Executive Briefings

A New Supply-Chain Metric: Total Cost to Serve

There is a distinct difference between the metrics of total landed cost and total cost to serve, according to David Landau, vice president for industry marketing with Manhattan Associates. The former has been a focus of many companies, covering costs incurred from the moment a product is purchased to its transfer of ownership to the buyer, or arrival at the distribution center. Total cost to serve extends that measurement to the point where the product is in the hands of the buyer's customer. It includes inventory-carrying expense, value-added services, store-ready packaging, labor at the retail store and related overhead. "When I get full visibility," Landau says, "I can create game-changing conversations around decisions with suppliers, customers and operations. Those are decisions I couldn't make without that information."

Having only recently achieved an understanding of total landed cost, many managers are just beginning to get a grasp on total cost to serve. Landau cites statistics showing that between 50 and 60 percent of companies use a simple average for figuring cost to serve. More than half of manufacturers limit themselves to three or four metrics in making the calculation.

The timing is right for deploying total cost to serve as a key metric, Landau says. Technology has developed to the point where managers don't have to rely on limited-capacity mainframes to handle the calculations. Computing power is far greater and more portable than in the past. In addition, companies have passed through all of the "mature" technologies, such as warehousing, transportation, inventory and order management. Those applications have yielded some benefits, but have largely been deployed in a "siloed" approach. Total cost to serve, in its tendency to cross functional boundaries, provides an exercise similar to that of sales and operations planning. It offers a means of bringing together buyers, merchants, operations and sales personnel, to name a few key disciplines. The exercise can help companies to determine which customers are actually generating a profit for the vendor, and which are costing more to serve than they deliver in revenues.

To view video in its entirety, click here

There is a distinct difference between the metrics of total landed cost and total cost to serve, according to David Landau, vice president for industry marketing with Manhattan Associates. The former has been a focus of many companies, covering costs incurred from the moment a product is purchased to its transfer of ownership to the buyer, or arrival at the distribution center. Total cost to serve extends that measurement to the point where the product is in the hands of the buyer's customer. It includes inventory-carrying expense, value-added services, store-ready packaging, labor at the retail store and related overhead. "When I get full visibility," Landau says, "I can create game-changing conversations around decisions with suppliers, customers and operations. Those are decisions I couldn't make without that information."

Having only recently achieved an understanding of total landed cost, many managers are just beginning to get a grasp on total cost to serve. Landau cites statistics showing that between 50 and 60 percent of companies use a simple average for figuring cost to serve. More than half of manufacturers limit themselves to three or four metrics in making the calculation.

The timing is right for deploying total cost to serve as a key metric, Landau says. Technology has developed to the point where managers don't have to rely on limited-capacity mainframes to handle the calculations. Computing power is far greater and more portable than in the past. In addition, companies have passed through all of the "mature" technologies, such as warehousing, transportation, inventory and order management. Those applications have yielded some benefits, but have largely been deployed in a "siloed" approach. Total cost to serve, in its tendency to cross functional boundaries, provides an exercise similar to that of sales and operations planning. It offers a means of bringing together buyers, merchants, operations and sales personnel, to name a few key disciplines. The exercise can help companies to determine which customers are actually generating a profit for the vendor, and which are costing more to serve than they deliver in revenues.

To view video in its entirety, click here