Subscribe to our free, weekly email newsletter!


What is Cost-to-Serve Optimization?

Cost-to-Serve is the analysis and quantification of all the activities and costs incurred to fulfill customer demand for a product through the end-to-end supply chain.

November 11, 2010

Your ultimate goal is to increase company profitability—either making unprofitable customers profitable, or making profitable customers more profitable! If you don’t know an accurate Cost-to-Serve for current customers and products, you can’t even get started improving profitability.

There are multiple methods and disciplines to achieve this, and the distinctions between them are not always clear. The terms “Activity-based Costing” (ABC) and “Costto-Serve Analysis” (CTSA) are used to describe two different cost modeling approaches, both of which require allocating indirect costs to cost drivers in a process or supply chain model. Further, Supply Chain Network Design and Cost-to-Serve Optimization are both supply chain optimization disciplines that can identify and reduce costs and increase profitability.

So which do you use where and for what?
A starting point for understanding the two different methods is the recognition that Activity-based Costing is not Cost-to-Serve, but ABC utilizes a similar approach to CTS. Both methods center on allocating indirect cost pools to products—overhead or fixed costs that are not easily and directly attributable to a single order, shipment, or activity. Both also seek to make clear the “invisible” costs in the process or network being examined. However, the use, context, and level of detail of the two methods are different.


imageWhen a client conducted an analysis on their product and source point portfolio, it resulted in 41 SKUs being discontinued at specific source points due to excessive costs (from the LLamasoft White Paper on Cost-to-Serve Optimization)

Activity-based Costing is often used by the finance department to cost out and predict the budget of departments, processes, or business activities under changing loads of cost drivers. Without an ABC model, the financial impact of product mix and volume changes can be misunderstood and the wrong decisions made. It helps finance focus on total product costs within the four walls of the organization. ABC identifies all of the relevant activities in a process or organization of interest, then identifies a natural cost driver, such as labor hours, or product quantity, which can be related to an indirect cost pool.

By making a detailed model of all the value and non-value added activities performed in the process, and connecting the activity drivers more directly to all of the relevant cost pools, the resulting cost model is much more precise than other more traditional methods for determining “what-if” budgets. ABC is very detailed and time-intensive to prepare. It is typically used to supplement traditional cost accounting methods to analyze specific financial decisions. ABC is not typically applied to an end sales item at the point of transfer to the customer.

Cost-to-Serve has a scope across all functional areas in the supply chain and is intended to accurately assess the total profitability of an individual product or item being sold to a customer. CTS models and incorporates all activities necessary to complete the customer delivery and collect the product revenue. It models how each major supply chain activity affects the complete end-to-end cost-to-serve a customer or total landed cost for a product. Stated differently, it is the determination of the total cost of servicing each individual customer at an SKU level, and at the designated level of service.


Download this paper:
What is Cost-to-Serve Optimization?
Sponsored by:
image
* Indicates a required field
*Email:
*First Name:
*Last Name:
*Title:
*Company:
*Country:
*Address 1:
Address 2:
*City:
*State:
Province/Region:
*Zip/Postal Code:
*Phone Number:

*Q1: Are you currently looking for Supply Chain Design or Cost-To-Serve modeling tools?

 

Yes
No


*Q2: Would you like to schedule a short 1-hour web-demonstration or discussion about Cost-To-Serve modeling?
Yes
No



Save my data on this computer (do not use on public/shared computers)

Subscribe to Logistics Management magazine

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your
entire logistics operation.
Start your FREE subscription today!

Recent Entries

So far, so good may be the best way to describe the current state of progress in the negotiating process regarding the announcement made last month by FedEx that it plans to acquire Netherlands-based TNT-NV and a provider of mail and courier services and the fourth largest global parcel operator for $4.8 billion.

A new study, “Understanding Risk Assessment Practices at Manufacturing Companies,” uncovers complex business risks and disruptors facing manufacturers, and a pressing need for the industry to evolve its risk assessment capabilities.

Led by perennial earnings champ Old Dominion Freight Line, the nation’s LTL carriers as a group are enjoying a particularly strong earnings season—especially when one considers the first quarter usually is the slowest period for trucking in general with harsh winter weather bearing down on earnings.

A mixed bag may be the most appropriate way to characterize the current state of manufacturing based on the most recent edition of the April edition of the Manufacturing Report on Business issued by the Institute for Supply Management today.

The Department of Transportation’s Federal Railroad Administration and Pipeline and Hazardous Materials Safety Administration (FRA) issued its long-awaited Final Rulemaking for “Enhanced Tank Car Standards and Operational Controls for High-Hazard Flammable Trains.”

Comments

Post a comment
Commenting is not available in this channel entry.


© Copyright 2015 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA