As portfolios and customer service propositions diversify at an unprecedented rate, a detailed understanding of true profitability and the ‘cost to serve’ is essential, if companies are to avoid unintentional cross-subsidisation and loss making products.
Diversification of products and customer service offerings typically lead to shorter product lifecycles and more varied production and supply economics.
As production runs and packaging requirements become shorter and more intermittent, the management time spent on these new and/or lower volume products becomes disproportionately high.
The temptation to over-simplify product costing methods can hide these complexities but mask the true cost of supply from the sales and marketing teams. This can only lead to unwittingly cross-subsiding customers and/or destroying profit.
In these environments, the true cost to serve and profitability needs to be accurately calculated and continually assessed. Costs should be allocated for actual operational rates for inventory carry, obsolesence, line speeds, changeover groups, product handling and shipping channels and then measured against the net sales revenue.
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