Introduction and challenges
A cost to serve model makes it possible to calculate the service costs for a particular customer, for a product line or a distribution channel to compare them with the associated revenues. It can be used to analyze how costs are consumed through the supply chain and manage profitability accordingly.
Indeed, the customers or different distribution channels of a company can have different behaviors that significantly impact the cost profile of the service (delivery time, target service rate, frequency and size of orders, product exclusivity, forecast visibility of demand, level of automation of information exchanges, preparation profile, etc.). Similarly, the various product lines may have different characteristics (volume, weight, fragility, etc.) contributing to very different cost structures.
The adoption of this approach facilitates strategic decision making such as commercial efforts to retain or recruit highly profitable customers, the repositioning of sales prices on unprofitable products or services, and the modification of certain routes to market models. The structuring and deployment of a cost to serve tool also encourage win-win collaborative approaches with customers to change “costly behaviors” and enhance service offerings.
How we can help
- Framing the cost to serve approach: definition of granularity and levels of segmentation (grouping of customers, products, etc.), definition of the activities involved and cost drivers
- Structuring an analytical approach for allocating and modeling cost variability according to cost drivers, building of the cost to serve model
- Definition of short and long-term action plans, and alignment of the company’s stakeholders with shared objectives
- Definition of the service and pricing policy
- Implementation of tools (modeling, industrialization) to support the approach in a robust and sustainable way as well as the associated governance