Cost to Serve

Cost to serve is an approach to customer accounting that calculates the true profitability of a customer, based on the total costs of supporting that customer. Just as different products have different cost structures, so customers may have different cost profiles. For example, Customer A may contract annually and arrange for 12 monthly drops against a delivery schedule updated quarterly. The customer has one decision maker who seeks technical support on average once every 90 days. Customer B may buy hand-to-mouth, with ad-hoc orders which are always ‘panic buys’ with short lead times, and have a total of 26 drops in the last 12 months. There are three technical officers who seek regular guidance and each seeks technical support at least once a month. Assuming that both customers purchase identical volumes, the ‘cost to serve’ of each customer will be very different. A pricing regime that is based on volumes will charge both the same price, while the real profitability of Customer A will be higher than that of Customer B. A ‘cost to serve’ approach would price the same product at a higher price to Customer B than to Customer A if the supplier wanted to achieve the same profitability. See also Service Level.

In short

Cost to serve is the full cost a supplier carries to support one customer: ordering, delivery, service and administration, not only the product. Two customers buying the same volume can cost very different amounts to serve.

What drives cost to serve

• Order pattern. Many small orders cost more to process than a few large ones.
• Lead times. Urgent and short-notice orders cost more to fill.
• Delivery. The number of drops, sites, time windows and any special handling.
• Support. Technical help, account management and reporting.
• Administration. Invoicing, disputes and late payment.
• Changes. Amended specifications, returns and cancellations.

How suppliers use it

A supplier that measures cost to serve can see which customers are profitable at today's prices. It uses the figures to set prices, minimum order sizes, delivery charges and service levels, and to decide which customers to grow.

Why it matters to buyers

The way you buy is part of the price you pay. A buyer who forecasts demand, orders in planned quantities, consolidates deliveries and pays on time is cheaper to serve, and has a case for a better price or better service. Knowing what drives a supplier's cost to serve also helps in a negotiation: it shows which changes cost you little but save the supplier a lot. It is part of becoming a preferred customer.

How to start

1. List what you ask of a key supplier: how often you order, how many delivery points, how many urgent orders, how much support and how quickly you pay.
2. Use a spend analysis to see your order pattern with that supplier.
3. Ask the supplier which of these drive its costs.
4. Agree changes on both sides, and share the saving through price or service.

Help with cost to serve

Comprara analyses order and supply patterns through its procurement reporting and analysis service, and builds negotiation positions through negotiations and auctions.