5 strategies to improve your cost to serve analysis

Your company's financial security depends on understanding cost drivers and their impact on your bottom line.

Cost to serve (CTS) or cost of service (COS) is your true cost to fulfill customer demand. Whether you’re shipping intra-company to fulfill your internal teams' orders or shipping to an end customer, knowing your CTS across different segments is crucial.

Reducing this spend helps you strategically allocate each dollar to grow your profit margins. But before you can improve your cost to service, you need to set your baseline and be able to break it down to identify savings opportunities.

Cost to serve analysis: The key to informed strategic planning

We’re in a market where every cent counts. Rising interest rates, inflation, and supply chain shifts make maintaining and improving margin tough.

You simply can’t afford unnecessary losses in your processes or network today. Cost management is king.

The solution is line-item level cost analysis that can roll up into an aggregate view or be segmented down:

• Cost per pound
• Cost per package
  • Freight cost, fuel cost, accessorial cost, total cost
• Cost per service level
• Cost per lane
• Cost per product/SKU
• Cost per unit
• Cost per customer
• Cost per carrier

Without these, you won’t have a comprehensive view to help you spot anomalies or areas where you’re hurting your margin.

Among other things, cost to serve analytics can reveal:

• Expensive service levels and potential cost-saving alternate routes
• Current warehousing options that are eating into your profit margins
• Differences in the profitability of your customer segments
• Incorrect packaging that is hurting your profit per package

Ultimately, improving your cost management decreases your financial, operational, and growth risks.

Many of these risks come from the sunk-cost mindset. It’s dangerous to settle for your current way of doing business just because it's familiar. Nine times out of 10, there are better, more profitable ways – it’s up to you to be open to adopting them.

Your logistics model is ideally a break-even service center. Even better, it’s a profit center that differentiates you from other shippers. Access to high-quality data – once unlocked – makes this possible.

5 strategies to improve your cost to serve

1. Enhance operational efficiency

Fragmented networks and disconnected data are common issues for shippers. You’ve probably experienced them firsthand.

Key insights are usually spread out across your transportation management system (TMS), electronic data interchange feed (EDI), paper documents, and photos. Yet it’s this unified and standardized network data that can illuminate where you’re overspending. If it’s not clean and centralized, it’s not useful.

Say you have several customers who need overnight delivery. You consistently pay for FedEx’s First Overnight and UPS’s Next Day Early AM Air service levels to accommodate them. Of course, the customers are important but these service-level charges add up fast.

Is this the right way to allocate your transportation budget? What would a data-driven solution look like?

Analyzing your network data can help you cut costs by answering key questions. For example:

• Do you always need to ship First Overnight or Next Day Early AM Air?
• For some locations, would FedEx’s Priority Overnight and UPS’s Next Day Air deliver the same service at a cheaper cost?
• Would you save more money if you consolidated all of this service-level spend into one carrier to unlock more discounts?

Based on the data, you can decide which path forward is most cost-effective for your required performance.

This is just one example of the benefits of cost to serve analysis done at a granular level.

Pro tip: The most efficient way to extract valuable insights on spend from different sources is logistics-AI driven software. It automatically gathers essential data points in one place and cleans them up to provide high-quality data that improves your strategic planning.

2. Streamline your supply chain strategy

“Optimize your supply chain” is common advice. But it’s easier said than done.

There’s no one-size-fits-all way to improve your supply chain strategy and reduce costs. However, consider these options for streamlining your network:

• Use a routing optimization solution. You can implement zone skipping within your parcel network by sending full truckload (FTL) shipments to your provider hubs. You could also use third-party logistics providers (3PL) for localized distribution. Then you could re-optimize your shipments daily as orders change.
• Establish standard rating practices. Do this particularly for less-than-truckload (LTL) and truckload (TL) freight. A standard fuel surcharge and accessorial fee schedule create a market-aligned baseline for your operations.

Efficient supply chain management strategy and lowering cost to serve go hand in hand. The less time and resources your supply chain model requires, the cheaper it is.

