Managing supply chain costs effectively is critical for profitability, yet many businesses struggle to determine the true cost of serving their customers. A one-size-fits-all approach to cost allocation can obscure inefficiencies, leading to unprofitable operations. Cost to Serve (CTS) analysis provides the visibility needed to make informed decisions, ensuring that resources are allocated efficiently and margins are protected.
What is Cost to Serve?
Cost to Serve (CTS) is an essential financial metric that calculates the true cost of fulfilling demand for a product or service. Unlike traditional costing methods that apply broad averages, CTS provides a granular view of costs incurred at each stage of the supply chain.
This includes warehousing, handling, transportation, packaging, and customer service.
By accurately determining these costs, businesses can identify which customers, products, or channels are truly profitable and where inefficiencies may be eroding margins.
Why is Cost to Serve Important?
Understanding Cost to Serve allows businesses to make data-driven decisions that optimise their supply chain and enhance profitability. Many companies assume all customers contribute equally to revenue, but in reality, 20-40% of customers may be unprofitable. Without CTS analysis, businesses risk under-pricing services, misallocating resources, and absorbing unnecessary costs.
A robust CTS strategy enables:
- Profitability Assessment – Identifying which customers, products, or sales channels contribute positively or negatively to the bottom line.
- Process Optimisation – Highlighting areas where operational efficiency can be improved, from warehousing to last-mile delivery.
- Strategic Pricing – Ensuring pricing reflects actual servicing costs to maintain sustainable profit margins.
- Informed Decision-Making – Enabling data-driven choices for customer segmentation, resource allocation, and supply chain investments.
Key Components of Cost to Serve Analysis
To determine CTS, businesses must evaluate multiple cost drivers across the supply chain, including:
Cost Driver | Description |
|---|---|
Warehousing | Storage costs, inventory handling, picking and packing operations. |
Transportation | Freight, last-mile delivery, courier costs, and return logistics. |
Order Processing | Administrative costs related to sales orders, invoicing, and fulfilment. |
Customer Service | Support costs, returns handling, and complaint resolution. |
Channel Costs | Costs incurred through different sales channels, e.g. eCommerce vs. wholesale. |
Sustainability Factors | Energy usage, waste management, and carbon emissions related to logistics operations.
|
How to Calculate Cost to Serve
There are different methodologies to calculate CTS, ranging from traditional spreadsheets to advanced analytics platforms. The formula is typically:
Cost to Serve (per customer or product) = Total cost of service / Number of units or customers served
However, determining the total cost of service requires detailed cost allocation across the supply chain. Traditional CTS models rely on estimated labour and overhead costs, while modern approaches use real-time data from Warehouse Management Systems (WMS), Transport Management Systems (TMS), and other digital tools.
Challenges in Cost to Serve Analysis
Despite its benefits, implementing a Cost to Serve analysis presents several challenges:
- Data Accuracy & Visibility – Many businesses lack a consolidated view of cost data across departments.
- Complexity of Cost Allocation – Assigning precise costs to each customer or product can be difficult.
- Dynamic Market Conditions – Customer demand, transportation costs, and supplier pricing can fluctuate, impacting CTS.
- Balancing Detail with Actionability – Too much data can lead to “analysis paralysis,” making it crucial to focus on actionable insights.
How BoxLogic Can Help
At BoxLogic, we specialise in helping businesses understand, optimise, and reduce their Cost to Serve through expert supply chain consultancy. Our approach includes:
- CTS Data Modelling & Analysis – Identifying key cost drivers and providing clear visibility into profitability.
- Process & Operational Improvements – Recommending efficiency-enhancing strategies to reduce servicing costs.
- Warehouse & Logistics Optimisation – Evaluating storage, picking, and transport solutions to drive down costs.
- Customer Segmentation & Pricing Strategies – Helping businesses tailor service levels and pricing based on CTS insights.
Understanding your Cost to Serve is not just about cost-cutting—it’s about strategic decision-making that enhances profitability and customer satisfaction. Contact BoxLogic today to discuss how our expertise can help transform your supply chain operations.
