Cost-to-serve

Example 2 - Resource inputs and customer profitability. Firms invest resources in a customer relationship with the objective of earning a return on that investment. Consistent with this goal, Shapiro, Rangan, Moriarty, and Ross (1987) develop the price versus cost-to-serve (which includes pre-sale, order-related, distribution, and postsale service costs) framework, which links vendor investments to the returns from each customer relationship. This relationship, however, is not a simple one efforts to find a strong correlation between vendor investments in a relationship (as measured by cost-to-serve) and returns (i.e. price paid by the customer) typically fail. Shapiro, Rangan, Moriarty, and Ross (1987) interpret this as evidence that high income does not necessarily mean high cost-to-serve. And nor does low income necessarily mean low cost-to-serve. 

Table 11.4. Analysis using the price versus cost-to-serve matrix... 

Price Cost-to-serve Supplier rank Share of customer wallet (SCW) Overall satisf. Satisf. with competition Operating margin Total sales ( k) Share costs Competitor share costs... 

Significantly less than the low-price, high cost-to-serve subsample mean. 

Shapiro, Rangan, Moriarty, and Ross (1987), Rangan, Moriarty, Gordon, and Swartz (1992), and others conceptualize industrial buying behavior segmentation in mature markets as based on price and cost-to-serve. This framework permits the linking of a vendor s customer management effort (value creation) with ability to extract customer value (prices). ... 

To utilize the framework with our data, we first classified each customer s price (high versus low) and cost-to-serve (high versus low) using median splits. We compared the means across the resulting four groups on customer profitability, size, share of wallet, satisfaction with vendor performance, satisfaction with competitor performance, and propensity to share costs. The results are provided in Table 11.4. 

We also find that customers in the low-price, low cost-to-serve quadrant, although typically not the largest ones, are most likely to share costs. They are also the most difficult to satisfy, are equally satisfied with their other vendors performances, and are unprofitable. It is possible that these customers share costs with vendors and jointiy work with them to reduce the overall procurement costs. But rather than mutually share the gains from cost reductions, it appears that these customers might squeeze margins beyond the cost reductions that accrue to the vendors. 

Standards have shifted from being neutral market lubricants to serving as new tools of product differentiation. We are witnessing a fundamental shift in their role from reducing transaction costs to serving as strategic tools for market penetration, system co-ordination, quality and safety assurance, and even product niche definition (Giovannucci and Reardon, 1999). 

Network Design Probability of Demand Channel Design. Cost-to-Serve Analysis Network Design Supplier Network Supplier Rationalization... 

In the most mature companies, revenue management is a subprocess or a piece of cost-to-serve analysis. Cost to serve is defined as a process that calculates the profitability of products, customers, and... 

The benefit of cost-to-serve analysis is twofold identification of the cost elements of a relationship and the visualization of orders that are not profitable. The relative costs per customer can vary greatly as shown in Figure 5.6. 

There is a deep understanding of value chain economics and cost-to-serve by various segments and/or customers. 

Activity based costing Value pricing based on cost to serve ever day low pricing (EDLP) cost plus pricing 2-Modularization and vertical range of value creation 0 ... 

Value pricing based on Cost to Serve EDLP cost plus pricing... 

Golden Circle commenced engaging its major suppliers in its change process in December 2003 when it initiated a workshop to inform its chain partners of its internal change initiative and to invite them to participate in a whole of chain approach to improve customer service while at the same time reduce their collective cost to serve . Subsequently, the chain partners agreed on a series of joint chain improvement projects across four major areas - fruit intake, internal processing, customer service and packaging. 

Avoid allowing cost to serve negate emphasis on overall value... 

The 80/20 rule will often be found to hold 80 per cent of the profits of the business come from 20 per cent of the customers. Furthermore, 80 per cent of the total costs to serve will be generated from 20 per cent of the customers (but probably not the same 20 per cent ). Whilst the proportion may not be exactly 80/20 it will generally be in that region. This is the so-called Pareto Law, named after a nineteenth century Italian economist. 

The appropriate measure should be profit rather than sales revenue or volume. The reason for this is that revenue and volume measures might disguise considerable variation in costs. In the case of customers this cost is the cost to serve , and we will later suggest an approach to measuring customer profitability. In the case of product protitability we must also be careful that we are identifying the appropriate service-related costs as they differ by product. One of the problems here is that conventional accounting methods do not help in the identification of these costs. 

The advantage of using activity-based costing is that it enables each customer s unique characteristics in terms of ordering behaviour and distribution requirements to be separately accounted for. Once the cost attached to each level of activity is identified (e.g. cost per line item picked, cost per delivery, etc.) then a clearer picture of the true cost-to-serve will emerge. Whilst ABC is still strictly a cost allocation method it uses a more logical basis for that allocation than traditional methods. 

From trucks and sheds to end-to-end pipeline management A wider definition of supply chain cost Understanding of the cost-to-serve and time-based performance indicators... 

Closely related to the preceding issue is the problem of cost transparency. What this means is that costs relating to the flows of material across functional areas are not easy to measure. Hence the real costs to serve different customers with different product mixes are rarely revealed. 

In the case of Better, Faster, Cheaper, Closer , the processes that lead to perfect order achievement , shorter pipeline times, reduced cost-to-serve and stronger relationships need to be identified. 

Cost-to-serve how do we manage full service costs for healthy, profitable growth ... 

Managing with cost-to-serve to support growth and profitability 305... 

The concept of cost-to-serve shows that the supply chain contributes significantly to profitability. Cost-to-serve also enables a local firm to home in on the best growth opportunities, which would otherwise be difficult to identify. 

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