SAP Digital Supply Chain Partner News & Blogs
Posted on Apr 01, 2021
by Lewis Marston

SAP Supply Chain Management - How to understand your Cost to Serve (CTS)

SAP-run companies must learn how to ensure their supply chains deliver financial value in an optimised manner. Learn more about tried and tested approaches that aim to reduce the financial risk and cost of delivering enhanced customer service.

Many supply chain and product intensive SAP-run businesses that have been able to fare the disruption of the past year are finding themselves in a position with the need to innovate by designing and applying flexible business services that can respond to demand across every channel fast.

Understand the true cost of your customer service

For any add-on business services to be a success story, supply chain leaders need to focus on creating not only responsive and flexible supply chains, but profitable ones too.

These times are unprecedented and COVID has had a significant impact on customer service teams, meaning businesses have had to adapt quickly to create new ways of working. Personalisation of products, eCommerce, rapid order fulfilment and value-add customer service offerings are a few examples of strategies we have seen clients aiming to provide to achieve heightened customer retention and growth and to remain in the market. However, it is clear that serving consumer immediacy and delivering seamless customer experiences such as, for example; knowing precisely when your delivery will arrive, will continue to put pressure on supply chain operations and this is a challenge that will not be going away in the near future.

Supporting the business in offering differing levels of customer service can place a huge burden on an organisation’s supply chain, profitability and potential to grow, with any value-add service requiring execution in a profitable way. This inevitably makes supply chain risk management more difficult.

Learn more about Hallmark Cards who wanted to provide their customers with flexibility and additional services and learn how they achieved this through the creation of streamlined supply chain processes to manage entirely different demand profiles that enabled efficient and cost-effective fulfilment.

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How are best in class SAP-run businesses succeeding?

We know best-in-class SAP-run organisations not only understand in real time the cost to serve for the expected service/product delivery, but also have transparency surrounding the variations to this, such as dealing with requests for new value-added services and changes to delivery and transportation requirements.

However, achieving clarity and visibility is the challenge for many, being able to understand the true cost to service and impact (or potential impact) of these customer requested variations is hard, with many organisations keen to say yes to the customer without calculating the impact to profitability.

So where does the responsibility lie? Traditionally, this level of visibility would not have reached the board. More space might’ve been made within a warehouse to service value-add, but with profit margins potentially being eroded by service differentiation, Supply Chain leaders can no longer avoid recognising the cost impact of these initiatives.

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With many organisations piling in a wide array of customer service, value-add options; for example ‘can you add a bow’, ‘add the leaflet’ or ‘build personalised product configuration’, it’s very easy for businesses to say yes without truly understanding the cost implications. Without fully quantifying the cost of the service, each value-add service could diminish profitability and there comes a point where you suddenly erode all of the margin from a customer.

How to overcome this challenge

We have worked with supply chain and product intensive market leading businesses for the past 15 years and what we recommend, and have seen many times when helping organisations through their journey of wholesaler/retailer/e-commerce models, is to gain insight into the actual profitability of servicing a customer. The cost of goods sold, warehousing costs and overall operational costs is usually clear, but the visibility into what bespoke services are creating additional costs from a specific customer may not be known. These costs are generally hidden well within the supply chain and accumulate by stealth.

Being able to see the true cost-to-service at a customer level is the optimum outcome from a digital supply chain, while it is also necessary to understand the potential further impact on profitability.

Within one warehouse you may have a customer who has no value-added service and another being serviced with numerous additional services. 

The first thing to do is gain visibility of the true cost to service each customer.

The second element is helping the board and finance stakeholders flip this scenario around. When a customer says “Can you do ‘x’ for me?”, an informed investment decision needs to be made. Through simulation you will be able to see whether or not you can absorb it into your price-to-sell or that you should be classing this as a chargeable service to the customer.

Historically, these decisions are relayed to customer services to make the decision as to whether the additional value-add service is possible. They may say yes or move the query on to manufacturing, and so on up the supply chain. Before you know it, you have a compounding effect of incremental cost through diversification of previously uniform processes all having a detrimental effect on efficiency.

We have seen this with many of our SAP customers across retail, manufacturers and distributors, and consumer products wholesalers. With a common theme that teams involved in managing and designing customer-specific activities don’t have the necessary detailed information to properly understand the cost impacts of these.

Looking across your whole supply chain, you need to be sure you have the tools to decide whether you can offer this service to the customer and where best to fulfil this service request in the supply chain; for example it may be that including the personalisation service within the manufacturing process is the most efficient and can meet the lead time, alternatively it may be better within the warehouse as late as possible in the customer fulfilment process as would be seen with a classic postponement strategy. Decisions can only be made once you have the supporting supply chain cost based planning and execution information.

Pitfalls to avoid

It can be tempting for organisations to over accommodate customer requests, regardless of their complexity or cost, just to secure market share. However, when it is poorly planned and decisions are taken and pricing set without clear visibility of additional costs involved, this strategy for attracting/retaining and serving customers can be a false economy and quickly erode an otherwise profitable revenue stream.

Want to find out more about uncovering hidden costs within the supply chain? Click below to take a look at our free resource, understand risks to profitability within your supply chain.

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