InsightsLast mile short cuts: the value of knowing your cost to serve
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Have you been hearing a lot about cost to serve lately? At the recent Last Mile – Leaders in Logistics event, it came up in practically every conversation we had with attendees and logistics experts.
If cost to serve is top of your agenda, we’d like to share some insights into how we calculate it and what you can do with the information. If it’s a relatively new concept to you, we plan to demystify and explain it in the following paragraphs.
Cost to serve is a valuable metric because it enables logistics operators to drive efficiency and support decision-making by understanding fulfilment costs across the entire supply chain.
Logistics operators and retailers are interested in the cost to serve for a range of different reasons. Depending on your organisation’s strategic priorities and current pressures, you might apply the insights to any of the following:
- Retail network strategy, incorporating fulfilment costs
- Multi-tier returns strategy and pricing
- Reduce fuel costs and optimise your existing fleet
- Transition and selection of electric vehicle (EV) fleets – ‘what-if?’ scenarios
- Site selection, weighted by cost to serve
- Sales forecast modelling, balanced by cost to serve
- Scenario modelling, driven by cost to serve
There’s a relatively simple sum to calculate cost to serve: distance + fuel + time + environmental impact + resource. Measuring each element individually first, we look at the distance from distribution centre (DC) to store as well as from the store or distribution point to the end customer address. Fuel is costed according to delivery vehicle type. The time a delivery takes will take into account variable traffic and route conditions as well as accessibility on the doorstep. Emissions, noise and congestion add up to the environmental impact. And lastly, there’s the resource cost – including people, vehicles and equipment.
The sum might look fairly straightforward but gathering the data and putting it into comparable formats can be challenging. You may be familiar with data for distances, fuel consumption and resource costs, but tracking and estimating time to deliver can be more difficult, particularly in the last few metres when your driver is outside the vehicle.
Environmental impact is another measure that might be new to your business, but it’s increasingly important from a financial perspective as well as being a customer concern and area of corporate social responsibility. Emissions charging, tolls and vehicle tax all add cost into logistics and it’s important that they’re visible when it comes to planning and optimising services.
Cost to serve is a holistic measure that shows the true overall cost of a delivery or type of delivery. It puts each element in context, because they all influence each other.
You can understand and tackle the most expensive cost to serve areas and apply best practice and understanding from areas with a lower cost to serve. It can help you prioritise future investment and reveal opportunities to streamline processes or boost training.
The logistics market can change fast – the recent fossil fuel price hikes were unexpected. Consumer preferences and competitor activity can affect your operation quickly. That’s why it’s not just a strategic measure: it’s important to monitor cost to serve continuously, so you can react quickly to emerging trends and keep control of costs throughout the supply chain.
CACI’s blend of logistics expertise and customer understanding can give you the edge when it comes to adding value and differentiating your services profitably. We can line up the data so you can measure your cost to serve accurately and keep your logistics operations delivering effectively, with a clear, business-wide understanding of costs and all the factors that affect the supply chain. Get in touch today at iwheeldon@caci.co.uk
Check out the other blogs in the Last mile short cuts series:
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