without fully understanding the associated costs and margin implications for the business.

Changes in consumer buying habits also pose a challenge. In particular, retailers risk damaging profit margins if they fail to understand, for example, how the cost of servicing a new or more aggressive home delivery strategy will differ from the cost of servicing conventional retail stores.

To counteract these challenges, manufacturers, retailers and other supply chain organisations need visibility over the cost of serving particular customer chains and delivery channels so that pricing can be adapted accordingly. Likewise, they must continually re-evaluate the impact of a customer or customer group’s changing service expectations.

Using CTS, they are better equipped to calculate the total end-to-end product supply costs by market and channel. By providing the facts and visibility needed to make decisions geared to reducing costs, CTS analysis can positively impact profitability, target specific supply chain areas and help grow efficiencies. The important cross-functional discipline also has an important role to play when changing the service strategy for an existing product, customer or channel, or when bringing new products to market.

Using network design software to build an integrated, end-to-end supply chain cost model, organisations have the capability to overcome many existing operational silos and test different routes to market, along with alternative service strategies for specific customers and products. Using it, supply chain organisations can test decisions and understanding the impact on their eventual CTS and profitability, leading to improved outcomes.

In today’s changing and complex market, CTS needs to be viewed as a tactical tool for any modern manufacturer or retailer. From finance to sales and operations, by sharing and using CTS reporting across the business it can play an essential role in bringing to light damaging margin erosion and feed into improved decision making.

☛ Fraser Ironside is head of strategic modelling at Barloworld Supply Chain Software.

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