Knowing Your Actual Cost To Serve For Each Customer

Summary: Most companies can measure gross margin contributions for customer or store sales orders.  However, when it gets down to decisions regarding servicing those orders it becomes a little grayer.  Often the incremental and varying levels of costs associated with fulfilling those orders is buried and certainly not visible through the P&L.  So whats at stake?  Missed opportunities to realize significant cost reductions!  This is particularly true as companies struggle with the current shortages around transportation capacity.

Case In Point: One Chicago based company created an initiative to accurately measure the Cost To Serve of every customer through every sales channel.  The results were shocking.  For one specific channel, all customers were receiving 24 hour service deliveries (a one size fits all approach).  However, less than a third of these customers generated a positive contribution to the company’s operating margin. 

Action: Taking action on this discovery was made easier because the decisions were being made on fact based insights on the true cost to serve to each customer location.  Customers were categorized into performance segments based on sales volume, the cost to service those sales and the profit generated by those sales.  Delivery service levels were then aligned based on financial performance and an immediate $3.2 million dollars in transportation cost savings was realized.

Takeaway:  Ongoing knowledge about the specific and accurate costs to serve your customers or stores should be a core competency of your organization.  It is essential in managing the dynamic variations of operational costs and their direct impact to profit performance.  Using generalized information in managing your operation can lead to missed cost reduction opportunities.  Accurate, specific and repeatable Cost To Serve insights will allow you to out pace your competition and delight your stakeholders.

I would love to know your thoughts on this.  Please comment on this posting or email me at [email protected] .

All the best,

Richard Sharpe