Moving from ‘Cost’ to ‘Serve’
by Tim Richardson | Iter Insights
Moving from ‘Cost’ to ‘Serve’
Cost to Serve as a mature process in many industries helps optimise supply chains to provide the required service at lowest cost. Cost to serve modelling can also be used to define and manage risk and with the current global supply issue the focus has increasingly moved to focusing on “to serve” and less on “cost”.
Iter’s approach to cost-to-serve analysis reveals the true cost of servicing individual customers (usually the most important) and how this can be optimised in a systemic and scalable way. A key part of this process is how we allocate “fixed” costs at customer, product, geography, and channel levels to reflect complexity and its associated cost. Advanced analytics then provide insights and allow scenarios and approaches to be tested before committing to a segmented approach.
In our last article we looked at why supply chains have recently broken down and what can be done about it. In this article we look at how to use Cost to Serve as an important element in getting clarity about the cost of multiple sources of supply and stocking, and where this should be focused to give the best service to your most important and profitable customers.
Iter, with its analytics partner AlignAlytics, operate a unique double pareto approach that initially segments customer/SKU combinations into quadrants that reflect where the real value lies. Adding proxies for the cost of complexity then refines this to show where your profit is really made and where in these challenging times our focus needs to be. To understand in more detail have a look at the webinar that we ran on this subject.
With this insight, it is clear where the business is making its profit and where serving a customer/SKU combination is value destroying. Armed with this knowledge we are then able to model scenarios such as duplicated manufacturing capability or additional stock holding. Applying these globally or to specific segments of demand will help define how best to focus on meeting your most important customer/SKU combinations as profitably as possible. It will also help you understand if there are segments of your current demand that you simply can no longer afford to serve.
Two of our clients have faced very different challenges and have adopted quite different strategies as a consequence:
- An automotive client with acute shortages of electronics is directing its very limited supply to the ranges and mixes within the ranges that are most profitable and in effect, using extended lead times, temporarily limiting the product range
- A pharma business that has been experiencing a significant increase in OE demand, has predicted the rise in consumables and has used Cost to Serve to pre-position stock and is now enjoying growth in the consumable business, without haemorrhaging demand to competitors through a lack of supply
How We Can Help
To understand how these approaches can help your business to out compete your competitors and how the strategic analysis of Cost to Serve can be used to transform your focus on your most valuable customers please contact me here and I’d be delighted to share experiences.
Welcome to Iter Insight, this is one of a monthly series of articles from Iter Consulting addressing the most critical operational and supply chain problems businesses face today.