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What is cost-to-serve in logistics and supply-chain?

What is cost-to-serve?

General definition​

Cost-to-serve is a term used in logistics and supply chain management to refer to the total cost of fulfilling a customer's order, from the point of receipt of the order to the point of delivery to the customer. This includes all of the costs associated with handling, storing, picking, packing, and transporting the products, as well as any additional costs such as returns processing or customer service.

Cost-to-serve analysis is a tool used by businesses to understand and manage the costs associated with fulfilling customer orders. It can help businesses identify opportunities for cost savings and improve efficiency in their supply chain operations. For example, a business may use cost-to-serve analysis to compare the cost of fulfilling orders from different fulfillment centers or to evaluate the cost impact of different transportation modes.

Understanding and managing cost-to-serve is important for businesses because it can help them optimize their supply chain operations and make informed decisions about pricing, customer service, and fulfillment strategies. It can also help businesses identify opportunities to reduce waste and increase sustainability in their operations.

Technical​

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.

The terms “Activity-based Costing” (ABC) and “Cost-to-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. 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.

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.

For Shippers, this is their cost-to-serve their product to their customer. For freight brokers, this could be their cost-to-serve their service to their shipper customers.

Freight brokers​

Cost-to-serve is a term that is also relevant for freight brokers, who play a critical role in facilitating the movement of goods from one location to another. Freight brokers are intermediaries who match shippers (companies that need to transport goods) with carriers (companies that have the capacity to transport goods) and help coordinate the logistics of the transportation process.

For freight brokers, cost-to-serve refers to the total cost of providing brokerage services to their customers, including all of the costs associated with finding carriers, negotiating rates, coordinating the pickup and delivery of shipments, and handling any issues that may arise during transportation. This may include costs such as salaries for brokers and other staff, marketing and advertising expenses, and technology and infrastructure costs.

Freight brokers use cost-to-serve analysis to understand and manage their own operating costs and to make informed decisions about pricing and business strategy. It is important for freight brokers to accurately track and understand their cost-to-serve in order to remain competitive in the marketplace and to ensure that they are generating sufficient profit margins.

Shipper viewpoint​

Out-going orders (spread sheet by sales orders numbers)

What they're being billed is what they agreed on

  • Detention, lumper views will be chased down (and not comfortable with saying 10% higher, then roll with it)
  • Check spreadsheet, check invoice and check by out-going customers
  • Check by sales order numbers, and allocate by case. A shipment that has 10k cases on it for 2 customers (depending on number of cases going out) and allocate the cost to the customer by the end of the month

Freight is built into the price of our mechandise, and we conver it 100%. We want it split out to validate if we are pricing it correctly to the customer. We look at this to see if we are pricing product properly for each customer, and breakdown cost to serve by customer, by case, and figure out how to properly factor in transportation in their pricing model:

  • If bunch of people accross the country, the we know those will be cheaper because we can just put it on a truck.
  • And other customers that are super strict that say "You can only deliver on Monday", and those are more expensive because it isn't FCFS, so there is a markup around a specific delivery time or expedited delivery.
  • You can breakdown that cost to serve by customer, by location, by case.