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Closing in on the cost to serve

Closing in on cost-to-serve

Knowing where expenditure is building

GS1 UK’s cost-to-serve ‘ready reckoner’ identifies the areas and processes that drive retailers’ biggest costs – taking into account the volumes and business mix of various retailers.

Operational costs

The mix costs incurred by different retailer types:

Operational costs

Retailer B is a much lower volume retailer than retailer A – with fewer stores and costs for in-store inventory management. However, Retailer B has a much higher proportion of online sales and so incurs a correspondingly higher proportion of the cost for home delivery and click-and-collect.

Although downstream costs account for the majority of operational expenditure, they are not necessarily a problem. Sharp increases in warehouse outbound costs are the result of more complex supply chain processes. For example, this might be the need to handle single unit or pack deliveries, rather than containers. And as we get closer to the customer in the chain, higher expectations of service levels also drive up costs.

However, our research shows that managing downstream costs demands close analysis of upstream activities – in particular those that impact non-value added and value added costs.


CTS costs

Non-value added costs

These are the result of poor supplier compliance, operational process inefficiencies and data inaccuracy that can all delay product moving through the supply chain. Alongside additional cost impacts on downstream labour and resource planning, other knock-on effects increasing in and out warehousing costs include:

  • Addressing disputes
  • Relabelling/repackaging
  • Invoice/shipping corrections
  • Product recalls

Examples of non-value added costs include:

  • 5%-25%: range of disputes on inbound receiving orders *
  • 2 hours: average time spent to manage each inbound dispute **
  • £0.30: average cost per unit to relabel product *
  • £0.40: average cost per unit to hang product in store *
  • 3-4 days: average time per delivery spent relabelling inbound product
Sources: * Cost-to-serve interviews, ** GS1/Cranfield EDI Calculator


Value added

Value added costs

The retail service offer– particularly around delivery and returns – does represent a cost to retailers. However, as service can form the USP for a company it’s an investment to maintain market share. So how well they manage the following three key factors has a big impact on profitability:

Width of range

Offering a broad range and constant newness may sharpen competitive edge but also can drive up costs through the management of more suppliers/inventory/logistics. This is especially the case if there are no economies of scale through greater volumes.

Last mile promise

Returns – often free to encourage online sales alongside free delivery – is one of the biggest service level cost factors of all. And it’s a challenge that’s growing, with returns on the rise as customers buy multiple sizes/variants to ensure fit/style satisfaction.

Peak management

Meeting the demands of extreme peaks such as Black Friday demands costly internal flexibility or third-party partnerships. Planning the internal connectivity to make this happen impacts infrastructure investment requirements and labour planning.

Example of value added costs include:

  • Brands used to launch an average two collections per year – nowadays this is 18 *
  • Returns cost the UK industry £690 million per year **
  • Average returns rate for apparel is 38% ***
  • 55% of customers won’t complete a transaction when faced with a cost for return shipping ****
  • Each year Black Friday sets new records as the biggest UK shopping day of the year
  • Number of delivery vans used on Black Friday compared to the rest of the year: 4:1 ***

Key cost drivers

CTS Key cost drivers

Sources: * Priscilla Queiroz Guimarães Wiegandt Ceglio, 2013, ** JDA CEO Viewpoint 2016, *** Cost-to-serve interviews, **** UPS, 2014 

Our cost-to-serve findings

Cost to serve sales up

Sales up? Yet margin down?

Understanding cost-to-serve to boost profitability

Cost to serve rising to the challenge

Rising to the challenge

Unpicking the complexities of managing cost-to-serve

Closing in on the cost to serve

Closing in on cost-to-serve

Knowing where expenditure is building

Pushing the right levers

Pushing the right levers

Controlling cost-to-serve to maximise profitability

Cost to serve tools

Tools that deliver impact

Using GS1 standards to manage and reduce cost-to-serve

Cost to serve downloads

Cost-to-serve resources

Read our full report and test your own numbers in our ready reckoner tool


 
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Our findings

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