Cost to Serve Analysis: A Competitive Advantage Hiding in Plain Sight

In an era of economic instability — fueled by geopolitical tensions, on-again, off-again trade policy shifts, and looming threats of an upcoming recession — order management and supply chain efficiency are critically important for businesses hoping to remain competitive, profitable and resilient for years to come. The people, processes and technologies that encompass these operations play a significant role in helping to maintain service levels, mitigate risks, protect profit margins and nurture customer relationships.  

A proven method for ensuring high-performing order management and supply chain operations is tracking key performance indicators (KPIs) — a set of quantifiable metrics that enable businesses to measure their performance or progress against a set of objectives industry peers. Tracking KPIs related to order management and supply chain performance not only shed light on operational trends that facilitate order tracking, delivery commitments and accountability across multiple teams and departments, they also yield broader insights that inform strategic business decisions.  

Deciding what KPIs to track is dependent on the organization’s objectives — there’s no “magic metric” or specific number of KPIs a business needs to prioritize to ensure success. However, there are tried-and-true KPIs proven to be highly effective at guiding businesses on where they should focus their order management and supply chain improvement efforts.

These KPIs often include:

• Order Cycle Time — measures the average time it takes to ship an order after it was placed (excluding actual shipping time)
• Response Time — measures how long it takes Customer Service teams to respond to a customer inquiry
• On Time in Full — assesses a company’s ability to fulfill its delivery promises on schedule and with the correct number of goods
• Perfect Order Rate — measures if the right order is fulfilled in full, while evaluating the accuracy of associated documentation, labeling and invoicing
• Customer Satisfaction Score — measures customer satisfaction related to a particular interaction or purchase
• Net Promoter Score — provides companies with broad, high-level insights into customer satisfaction levels, measuring a customer’s overall relationship with or perception of a company
• Employee Satisfaction — evaluates how satisfied employees are with their job and company

The above KPIs run the gamut on the issues that matter most to order management and supply chain performance — from operational speed and order quality to customer and employee satisfaction. However, when it comes to maintaining profitability in today’s margin-sensitive environment, one not listed above stands out above the rest: Cost to Serve.

What is Cost to Serve?

Cost to serve is the total overall cost that goes into serving a customer or producing a product. Cost to serve includes all granular cost factors throughout the production process.

Imagine you’re a wedding photographer. You’re booked for an upcoming shoot for a total of 4 hours for which you’ll be paid $3,000. At first glance, you might think, “Wow, that’s a good haul for a half day’s work.” But upon closer examination, the actual take-home profit for this service is significantly lower when accounting for all the time and costs — both direct and indirect — that go into serving your soon-to-be-married clients.

Consider, for example, the time spent consulting with the couple, planning the timeline, sending follow-up emails, scouting the location, reviewing contracts, sending invoices, and editing, exporting and uploading photos. Add in the costs of gas and travel, camera equipment and backup gear, and (potentially) hiring an assistant photographer, and it’s easy to see how that top-line revenue of $3,000 quickly becomes more mirage than reality.

It’s this analytical framework that yields significant value for business leaders concerned with their order management and supply chain performance. Far beyond what product or service is being sold and how much money is made by selling it, developing a Cost to Serve model arms companies with a forensic view into specific factors involved in fulfilling the demand for goods or services, including: 

• The efficiency and effectiveness of operations (order quantities, inventory costs, freight and delivery costs, return processing costs, etc.)
• Patterns and trends in customer behavior that impact transactional costs (order size, frequency, cost per order, etc.)
• Variations in customer costs based on location and segmentation
• Price and alignment of service levels
• Margins at the product, SKU, customer and channel level 

From a broader perspective, Cost to Serve plays a significant role in company’s decision-making and growth strategy, as leaders are afforded a clearer understanding of which customers and products are most profitable, which aren’t, and how to identify potential underlying issues to effectively address them. 

