Cost-to-Serve: The Pursuit of Truth about Profitability

By Pieter Bauwens | Principal, Europe | Chainalytics

When explaining my job and expertise to friends and family, I explain it as “helping companies understand what the profitability is of their customers and their products.” It is remarkable even kids immediately question how a company can become successful not knowing which customers are most profitable and which least.

Still, the majority of the many companies I have worked for do not have a reliable view on the profitability at a client or a product level. If profitability views exist at that level, they are most typically limited to gross profit, and when net profit is reported the costs between gross and net are typically equally spread over the whole portfolio.

Gross profit differences between customers can only explain price, volume and product mix differences, but not the costs related to the behavior of a customer – think of logistics costs, selling expenses, etc. that would only be included in net profit. Consider an e-commerce customer ordering a single unit to be picked, shipped via parcel, requesting next day delivery, often followed by a complex return flow, and supported with a costly web-platform. Compare it to a B2B customer passing his order of a full pallet for next week delivery via EDI. When reporting on gross profit, these 2 very different customers would show the same unit costs, and – assuming the same price – equal profit levels. We all feel the true Cost-to-Serve and profitability will in reality be very different. The true profitability insights will help answer basic business questions such as:

  • Are all customers profitable? Do we focus on the right segments?
  • Is the Cost-to-Serve too high and not compensated by the right price level?
  • Should we differentiate our offering?
  • Is our value chain rightly equipped to guarantee a smooth and efficient customer experience?

Many industries are now being confronted with changing business models (e.g. direct to consumer/pharmacy/patient), often leading to an increasing Cost-to-Serve and shrinking product margins, and thus – we believe – a growing need for true profitability views.

Luckily, we have seen that the technology changes which triggered the new business models also bring new tools to make data more easily available and the software to analyze and report the Cost-to-Serve in an easy and attractive way.

So, we believe, the time is now for a number of companies to invest in creating insight in the Cost-to-Serve and profitability of their product and customer portfolio, and so become more profitable.

Pieter Bauwens is principal within the Chainalytics Europe practice. His focus is on the Cost-to-Serve, Portfolio Profitability and Complexity offerings to support the expanding growth of the European practice. Pieter’s 20+ years of experience span roles at Heineken, S&V Management Consultants, and Director of Strategy and Operations at PwC Belgium prior to joining Chainalytics. 

Read more about how Chainalytics provides supply chain design services and results for our clients:

In this article