Optimising Cost to Serve
In recognition that every customer has different needs and expectations, especially in regards to what they are prepared to pay for a given level of service, it is wise for businesses to understand those customer dynamics, and ensure that their service offering meets as wide a variety of requirements as possible.
To illustrate, online retailers may offer one price for delivery within 28 days, and another, likely higher price, for next day delivery. This is now very common, but how does one set the right price points in a business?
Secondly, to achieve a given level of service (say, 95%) could be relatively easy, but for each additional 1% the cost can increase dramatically. At what point does one decide to stop chasing the extra 1%?
Applied Acumen has an excellent and easy to understand process for determining these variables, so that you can offer what your customers may want, whilst ensuring that you make the right margin.
Does this apply to every industry or sector?
Any business or organisation is providing a product or service of some sort, and the dynamics are there. If you are doubtful whether cost to serve is important to your business, it is worth having an exploratory discussion to find out more. Contact us here.
We have a very complex service offering, can you help?
We have undertaken assignments in 100,000 sku distribution operations with multiple ordering and delivery variables, and in field service operations servicing vulnerable client groups where 100% service is mandatory, but where transparency of cost to serve is as difficult as it gets (multiple agency stakeholders etc).
We don’t know whether we’re making money or not?
This is true of so many businesses, many of which are household names!
Often, consultants will examine the product portfolio and undertake a pareto analysis, subsequently glibly recommending a hacking off of the ‘tail enders’. This is unhelpful.
It is not only important to understand the cost construct of products, it is even more important to do so not in the context of how you are currently performing, but in how you could be performing.
To illustrate, a factory GM declined to renew a contract with a customer since the product on offer did not meet the targeted margin criteria. However, not only was this rather easy to produce item providing sufficient contribution to keep the lights on even at current performance levels, if it were run at improved levels of performance – levels which could be demonstrably achieved – the target margin could all but be achieved anyway. The factory was subsequently hauled out of administration after being forced to close.
Whether it is cost of manufacture, or cost to deliver, or both, it pays to have expert analysis.
Contact us to explore how we might help.
We have to hit 100% so do the dynamics still work?
This situation is one we are familiar with.
Some supermarkets will demand 100% service levels from their suppliers and fine them for every unit that is short, or threaten delisting if the service does not meet required levels.
Automotive OEM’s like Honda demand 100% right first time, on time in full.
Some businesses simply have to hit 100% because they are servicing vulnerable client groups (hospital release patients, for example), and 99.9% could potentially be fatal.
It might not be life or death for everyone, but in each case, the cost to serve dynamics are critical and need to be known, so that the right levers can be pulled and the right decisions made.