Know Your Cost-to-Serve

Blog | May 1, 2012 by Mike Wise

I previously discussed how my daughters’ spending was out of control and how that compared to some distributors I have worked with whose spending was also out of control. I had a few suggestions that could help both my kids and these distributors get their spending under control.  And since there are similarities (or since the analogy worked so well) that exist between the two, I’m going to use the analogy again on the topic of cost-to-serve.

Both of my daughters have smart phones, and I’ll give you one guess who is paying for them.  I would consider them both ‘power users’ based on how many texts messages and data they use per month.  However, that’s where the similarities end.  My oldest daughter is fairly self-sufficient. If she has an issue with the phone, she can usually figure out how to fix it using websites, blogs, friends, etc.  My youngest, however, uses the genius bar so often I’m surprised they don’t know her by her name.  That difference got me thinking, does the phone provider realize how many resources they are allocating to service my younger daughter?  If they did, would they want to sell her a new phone and extend her contract?  Would they want to charge her more than they would a different customer like my oldest daughter who has a service cost of zero?

Today, distributors serve customers in an increasingly complex environment involving more services, more channels, and more demands, all of which contribute to raise indirect costs. Business leaders often have no clear understanding of the reasons behind the indirect cost creep. In this challenging environment, distributors need help keeping indirect costs immediately visible to all their decision makers.

With reliable visibility into cost-to-serve, executives across your enterprise can help manage decisions that impact indirect cost and net margin by customer, product, and channel. You can distinguish the combinations and activities that are profit makers from those that are loss makers. You can learn from both your successes and your shortcomings to sharpen your competitive edge, adjusting your contracts with channel representatives and your product mixes as needed.

If you had insight to the drivers of your indirect costs, you can tackle a wide array of profitability and cost issues confronting your company across diverse disciplines, including finance, sales, marketing, operations, strategic planning, and product category management. You could see quickly how product mix, order frequency, and delivery method impact profitability in each market segment. And you could analyze net margin by customer as well, in order to manage informed interactions that can help improve customer performance, raise prices or even fire a customer?

Ideally, today’s distributors would like to identify and learn from their top customers and modify tactics with the least profitable ones. They would like to view cost-to-serve history by customer segment to target particular customers with new modes of interaction, such as indirect sales for low profit customers. And distributors would also like to investigate how to optimize the customer, product, and channel mix at any point by drilling down through multiple levels in all dimensions. Companies can raise operational efficiency and effectiveness by learning what worked in the past and understanding where potential improvements can be made.

Cost-to-serve has always been on the minds of distributors, but unless you were ready to tackle an Activity Based Cost project, you were unable to really get a handle on the cost to serve your customers.  Today, with the tools available, you no longer need a full blown ABC model to understand your cost to serve and have the information to stratify your customers and service them in a manner that is better for both you and your customers. With a true view into cost to serve, your company can  develop better strategies, track key performance indicators along the value chain, uncover and address cost issues early, and enhance your bottom line.

Mike Wise is the Industry principal for Wholesale Distribution at SAP America.  He is a wholesale distribution technology and operations leader with over twenty years of comprehensive experience in distribution and logistics environments, executing operational improvement strategies through technology. He focuses on enabling efficient distributor operations with SAP for Wholesale Distribution solutions.

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