Home > Cost To Serve (CTS): what it is and why it is important

Cost To Serve (CTS): what it is and why it is important

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THE understanding of Cost To Serve (CTS) has increased a lot in the last two years, although the concept has been around for years, according to Rob O'Byrne, Managing Director of Logistics Bureau , a management consulting company based in Australia and Thailand.

CTS is an approach that builds on techniques such as Activity Based Costing (ABC) by including the 'softer' elements of product characteristics and customer behaviours.

For example, Rob says a financial view of the Supply Chain breaks costs down into GL areas such as wages and rental. An ABC approach segments costs into functions, such as transport and warehousing. But a CTS approach is more market focused and might segment costs by channel (modern trade, independent or mum and pop stores) or by product category (seasonal, continuity, promotional), or even by individual customer and SKU.

This segmentation, coupled with the deeper appreciation of product and customer cost drivers, makes CTS reporting so beneficial.

CTS is really about understanding the cost of supplying specific customers, with specific products, says Rob.

Given a typical supply chain, it is about understanding the costs associated with each path through that supply chain network.

The importance of CTS for many companies is driven by understanding the impact of changes such as Factory Gate Pricing (FGP). A supplier that does not have a firm grasp of the resource and cost impacts of FGP is likely to suffer - due to changes in demand profile, asset utilisation and delivery timing.

At a simpler level, Rob has seen CTS deliver significant savings to companies by merely identifying loss of margin by certain product/customer mixes - these are easily reversed by easy to implement process changes.

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