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Cost to serve rising to the challenge

Rising to the challenge

Unpicking the complexities of managing cost-to-serve

As more retail businesses understand the need to review their systems, processes and KPIs to get a full view of end-to-end supply chain costs, three key challenge areas are emerging. 

These are increasingly complex networks, market volatility and lack of visibility.

Cost to serve elements

Network complexity

The number of retail touch points in an omnichannel world is growing exponentially – as is the intricacy of the networks required to manage them effectively.

Wider apparel ranges and the need to diversify and de-risk the supply base are demanding more suppliers upstream – often scattered across multiple continents. Growing customer expectations downstream, meanwhile, are driving new channels, business models and markets. And with the store now often functioning as a mini-distribution centre/receiving depot, and customer returns the biggest ‘supplier’ of all, the cost-to-serve is coming under increasing upward pressure.

Key drivers include:

Growing involvement of third parties and suppliers

Extended product ranges and ‘anytime, anywhere’ customer propositions mean guaranteeing inbound compliance and effective information flows is more difficult than ever – especially with mushrooming external partners. The speed retailers now require to get products through the supply chain is pushing inbound visibility further up the agenda. Downstream, the customer experience for fulfilment and returns is dependent on effective traceability and service performance measurement.

Siloed internal organisation structure

Improving communication and aligning objectives such as common goal KPIs represents a big opportunity for all in the supply chain. Head office roles for buying, merchandising and managing the supply chain also demands further alignment. And the store’s new role in delivering omnichannel needs to be reflected in cost-to-serve calculations, in-store processes and tracked KPIs that can cater for off-the-shelf sales, as well as web-ordered collections and returns.

Balancing competitive ambition with a sustainable service proposition

As customers choose from ever more complex fulfilment options, retailers need to make sure they’re geared up to cope. Barclays is forecasting a rise in average online retail delivery and collection options offered from 7.2 in 2016 to 10.1 by 2019. Fragmented channels, however, divides sales among more channels impacting a retailer’s ability to leverage economies of scale by driving volume through any one channel.


Networks and infrastructure compromised by poor planning, visibility and supplier compliance

Keeping costs competitive against a backdrop of big customer promises has never been tougher. Single channel legacy systems demand time and money to overhaul. Much online business meanwhile is simply diverted to the most convenient channel rather than being incremental to total retail sales – significantly impacting fulfilment costs and net margin. Balancing offer and capacity has never been more important.

Previously we only looked at intake margin as that was considered the key driver. Now each channel has a different level of profitability; selling an item off the shelf floor has a vastly different return to click-and-collect through one of our partners"

Cost-to-serve interviewee

Market volatility

As retailers have targeted new sales opportunities by expanding their networks, the shift has led to greater variation in product flows, customer demand and competitor activity. In turn this has impacted retailer control over activities and supply chain costs.

The demand for ‘anywhere, anytime’ omnichannel shopping means retailers are having to be more reactionary – incurring higher costs for the capacity and resourcing this demands. Key factors include:

Changing product life cycles

More apparel ranges and shorter life cycles mean accurately forecasting sales requires more input than simply looking back at the history.

Volatility is our highest cost area due to the increases it requires on capacity and resourcing.”

Cost-to-serve interviewee

Increased peaks and sale events

Competitor activity and the need to price match – for example, Black Friday and other ‘extreme’ sales-driven events – can bring huge spikes in sale and fulfilment operations which are difficult to accurately plan for.

Supplier performance

Not all suppliers can guarantee consistent product availability themselves, resulting in some retailers building up stocks to meet their own demands. The costs of this ‘insurance’ inventory make themselves felt the length of the supply chain – through the additional costs of handling, storing and maintaining stock.


Lack of visibility

The complexity and scale of the omnichannel network can disguise many retail supply chain activities and their costs. Many retailers now use external suppliers and third parties to deliver on key service promises. And legacy systems haven’t yet caught up to offer ‘single view’ capabilities covering customers, inventory and estates across channels. It all adds to the challenge of managing unexpected costs and delivering the promised service level.

Logistics are totally dependent on inbound forecasts, but they are always wrong!”

Cost-to-serve interviewee

Other visibility problem areas include:

Production and inbound logistics

Once a PO is placed, there’s often little knowledge of goods status until they’re ready to ship. Plus, there’s a lack of connectivity between retailer track and trace, and third-party freight forwarder systems to support effective inbound planning.

Third party sales and distribution activity

Lack of connectivity also extends to concession, drop ship and sale or return partners. These business models face challenges in obtaining basic metrics like stock and sales reports from concession brands or product flows from drop ship partners.

Reverse logistics

Retailers are typically unaware of a customer return until it arrives with them. And they’re likewise often in the dark about how many times an item may have been returned before it’s finally sold.

Our cost-to-serve findings

Cost to serve sales up

Sales up? Yet margin down?

Understanding cost-to-serve to boost profitability

Rising challenge of the cost to serve

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


Our findings

Download the whitepaper

White paper

Check out the full report of the cost-to-serve programme

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