Issue link: https://www.e-digitaleditions.com/i/480616
March/April 2015 35 Learn more at vulcanequipment.com/win The new Vulcan School Combi. Designed for simple operation. Set temperature and time. It sets the perfect humidity. T H E N E W V U L C A N S C H O O L COMBI EASY A S A-B-C © 2014 Vulcan "Be Careful What You Wish For," says Past President Rick Ellingson The cost to serve is a real hot topic in distribu- tion now. However, like a lot of "movements," it can be a helpful tool to move channel partners in a positive direction or counterproductive if used in the wrong way. Regardless of the method or the system used to extract pertinent data, everyone should know their true costs—or what it actually costs to sell an order, process the order, deliver the order, and finally get paid for the order. In its simplest form, that's what cost to serve is. It puts a business on notice and shows that all transactions are not created equally. Each product and every customer demands different activities and has a distinct cost profile. This is one of the keys to managing profitability. Unlike activity-based costing, cost to serve is not resource-intensive and focuses on analysis around a blend of cost drivers. It provides an integrated view of costs at each stage of the supply chain. This can be valuable information to help understand how putting more lines on an order can drive more profit, and how raising the average line extension can do the same. It helps everyone understand the internal economics of the company and can be used for working with salespeople and custom- ers to inch everyone in the right direction. Sharing this information with others in the supply chain (manufacturers, reps, etc.) also would help them to better understand our true cost of being in business. The 10 percent mark-up does not cut it. It never has—nor will it ever—for those of us that field a sales force, maintain inventory, own trucks, extend credit, etc. Where cost to serve can be dangerous is in the "if it is not profitable, we don't carry it" camp. Some would have you drop unprofitable custom- ers and items and focus only on those items that are profitable. That kind of thinking will drive profits in the short run, but hurt the company in the long run. It makes more sense to me to use cost-tracking data and analysis as a tool to tee-up a conversation with customers and channel partners. Why not work with customers and change the economics of specific items. A lot is being said about the Amazon model and what it might mean to our industry. It seems to me they have an awful lot on their plate—and are adding more every day. Distribution will end up between benign neglect (they will just be one more competitor) to disastrous neglect (they will regret ever getting in). In either case, those of us that still add value to the marketplace will continue to compete. Knowledge is power. Knowing your true costs to serve should help everyone in your organization be more effective, and also can be a great way to approach customers that call for a revised value proposition. Ours is a very diverse end-user community, and the distributor that possesses the knowledge base to serve their various constituencies profitably will prevail. Cost to serve allows you to drill down from summary results to the transactional level and calculate the profitability of each customer and product. That said, proceed with caution. You might decide to throw out a customer that could be managed to a more profitable place, or drop a category of products that supports other more profitable categories. This can generate a slippery slope of choices that create long-term collateral damage.