How to calculate Cost to Serve

Unlike other KPIs related to order management and supply chain management, Cost to Serve casts a much wider data net and can’t be tied to a single mathematical formula. With that being said, the cost to serve formula can be simplified to the following steps:

1. Identify what activities (quoting, order-taking, warehousing, transportation, etc.) are necessary to service and maintain each customer and how often that activity is performed.
2. Approximate cost of doing each activity.
3. Identify a value that each customer comprises of these activities and perform cost allocation.

Cost to Serve measurements are traditionally kept using spreadsheets or some combination of ERP systems or data modeling techniques. However, the most effective way of tracking KPIs like Cost to Serve requires some form of digital support — specifically, AI-assisted automation solutions that not only facilitate the accessibility and visibility into KPIs, but ultimately help you improve them over time by improving the very people, processes and technology they reflect.

To learn more about AI-driven automation’s role in improving KPI performance, download the ebook: 8 Order Management KPIs Worth Measuring to Achieve B2B Customer Service & Supply Chain Excellence. 

Benefits of measuring Cost to Serve

A well-planned, thoughtfully executed Cost to Serve analysis can have a significant bottom line impact and be key in constructing a more sustainable operating model. Business benefits of utilizing the cost to serve model include:

• Cost savings + revenue growth. When you know where all the money goes, you know how to better manage it. Post-Cost to Serve analysis, companies are better equipped to take cost-saving measures like service reductions and institute more efficient internal resourcing, while increases in single sale prices or line-item surcharges further drive revenue growth. 
• Improved customer satisfaction. Meeting customer expectations requires strategic supply chain planning. Thanks to the insights provided by your Cost to Serve model, businesses can be more proactive (improving product mix, realigning supply networks, etc.) to achieve mutually beneficial delivery outcomes. 
• Enhanced supply chain visibility. By their very definition, supply chains are interconnected. A Cost to Serve analysis not only shines a light on how changes at one link of a supply chain have a downstream effect on others, it also informs businesses on how to harmonize operations to avoid issues in the future.
• Rapid, data-driven decision-making. The Office of the CFO and other c-level leadership need to make fast, informed and impactful decisions in order to stay competitive and resilient. The data provided by a Cost to Serve model aids in exactly that — helping to identify quick wins and actionable improvement opportunities, while also catalyzing conversations about longer-term supply chain strategies.

The process of gathering variables to inform and improve your Cost to Serve model can often be time-consuming, complex and imprecise — especially in highly dynamic business environments. But these hurdles should not deter companies from prioritizing Cost to Serve as KPI and reaping the rewards mentioned above. Rather, it should highlight the importance of having a strong, complementary digital foundation in place that facilitates data analyzation and performance improvement.

Where AI & automation tie in

Maximizing the impact of your Cost to Serve model requires alignment of all key stakeholders and ongoing evaluations as to what factors are most well suited to your Cost to Serve strategy. A business might not be able to control every contributing factor across the value chain that impacts Cost to Serve, but they can control how efficient their order management and supply chain operations are running — especially with the aid of AI-driven automation solutions such as Esker Order Management.

Powered by targeted and practical AI technologies such as machine learning, GenAI and NLP, Esker Order Management is designed to free up B2B Customer Service teams from the drudgery of manual order management activities by reducing the:

• Amount of average touches on an order and other common points of “friction” (navigating disparate systems, working with various spreadsheets, etc.)
• Average handling time for each order, particularly for high-involvement cases like change orders, which are often associated with unnecessary costs
• Other B2B Customer Service costs associated with fulfillment errors and communication snafus, reliance on paper, printers and ink, and loss of customer trust

Above all else, automated order management solutions bring all order management and supply chain information together in one centralized interface. Real-time metrics, performance trends and items analytics are readily available at the click of a button — ensuring your Cost to Serve model is always guided by good data and operational inefficiencies are nipped in the bud, thus, lowering your total Cost to Serve.

Think Esker Order Management might be just the solution your Cost to Serve model needs? Visit our solution page to learn more or request a demo to see our AI-driven tech in action.