Cost to serve

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.

Client successes

  • Conducted full product profitability analysis for a global packaging company, leading to a 20% reduction in the portfolio offered.
  • Developed a pricing model for third party bottling services.
  • Conducted a cost to serve exercise for a leading soft drinks company, which identified that 50% of the portfolio was loss making, as well as the NPD economics for all launch volumes.
  • Conducted full cost to serve review for UK pub distribution business identifying optimal distribution quantities and network economics.
  • Conducted full cost to serve review for UK drinks distribution business, to re-align third party pricing policies.

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Cost to serve