What Does It Really Cost to Serve Your Customers?

Averages can hide different service patterns

Two customers may generate similar revenue while placing very different demands on the operation. One orders predictable full cases; another needs frequent small picks, special labels, timed deliveries and repeated changes. A single average cost per order may obscure those differences.

Logistics Bureau’s cost-to-serve explanation highlights the distinction between aggregate reporting and customer/product-level warehousing and transport costs. It is a commercial service description, useful for framing the question rather than establishing an expected financial return. ^[2]

Agree the boundary with finance

APQC’s published Supply Chain management-cost definition covers planning, sourcing, delivery and returns, explicitly excluding manufacturing. That scope matters when comparing measures. A client cost-to-serve exercise may use a different boundary, but the differences must be explicit. ^[1]

SCP would agree the activities, time period and unit of comparison with finance and operations. Distinguish direct costs, activity-based allocations, shared overheads and genuinely avoidable costs. Allocating a warehouse cost to an account does not mean that cost disappears if the account changes.

An illustrative comparison

Synthetic example, not a client result: two orders each generate GBP 500 revenue and GBP 150 contribution before fulfilment. If attributable fulfilment activity costs are GBP 45 and GBP 90 respectively, the remaining contributions are GBP 105 and GBP 60. The difference invites investigation; it does not by itself justify changing a customer contract.

Check whether the activity estimates are accurate and whether costs are incremental or allocated. Consider strategic value, seasonality, product mix, returns and agreed service terms before drawing a commercial conclusion. Changes to terms or pricing remain the client’s decision.

Investigate the drivers, then compare options

Potential drivers include order frequency, lines per order, handling requirements, delivery windows, failed delivery, returns and manual exception work. Use observed activity where possible; label estimates and reconcile totals to the agreed financial boundary.

Options could include consolidated ordering, different delivery schedules, packaging changes or clearer exception rules. Compare the total effect, including stock, service, revenue risk and implementation cost. A cheaper transport rate is not necessarily a cheaper operating model.

Begin with one customer or channel group

A focused assessment can reveal which patterns merit deeper investigation without pretending that every overhead can be assigned precisely. Measure baseline and follow-up periods using consistent definitions, and separate recurring operating improvement from a one-off working-capital release.

A Transport Reliability discovery workshop can frame the delivery and cost question. Inventory and Service Improvement may also be relevant where order policies and stock decisions drive the cost pattern.

Explore the industries and services

• Inventory and Service Improvement →
• Retail and consumer goods priorities →
• Inventory and Service discovery workshop →