Article - Cost to Serve (CTS)

[Rob O'Byrne]

Hi, I hope this is of interest. Just my thoughts on the topic.

Cost To Serve – The devil is in the detail.

Most companies fail to recognise the true profitability of their customer and product/services mix. Traditional reporting methods aggregate revenues and costs, to the extent that poorly performing sectors of the business are hidden from view. Cost To Serve (CTS) enables companies to reduce cost and improve EBIT performance by up to 20%. Evaluating the benefits of CTS, is a ‘must do’ for those companies new to the concept.

What is CTS?

CTS can best be explained as understanding the total cost of servicing individual customers and individual products, so that the business can match service and cost, to achieve business goals. CTS is not; quantifying distribution cost as % of sales, knowing the cost of processing an order, or knowing the case/pallet throughput cost. These common measures are generally based on aggregated data that takes no account of the unique needs and cost drivers of certain customer and product types within the Supply Chain.

It is a rare business that has such a limited range of products and customers, that they can service their whole market with a generic service policy. Conversely, it would be rare for a business to incur similar costs for servicing what can be a complex matrix of customers and products. Unraveling this pot pouri of information, is what CTS is all about.

The Steps to Quantifying CTS

The critical steps in undertaking a CTS review are:

Step 1. Identify the characteristics of your customers and products. For example, typical order size, order frequency, geographic location, special handling needs, account management needs, brand support and so on.

Step 2. Identify the cost drivers within the Supply Chain. Processes and functions that will impact CTS will include purchasing, storage, transport, customer service, sales, account management as well as head office overheads.

Step 3. Determine cost allocation rules for each unique customer and product grouping identified.

Step 4. Conduct a trial data set through the model to test assumptions and results.

Step 5. Implement the CTS discipline and identify the areas of opportunity to a) reduce costs, and b) improve sales.

CTS typically highlights unprofitable products and customers This enables the company to reduce the CTS by allowing them to adopt alternative approaches to servicing their customers, such as; changing market channels, varying the service level to certain customers, utilising lower cost transport solutions for certain geographic locations, re-balancing inventory across the business to improve service and reduce costs. So the bottom line benefits can be substantial.

What CTS is not!

CTS is not just Activity Based Costing (ABC). ABC generally operates at a higher, aggregated level, and fails to identify the impact of different product and customer characteristics and service needs. ABC is often inwardly focused, CTS is market focused.

Leveraging CTS

The knee jerk reaction within many businesses when realising that certain customers and products have a negative impact on the bottom line, is to try to delete them from the range or customer base. Wrong. The opportunity is to use the knowledge that CTS provides, to turn those customers and products into improved profit.

Map Caption: The cost of servicing widely dispersed customers will vary considerably.

[IMG][/IMG]


I hope this was of interest, and that it may help you understand cost to serve within your own business.

[000]

Thanks Rob. If you have any more on cost to serve or some case studies, it would be interesting to read them.

[Pallet Rack]

Rob,

Cost to serve is still a relatively new concept for many companies, so thanks for contributing this. I look forward to seeing more about the topic.

[Ice Berg]

We are tackling this in our business. Very handy article. I'll steal some bits from it :-)

If you have a more detailed one, that would be good too.

[Loggie]

I think there are a lot of companies that are still struggling with this concept..........to their cost!

[Jonathan]

I have been hearing a lot about "time to serve". I guess the term is fairly self explanatory!

[Rob O'Byrne]

Originally Posted by Jonathan

I have been hearing a lot about "time to serve". I guess the term is fairly self explanatory!

Jonathan,

Yes, it is fairly self explanatory But it can be important not only from a customer service perspective but also to understand the impact of long lead times for resupply. For example, this can often be the case where companies import a lot of product. Whilst the unit purchase cost might be lower than locally manufactured product, the 'time to serve' can lead to higher inventory investment or lost sales due to stock outs.

[Lani]

I was involved in cost to serve work for about three years - and found the biggest challenge to be the data.

Unless the company has set up their information system in a very flexible way - companies have real difficulty identifing and allocating costs.

General ledger categories are often too broad and running through costs on a line by line basis is a nightmare.

There are some funky systems out there that can help - but the bottom line is that you need to have good access to data and people that understand the data.

This can become a very expensive exercise very quickly - if you don't have the right people involved.

Lani

[Rob O'Byrne]

Originally Posted by Lani

I was involved in cost to serve work for about three years - and found the biggest challenge to be the data.

Unless the company has set up their information system in a very flexible way - companies have real difficulty identifing and allocating costs.

General ledger categories are often too broad and running through costs on a line by line basis is a nightmare.

There are some funky systems out there that can help - but the bottom line is that you need to have good access to data and people that understand the data.

This can become a very expensive exercise very quickly - if you don't have the right people involved.

Lani

I agree. The lack of data visibility and data granularity on most companies IT systems makes it really hard to carry our accurate cost to serve. Most companies that want to get accurate cost to serve reporting on an ongoing basis, will tend to bolt on specialist reporting systems. Though for high level stuff some ERP systems have rudimentary cost to serve reporting. SAP For example has a profitability analyser module.