Increasingly complex supply chains have to meet the demands of customers and streamline logistics while keeping the end-to-end supply chain profitable.
Given the complexity of data and information exchanged through the network, supply chain profitability has to be properly measured without impacting on customer satisfaction.
Supply Chain profitability can be improved by looking at Cost to Serve (CTS). The CTS approach identifies specific actions to maximise the organisation’s bottom line by calculating how much it costs to serve the customer through the existing supply chain.
Calculating what it costs to deliver a product and service to the customer, and comparing it with the invoiced amount, can determine whether your business is at an overall profit or loss. Assuming the production cost stays the same, the overall profitability is calculated after subtracting the production costs from the sales price.
However, there are further expenses sustained in the supply chain that can affect the overall profit – sometimes to the point of substantial losses.
Take, for example, promotional discounts, marketing costs, storage, packaging, and transportation. Add any other costs incurred by additional customer-specific requirements and returns management, and you get the picture.
A large portion of the CTS analysis in the end-to-end supply chain is credited to logistics costs. Streamlining the process and reducing these costs – for example, opting for a less expensive transport solution to deliver low margin products – enables your business to remain profitable.
The Cost To Serve analysis offers many advantages to your organisation and its end-to-end supply chain, as it can accurately identify opportunities to improve or recover profit, transform existing customer losses into profitable transactions, and determine the level of pricing and service required to keep profit on an upward trend.
There is real value in knowing and implementing a CTS analysis as part of your supply chain optimisation procedure. Bear in mind that your business should focus on balancing profitability levels with customer satisfaction and logistics requirements.
A comprehensive CTS analysis involves the entire supply chain and requires intelligent data collection, modelling and analytics. The model can be implemented to improve real-time decisions about order handling, transport routing, and warehousing.
Finally, one of the greatest advantages of using CTS – beyond the cost-effective analysis – is the research and reporting that investigates alternative projections and future scenarios to act as business intelligence and add value to the end-to-end supply chain where it matters.