For an in-depth breakdown of cost allocation, we recommend using the supply chain operations reference model (SCOR). This methodology consists of five components, each with different action items:

1. Plan: Assess your supply and demand. Based on projected demand, determine how much material you need to get to a manufacturer.
2. Source: Figure out how you’ll acquire the materials or goods necessary to meet customer demand and handle inventory management.
3. Make: Manufacture and acquire the necessary goods, accounting for all related needs from facilities to equipment.
4. Deliver: Manage orders and invoices, store inventory in dedicated or shared warehouse space, and transport your goods.
5. Return: Make reverse logistics arrangements for seamless returns management when containers or packages get sent back by customers.

The SCOR model provides a clear overview of your entire process. Use it to get a bird’s-eye view of your network and available opportunities to cut logistics costs.

3. Focus on becoming a Shipper of Choice

There’s no shortage of shippers for carriers to choose from. Try to give your preferred carriers good reasons to work with you long-term. Build strong relationships and become a Shipper of Choice by:

Paying invoices on time. Carriers are in a capital-intensive business so getting paid on time matters. Freight audit and pay software like Loop automates payment workflows so carriers can keep operations running smoothly. (And the benefit for you is no late fees.)

• Avoiding delays as much as possible. Get drivers in and out of your facilities quickly. This will earn you a positive reputation among carriers as it helps them maintain efficiency.
• Providing a good carrier and driver experience. Make sure you offer clean facilities for drivers. Also, consider offering other conveniences like automated check-ins for a reputation boost.
• Negotiating fair rates. Reducing costs is important for you as a shipper, but you shouldn’t be the only one to benefit from contract negotiations. Stay up to date on cost drivers like changing market conditions, and know your current and future shipping needs so you can propose reasonable rates.

Additionally, diversify your network by building relationships with carriers you’re not under contract with yet. That way, you have alternate providers on standby if one falls through. ‍

4. Conduct regular carrier performance audits‍

Carriers missing delivery or pickup windows increase your cost to serve. How so? Storage or reschedule accessorials appear on your invoice unexpectedly. There will always be unforeseen setbacks beyond your control (e.g., road closures and weather delays). However, that’s exactly why you need accurate carrier performance data – to verify the root cause of potentially costly issues.Monitor carrier performance in a few ways:

1. Track key performance indicators (KPIs). KPIs help assess current performance by giving you targets to measure against. For example, it’s smart to keep tabs on the frequency of on-time deliveries, load damages, and accessorials to spot any profit margin erosion early.
2. Use carrier scorecards. Scoring your logistics providers is an objective evaluation method that helps you adjust quickly when necessary. To illustrate, say a carrier is habitually late at your expense. Switching the corresponding lanes or modes to another provider would be your best bet to match service levels with costs.
3. Automate invoice audits. You’ll know in real time if carriers deliver and charge per the contracted terms. Use this data to ensure that parcel and freight invoices correctly capture negotiated rates and price discounts.

All of the above methods of performance measurement prevent you from overpaying and can increase profits as a result.

‍5. Automate workflows with AI

‍Logistics software powered by artificial intelligence automates spend management workflows that are time- and labor-intensive otherwise. It has many capabilities:

• Identifying data issues. Logistics-AI software ensures that each invoice contains all necessary data. Then, it verifies that listed costs line up with your pricing agreement and the services provided by your carrier.
• Reducing operational costs by offloading work. With software in your arsenal, you’ll spend less time auditing and analyzing CTS data. In turn, you’ll have more time to identify opportunities to reduce total landed cost and improve profitability.
• Spotting trends that humans may miss. The larger your dataset, the more sophisticated AI and machine learning models become. In other words, logistics-AI software like Loop discovers trends and inefficiencies faster and more accurately over time. With advanced analytics and insights at your fingers, you can make informed decisions to streamline your supply chain and lower total cost.

Pro tip: For maximum effectiveness, choose AI technology that connects with other platforms you use. These might include supply chain management tools, enterprise resource planning tools, transportation management systems, or warehouse management systems.

Loop helps lower your cost to serve

Cost to serve analysis is the ticket to a better understanding of your transportation costs. By pinpointing where your money goes, you can work to optimize your spend and widen your profit margins. Data collection through logistics software like Loop pulls back the curtain on high-cost processes and errors that can lead to overpayment. Plus, our connected finance network provides advanced analytics. Get in touch with us today to improve network efficiency and make every dollar count.