Determine Your Distribution Business’ ‘Cost to Serve’

Before you expand do you know how much it'll cost your distribution business? Without detailed information your costs could be higher than expected.

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    Before you acquire a client, add a product line or expand your service offerings do you know exactly what it’s going to cost your distribution business to serve that client or the market? Without detailed information and data you may end up in ‘over your heads’ in a segment where your costs are higher than expected.

    There are many examples of large, established companies doing exactly that and regretting the choices they made, withdrawing from the market and taking substantial losses financially.

    Unfortunately, it is often difficult to find and assess the data to determine the ‘cost to serve’ required to make good business decisions. This article from Supply Chain Demand Executive provides some details.

    Many companies make the following mistakes:

    1 – Lumping Costs

    Do your expected costs match the actual costs? If not, do you have the data to determine exactly why your actual costs are higher? Don’t just throw an extra percentage buffer into your budget to cover these. When your margins become thinner, you really need to know exactly what is contributing to the decline.

    2 – Not Thinking Strategically

    Do you make decisions to change processes and then just wait for a month to see what the costs will be? That’s passive thinking. High performing companies actively look at what the costs will be to perform specific services for customer sectors. For example “Who makes the decision to expedite an order?” Customer service, a manager or an executive, and at what cost levels does the approval need to go higher? Put business rules in place to actively manage processes which can cause costs to escalate. That’s what it takes to actively manage change.

    3 – Outside Data

    Does the data to determine ‘cost to serve’ actually exist in your transportation provider or someone else’s system which you don’t have access to? Supply chains and their providers are notorious for not being able to provide systems and communications to share this data. What data do you need, from who and how can you get it or integrate to it?

    Adopting cloud based systems and reporting can actually solve these data acquisition problems to support determining your ‘cost to serve’. New technology is available to make sharing data with partners and providers easier and faster.

    Are you Cloud Ready?

    Would you like a demonstration of how the Microsoft PowerBI cloud based tools can help your team bring together data from a variety of sources to help answer your ‘Cost to Serve’ questions?


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    Originally published August 2015. Updated for accuracy and currency.