Cost to Serve is a process-driven
accountancy tool used to calculate the
profitability of a customer account, based on the actual business activities and overhead costs incurred in service that customer.
Businesses are able to reposition customers and services, and how they are served to improve overall margin.
Supply chain management
In the context of
supply chain management
In commerce, supply chain management (SCM) is the management of the flow of goods and services including all processes that transform raw materials into final products between businesses and locations. This can include the movement and stor ...
the tool can be used to analyse how costs are consumed throughout the
supply chain
In commerce, a supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. It refers to the network of organizations, people, acti ...
. It shows that each product and customer demands different activities and has a different cost profile. The product and customer profiles are often illustrated using a
Pareto analysis
Pareto analysis is a formal technique useful where many possible courses of action are competing for attention. In essence, the problem-solver estimates the benefit delivered by each action, then selects a number of the most effective actions tha ...
curve which highlights those that contribute most to the company's profit and those that erode it. Unlike
Activity Based Costing
Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore, this model assigns more ind ...
(ABC), Cost to Serve is not resource-intensive and focuses on aggregate analyses around a blend of cost drivers. The tool gives an integrated view of costs at each stage of the supply chain, providing a fact-based view to unravel the complexity of multiple supply chains and channels to market. It enables a focus on both long-term decisions and the prioritisation of short-term actions.
See also
*
Pareto principle
The Pareto principle states that for many outcomes, roughly 80% of consequences come from 20% of causes (the "vital few"). Other names for this principle are the 80/20 rule, the law of the vital few, or the principle of factor sparsity.
Manage ...
*
Activity based costing
Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore, this model assigns more ind ...
*
Supply chain management
In commerce, supply chain management (SCM) is the management of the flow of goods and services including all processes that transform raw materials into final products between businesses and locations. This can include the movement and stor ...
Notes
References
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Further reading
*Christopher, M (2005), ‘Logistics and Supply Chain Management’, 3rd edition, Financial Times/Prentice Hall
- LCP Consulting Ltd*Braithwaite, Samakh (1998), 'The Cost-to-Serve Method', The International Journal of Logistics Management, Volume 9 Issue 1 p69-84, ISSN 0957-4093
*Guerreiro, Bio, Merschmann (2008), 'Cost-to-serve measurement and customer profitability analysis', The International Journal of Logistics Management, Volume 19 Issue 3 p389-407, ISSN 0957-4093
*Australian Food & Grocery Council / Focus Information Logistics
'A Guide to using cost to serve to enable effective customer engagement'
Supply chain management