Why cost to serve should be a strategic priority for supply chain leaders

At any given point in time, a supply chain leader should be able to ascertain the exact cost to serve of any product, order, region, site, SKU, or customer in their supply chain, at speed and with little effort. Yet, getting to this level of granularity, and quickly, has not always been necessary, or in fact possible.

The difference today is that with supply chain leaders expected to deliver lasting value to the business while managing through increasing complexities, the ability to access detailed and precise data is vital for decision making.

Understanding cost to serve – the end-to-end direct and indirect, and variable and fixed costs associated with delivering a good or service to an end customer – should become a strategic priority for supply chain leaders. This deep awareness should be ‘always on’ and embedded in everyday, ongoing operations. In the past this may have been too complex, but with the latest tools and methodologies, this complete visibility should now be achievable.

A myriad of global and local forces are putting pressure on costs in the supply chain, making it vital that leaders have complete visibility of costs – both generated internally and from suppliers. Potential impacts on costs include tariff volatility, new and changing trade compliance requirements, and increasing Environmental, Social and Governance (ESG) compliance, which can increase costs aligned to human resourcing, product/material sourcing, transportation, carbon emissions, and more. In addition, rising geopolitical tensions, labor shortages in various sectors, and volatility in consumer demand can all create cost hurdles.

Amid these complexities, and in such a competitive trading environment, traditional levers such as increasing prices for the end consumer aren’t as readily available. Instead, supply chain leaders should be seeking much more nuanced ways to keep costs in check.

With so many factors affecting costs, traditional approaches to understanding cost to serve are often no longer sufficient. For example, very generalized cost-to-serve models might have average cost allocations across product lines or customer segments, but don’t usually get to the level of individual customers. Or, they may just focus on their top 10 to 20 accounts by size, but overlook the cost to serve smaller accounts, where some of the largest costs could in fact be located, perhaps due to infrequency of orders or distant locations.

Broad sweeping cost to serve assessments can also overlook risk factors such as over-servicing or under-servicing particular regions or customers, misalignment of sales team resources to demand, or poor working capital strategies. Ultimately, traditional models lack the level of detail that can offer supply chain leaders valuable decision-making insights.

A cost-to-serve approach for today’s environment should be granular. It should enable a clear view of profitability, forecasting, and scenario modeling. It should have the ability to mine data and find where levers can be pulled to change costs and mitigate risks.

A granular view of cost to serve might track 20-50 activity-based allocations. With such a detailed view of all costs, supply chain leaders can identify outliers, including low performing SKUs or regions, or unusually high-cost-to-serve customers. A granular view also provides the ability to benchmark costs, so that changes can be tracked, predicted and addressed.

A further benefit is that supply chain leaders can be proactive in improving profitability, rather than waiting for an issue then responding. For example, a KPMG member firm supported a large US-based pharmaceutical distributor to better understand its cost to serve. The distributor was servicing several small pharmacies which placed orders irregularly and were widely dispersed across the country. This meant that courier costs were high, and that the cost of serving these customers was much greater than local, larger businesses. This presented an opportunity for the company to establish smarter ways to manage these orders and deliveries – such as considering the use of distribution centers closer to the customers. They had the chance to find solutions to their costs, while also better servicing their customers.

To deep dive into cost to serve at a granular level, the right combination of new technology and strategic methodology is key. KPMG member firms can offer clients our Intelligent Performance Platform and supporting methodologies. It is populated with a number of pre-built scenarios designed to drive speed to value, but it can also be tailored to the specific needs of each organization.

The KPMG Intelligent Performance Platform has been developed and refined over 15 years, while working with companies across numerous industries. It integrates disparate enterprise data, creating a broad-ranging view of costs. It helps leaders measure the performance of every product, order, region, site, SKU, or customer using activity-based allocations. Users can simply click on an allocation to find out what that item costs.

The platform makes the most of data and analytics capabilities, automation and Artificial Intelligence (AI) to elevate useful insights. It is designed to maximize the capabilities of Generative AI, enabling leaders to ask natural language questions about the data for quick insights. Supply chain leaders can also use the dashboard to visualize forecasts or model scenarios, such as the impact of a tariff change, and see where proactive action could improve profits.

Importantly, the KPMG Intelligent Performance Platform can also help supply chain leaders better service their customers, as they can see where there are over- or under-serviced customers, what customers are valuing, and a customer’s lifetime value. The insights can also show where there is potential to customize communications, such as offering discounts or promotions to suit their profile.