Cost-to-serve
Cost-to-serve is a key concept in supply chain management that describes the total cost of serving a customer, a product, or an order. It provides insight into what it actually costs the business to deliver its service and enables more data-driven decision-making.
What is cost-to-serve?
Cost-to-serve includes all direct and indirect costs incurred from order to delivery.
This may include:
- Procurement and production costs
- Inventory costs and tied-up capital
- Picking, packing, and handling
- Transportation and distribution
- Administration, customer service, and returns handling
What is cost-to-serve used for?
Cost-to-serve is used to understand where profit is created and where it is actually lost in the supply chain.
It enables companies to:
- Identify customers or products with low or negative profitability
- Understand the impact of service requirements such as small orders or frequent deliveries
- Support differentiated service levels based on profitability
- Optimize pricing, minimum order quantities, and delivery terms
- Make more informed decisions about assortment and customer segments
When is cost-to-serve relevant?
Cost-to-serve is particularly relevant when a company experiences pressure on margins or increasing complexity in the supply chain.
It is often relevant when:
- There are large differences in customers’ ordering and delivery patterns
- Service levels are high, but profitability is low
- Logistics and inventory costs are rising without a clear explanation
- There are many exceptions and manual processes in order handling
How do you work with cost-to-serve?
Working with cost-to-serve requires access to reliable data across functions.
Typically, this involves:
- Collecting data from sales, inventory, logistics, and finance
- Allocating costs to customers, products, or orders
- Analyzing differences in service requirements and behavior
- Identifying improvement opportunities
- Adjusting processes, service levels, or commercial terms