Every day, companies are becoming more and more competitive in order to make their products and services profitable. In response, they need to look for ways that will drive efficiency both in their operations and at the consumer level. Many manufacturers use various models, such as the “top-down” model or the “bottom-up” model, to determine best practices for their supply chain management strategy. You can check this out for more details.
These models are often used with certain limitations that lead to wasted resources. In this blog post, we’ll discuss how to create a cost-to-serve model and determine which customers are worth more than they cost in order to drive a profitable supply chain.
What Is Cost-to-Serve?
Cost-to-serve (CTS) is a measurement of the true cost to deliver a product or service, typically accounting for all aspects of the business’s operations. CTS includes not only what it costs to make and sell a product, but also all the other expenses required to bring the product or service to market. CTS is an important factor in estimating margins, profitability, and competitive position for businesses – as well as understanding customer willingness and ability to pay.
What Are The Benefits Of Cost-to-Serve?
Cost-to-serve is important because many companies focus only on their direct costs when determining profit and market share. Direct costs are easy to measure because they can be traced back to specific products or services. However, they do not take into account all of the other expenses incurred by a company to run its business.
These indirect costs have a big impact on profitability and should not be overlooked. A business that can identify and understand its total cost-to-serve can make informed decisions about pricing, product mix, volume, and capacity – all of which will affect the company’s profit and competitive position.
Measuring CTS is especially critical for understanding profitability, strategic direction, and market positioning. These are vital in one’s attempt to keep the business competitive by aligning prices with the actual cost of providing a product or service.
Determine Your Cost-to-Serve Model
To create your CTS model, you’ll first need to measure the costs that your company incurs for each vendor and customer in its supply chain. Once you’ve identified these costs, you’ll be able to determine:
1. The average cost per vendor
This metric will help you identify the vendors that are worth more than they cost and the vendors that are costing more than they’re worth. You can aggregate average costs across major categories (i.e., raw materials, labor, energy, etc.). The average cost per order for customers. This metric will help you understand the distribution of costs associated with your customers.
2. Identify customers that are worth more than the cost
You can use your cost-to-serve model to identify customers that are worth more than they cost. To do this, compare CTS against WTP and look for the customers with a positive value. These customers should have a CTS that is less than or equal to their WTP. If a customer is willing to pay more for your supply chain services than it costs you to serve them, then they are worth more than they cost.
3. Identify customers that are costing more than they’re worth
You can also use your cost-to-serve model to identify customers that are costing more than they’re worth. Compare CTS against WTP and look for the customers with a negative value. These customers should have a CTS that is greater than their WTP. If a customer is paying less for your supply chain services than it costs you to serve them, then they are costing more than they’re worth.
Cost-to-Serve Models: How To Use The Data To Drive Profitable Supply Chain Decisions
Use this CTS model to justify reducing your costs and thereby increasing your operating margin. You can use the additional money that you save to give back in the form of better customer service, product features, or other value-added services that will increase your WTP. The more value you provide, the more you can charge for your products or services.
There are a number of ways for you to reduce costs. You can re-optimize your supply chain to eliminate waste, reduce transportation costs, and minimize inventory levels. You can also use CTS to justify teaming up with new suppliers that will allow you to cut costs.
The cost-to-serve model helps you identify the customers that are worth more than they cost and the ones that are costing more than they’re worth. You can use this model to justify making profitable supply chain decisions that will lead to long-term growth.