Understanding Cost to Serve with AgiSight

by Robert Fulghum

Within network optimization, a cost to serve model calculates the comprehensive cost of distributing one unit of demand for any customer and product type. This type of analysis will detail all the underlying expenditures including production, procurement, transportation, labor, inventory holding, and service level costs. Cost to serve analysis provides a clear breakdown of all costs incurred from a product’s origin to the customer, including any intermediate steps along the way. 

These detailed costs are often spread across multiple sources, including order data, transportation shipments, warehousing storage/inventory reports, and financial statements. The first step to building this sort of model is to develop a unified central repository to house these inputs. Then this data must be cleansed, validated, and prepared so that the model outputs will be accurate and consistent. An ETL (extract, transform, and load tool) like Alteryx can automate this process so that users can refresh the model inputs with the most up-to-date data with minimal effort. This sort of repeatable process also ensures that any assumptions made will be consistent throughout any updates. 

Once the input data is in the right format, AgiSight uses powerful network optimization software to run a cost to serve model. Once a baseline model is created and verified, additional scenarios can be created to test potential modifications to the network and how they will affect overall costs. 

Potential benefits of this type of analysis include: 

  • Improved Cost Transparency: A cost to serve model provides clear insights into the costs incurred in serving different customers, products, or channels. This transparency helps to identify which areas are most costly and why. 
  • Enhanced Customer Segmentation: A cost to serve model helps in better understanding the profitability of different customer segments. Creating different tiers of customers can lead to more targeted marketing strategies, customized offerings, and differentiated pricing based on the value each segment provides. 
  • Improved Profitability Analysis: By analyzing the cost effectiveness of different products, channels, or customer segments, businesses can focus on their most beneficial areas and consider exiting or reducing focus on those which are less profitable. Additionally, this type of analysis will identify products whose prices may need to be adjusted based on their higher cost to serve. 
  • Identification of Supply Chain Design Issues: A cost to serve model can identify opportunities for network improvement such as modifying delivery frequencies, optimizing transportation routes, and adjusting inventory strategies. This type of model can quickly illustrate both short and long term goals for the overall network. 
  • Building Network Optimization Scenarios: Once an accurate baseline model is established, a cost-to serve model allows the user to quantify the effects of both potential tactical and strategic changes to the existing supply chain and how they will affect overall costs and service times. 

Finally, once the models are run, AgiSight will export these results into a visualization tool like Power BI. Users can filter the results to focus on certain product types or regions of the country and quickly see the results of adjustments to the network. For example, shifting some shipments to a new facility may lower transportation costs, but also increase handling costs. The cost to serve model can demonstrate the trade offs involved in these changes and help justify or refute them. 

In addition, the true benefit of cost to serve comes from creating a continual business model. By using AgiSight’s Logistics module to populate and refresh the model, historical analysis can be performed to identify trends in the data. The tool will allow the user to determine which initiatives are most effective and to see how they are affecting the rest of the supply chain, making it more resilient and increasing profits. 

By leveraging the cost to serve reporting in AgiSight a user can improve visibility into the various cost components of their supply chain, identify which segments or products might not be profitable, and provide actionable insights on strategies to strengthen their networks. Moreover, AgiSight greatly simplifies this process by housing the necessary data in one source for easy access. By seamlessly integrating data through AgiSight and leveraging the analytical prowess of a cost to serve tool, businesses can expertly manage the complexities of their supply chain with accuracy and confidence. 

Learn more about AgiSight’s Logistics Insights here