Cost to serve is the cost analysis of all cost factors that go into the service of a customer or production of a product. This analysis enables you to accurately calculate each customer’s and product’s profitability. For most companies, between 20-40% of customers are actually unprofitable. With Cost-to-Serve, you are able to see which customers and products make you the most money and which ones lose money. Armed with this information, you can reprice your services accordingly or invest in process improvements and optimization to reduce costs of those unprofitable services
Today’s hyper competitive world requires the best information to compete. Companies are aggressively moving towards data driven decision making. The rapid rise of the IoT (internet of things) enables data analytics like never before. Armed with this data, companies like Amazon are able to out maneuver their competition by undercutting prices where market inefficiencies exist. Companies that do not have this information are at a severe disadvantage when going head to head with data driven firms. Cost-to-Serve is a powerful analytics methodology that gives companies tremendous insight into their process, customer, employee and product profitability. Without it, it is hard to pinpoint where you are making money and losing money.
How to Calculate Cost to Serve
There are different methods used to determine cost-to-serve. The most common and least complex method is to estimate average cost for each process then multiple that cost by the transaction volume. The average is usually determined by an estimated labor standard, ie it takes 5 minutes to perform this process per cost unit. So if there are 12 units, the cost is 1 hour of labor plus the pro rata allocation of fixed costs. This is usually accomplished with spreadsheets analysis of an output from the ERP system. As well, there are some commercially available packages that better systematize this approach. This method can be effective, but it is highly dependent upon both the accuracy and consistency of the time estimates which from our experience is highly variable based on employee performance and volume.
Easy Metrics takes a different approach by integrating with all of the workflow transactional data in a company. This data tells us the time spent on every transaction by every employee for each customer, product, equipment type and process. Merging that data with employee wage data and other cost metrics, Easy Metrics can then calculate near real time your cost-to-serve across all aspects of your business based on actual labor spent per process for each customer versus an estimated amount which is far more accurate.
Historically, building cost to serve from the transaction data was too challenging for most companies, but Easy Metric’s integration tool, Logic Writer, takes the normally complex process of multi-source data integration and effortlessly automates it. Logic Writer is able to integrate multiple data sources from WMS, TMS, CRM, MRP, time clocks and telematics into a comprehensive cost and performance model that shows you cost-to-serve by customer, employee, process and product.
Benefits of Cost to Serve
Cost to Serve tells you where you are making money and where you are losing money. The CEO of the 800 lb e-commerce gorilla is quoted as saying “Your margin is our opportunity!”. The days of averaging your costs over all customers/products no longer works. You need to know what the true cost is for every product, service, and customer in your business to compete effectively. Armed with this information, you can out compete the competition and take advantage of their lack of understanding of true costs.