What is a Cost to Serve Study?

When it comes to the production of goods and building a positive rapport with your customers, there are always costs involved. Whether it is the cost of procurement, manufacturing, packaging, fuel surcharges, or even detention fees your drivers may encounter, all of it involves some sort of cost. All of these fees and costs, when combined as a whole, are known as the "cost to serve."  

Cost to Serve is essentially a measure of how much money is required of you to effectively fill a customer’s needs from the beginning stages all the way to final delivery.

A Cost to Serve Study, provides you with a quantifiable value of how much you earn from a working relationship with a customer as well as how much money you are spending to continue catering to your customers. 

With the help of a cost to serve study, you can find areas of your supply chain that may be able to be made more profitable or ways in which you can cut costs while still fulfilling customer needs.

Specific Benefits of Cost to Serve Studies

On the surface, these studies may seem like an inefficient use of time. After all, if your business is profitable overall, why should it matter if there are certain clients who aren’t as profitable as others? As the old maxim goes: “if it ain’t broke, don’t fix it”, right?

Truthfully, these studies can provide significant insight into just how much labor and money may be wasted within a certain customer relationship. Even if it was a profitable relationship years ago, times have changed, and your customer arrangements need to keep pace with these changes.

Cost to Serve Studies provide, at a minimum, the following benefits to your supply chain:

• Identification of processes that are beneficial or harmful to your bottom line;
• Hard data that can indicate whether or not it’s time to raise prices;
• Specific areas that could provide cost savings via automation implementation. 

How to Determine Cost to Serve

Calculating cost to serve can be done in one of two ways -- manual or automation.

With some basic software, you can get a good picture of how much it costs you to serve specific customers. However, this method will require a bit of math and will also only give a general picture of your costs in servicing a customer. It can also be impacted by user error and become outdated rather quickly.

More sophisticated technology can present a detailed picture of your cost to serve customers. Redwood can provide these services to your business to ensure you are operating with maximum profitability.

Leveraging Cost to Serve In Your Supply Chain

There are a few themes that often appear after a business has completed a cost to serve study. Some of the most common solutions to improving cost to serve are as follows.

Raising Prices

Perhaps one of the simplest solutions for increasing your profitability is to raise your prices and renegotiate with your customers. As basic as the thought is: if you’re not making a profit, charging more to overcome this unprofitability will effectively solve the issue.

However, you’ll want to be mindful of your competitors and your customers’ mindset. If you raise your prices too much in order to improve profit, you could lose their business altogether.

Consider Eliminating Certain Services or Products

Through your analysis, you may find that there are a few specific products or services that just aren’t generating profit. Once you have vetted out the products or services that are performing poorly via your cost to serve study, you have to decide whether to cut those products or services from your offerings. Alternatively, you can dig deeper, determine why they are performing poorly and look for ways to improve upon their shortcomings.

Stop Offering Discounts

If you had initially gained a customer due to a discounted rate, you might consider ending the discount if your relationship isn’t profitable. While discounts can be a great way to get a “foot in the door,” they shouldn’t be offered long-term.

Ongoing Cost to Serve Studies

A Cost to Serve Analysis is not just a one-and-done process. Once you’ve conducted the study and made the appropriate changes to your operations, you’ll need to continue to monitor how your new processes affect your profitability moving forward. 

Conclusion

It’s important in all industries to take a detailed look at whether or not you’re accomplishing what you’ve set out to do. If your customer relationships are, in large part, unprofitable, you’ll want to strongly consider making some changes.

The best way to identify these profitable connections is to thorough a routine Cost to Serve study.