Cost to Serve Analysis

In recent years many businesses have experienced a proliferation in products, customers, sales channels and distribution channels. This complexity has resulted in many businesses not having visibility as to those products, customers and activities that are profitable and those that are not. A cost to serve analysis and ongoing management can significantly improve overall business profitability.

Challenges

In recent years many businesses have added new products (including levels of customisation), customers, sales channels and distribution channels to ensure that they are providing innovative products and services in a competitive market. The introduction of these has added complexity to existing product profitability analysis and often the full cost of each is not well understood. By way of example, the increasing amount of sales conducted over the internet whilst increasing sales can add cost depending on how the product is sourced and picked; whether it is delivered to a consumer’s house, to a store, click & collect etc… In order to maximise profitability and fully understand where profits are made in the business it is important to undertake a cost to serve analysis and assess the product, channel and supply chain costs.

Opportunities

Organisations that undertake a cost to serve analysis and manage cost to serve on an ongoing basis have the following business opportunities:

  •  Understanding of which customers are profitable and which are not. This enables an organisation to consider alternative service options to increase profitability.
  • Understanding of which products are profitable and whether some should be discontinued. The information can drive target pricing for new products and also enable an analysis of whether loss leaders are part of an overall bundle of goods that are profitable.
  • Analysis of channels including use of distributors, agents etc and the profitability of each channel
  • Understanding of which distribution channel (including e-commerce fulfilment) are profitable
Approach

To undertake a cost to serve analysis we customise our approach for each of our clients’ unique requirements. However, our typical approach includes:

  • Identify key strategic questions to be answered by the analysis
  • Develop an understanding of the current product, customer, channel and distribution channel structure for the business. Clearly identify all permutations.
  • Identify cost pools including activity cost drivers
  • Utilisation of our profitability models to develop profit analysis
  • Determine actions to improve profitability and manage cost to serve on an ongoing basis

At each step of the process it is important to engage across the business and ensure buy-in to key assumptions and the modelling approach. This greatly assists with change management and ensures speed of implementation for key actions / recommendations.

Outcomes

The primary outcome of the analysis is to enable informed decisions to be made once the sources of profitability (and losses) is understood by the business. Changing the product portfolio, levels of service for differing customer groups, emphasis on different channel sales and use of various distribution channels can be adjusted to improve profitability for the business and focus limited resources in the areas of greatest value.

Testimonials

"GRA conducted a very thorough analysis and provided recommendations within an ambitious timeframe... GRA helped us improve morale and productivity almost immediately while giving us a roadmap for strategic planning as it relates to our warehouse operations."

– Larry Fells, Managing Director, Liberty Medical Pty Ltd

Typical results

  • 20-40% inventory investment reduction
  • increased service levels ranging up to 99.9%
  • 10%-15% reduction in supply chain operating costs
  • 5%-20% spend management savings
  • the ability to fund business initiatives from operating cash flow (OCF) improvements
  • improved return on capital employed (ROCE)
  • a minimum 3:1 ROI (10:1 to 30:1 typical)