Cost Optimisation
November 22, 2023

Rethinking the Cost-to-Serve Factor by Insourcing Logistics in Modern Business

Discover how insourcing logistics transforms cost-to-serve, enhancing control and efficiency in modern supply chains.
Romain Fayolle

The landscape of supply chain management has undergone significant transformations in 2023, paralleled by notable shifts in both costing and controlling. In this dynamic environment, cost-to-serve has emerged as a pivotal element in defining corporate strategies. This KPI, known for its forward-thinking and agile characteristics, plays a crucial role in assessing the efficiency of supply chain operations.

Cost-to-serve considers many moving pieces in costing that act as great levers. As a result, it has also brought companies' attention to opportunities to insource their logistics operations to better control costs. While counterintuitive to some, this move promises enhanced control and a potential cost reduction as well.

This article explores why insourcing logistics is becoming a game-changer in optimizing cost-to-serve and how companies can achieve it.

Cost-to-Serve vs. Cost of Goods Sold

Let's first understand how cost-to-serve (CTS) differs from the other commonly used KPI, i.e., cost of goods sold (COGS). While both CTS and COGS are important business KPIs, they serve different purposes and can offer contrasting insights.

COGS primarily focuses on the direct costs of producing goods only, such as raw materials and labor. It's a measure of the raw material and production cost of the finished goods sold by a company. In contrast to COGS, cost-to-serve includes all the expenses incurred in delivering a product or service to the customer. This includes logistics, warehousing, distribution, returns, and customer service costs.

Thus, cost-to-serve is more comprehensive as it captures all customer service costs. It helps companies get the true picture of the profitability of different customer segments, products, or distribution channels and then make informed decisions for these channels individually. COGS is relatively static and remains the same across various channels. But Cost-to-Serve is dynamic and varies with service levels, customer demands, and distribution strategies.

By focusing on CTS, businesses can identify inefficiencies in their supply chain at the channel level, optimize operations, and make strategic decisions that improve profitability and customer satisfaction.

Cost-to-Serve in Logistics

When focusing on logistics specifically, CTS extends beyond just the transportation costs to a comprehensive view of the total costs of delivering products through various channels. CTS in logistics includes transportation expenses, warehouse storage fees, handling charges, and costs associated with meeting specific customer demands.

Consider a scenario where a business must deliver goods to a remote area. This situation might involve higher transportation costs due to the distance and difficulty of access. Additionally, a customer requesting special packaging for their order can increase handling and material costs. This is how different elements of the logistics cost-to-serve contribute to the overall CTS. With these insights, businesses can relook at their shipping methods, warehouse operations, and supply chain configurations to balance customer satisfaction with cost efficiency.

The Shift to Insourcing: Why Does It Matter?

With the CTS focus and the need for better control, companies are shifting from the age-old traditional outsourcing model to insourcing the critical elements. This transition is driven by the need to reduce dependencies on third parties for critical or expensive operations. It also offers direct control of quality and delivery times. In a survey, 100% of the respondents confirmed that bringing the work back in-house improved customer service, while 77% confirmed it gave them better control.

5 Ways to Explore Potential Insourcing Opportunities in Your Company

Alright, we've talked about why bringing logistics in-house is becoming popular. But where and how to start? Insourcing can become a difficult journey if that clarity is not there. Here are five ways to begin exploring potential insourcing opportunities:

  1. Audit Your Current Logistics Operations: Create a process blueprint of how things are running right now. Are there areas where you're spending too much or where delays keep popping up? This audit will help you spot the weak links in your supply chain and see where insourcing could make a difference.
  2. Analyze Cost vs. Control: Weigh outsourcing costs against the benefits of having more control over your logistics. In contrast to the expectation, in a survey, 77% of the respondents said insourcing saved money in the long run. This is possible through intangible outcomes like better quality control and faster response times.
  3. Evaluate Your Team's Capabilities: Do you have the right people to handle logistics internally? If not, find out what it will take to build a team that can handle the job. Remember, having skilled folks on your side can make a difference when insourcing critical functions.
  4. Note the Technology and Infrastructure Needs: Insourcing logistics means you'll need the right tech and tools to keep things running smoothly. Consider what you'll need regarding software, tracking systems, and physical space.
  5. Start Small and Scale Up: You don't have to dive headfirst. Try insourcing a small part of your logistics, like local deliveries or a specific product line. This lets you test the waters, scale up as you get comfortable, and weigh the benefits.

How does Holocene Help with Insourcing?

Holocene offerings are future-ready offerings for the journey toward effective insourcing. Holocene's suite of tools and technologies empowers businesses to seamlessly manage their in-house logistics operations. We provide insights and oversight needed to make informed decisions, from real-time tracking systems to advanced analytics.

With Holocene, you don't have to stress about the complexities of insourcing. We've got your back, ensuring you keep control without feeling overwhelmed. It means you can focus on cutting costs and making your customers happy without sweating the small stuff.

With Holocene's help, you're not just keeping up with the times but setting the pace. Holocene will help you find the balance between efficiency and customer satisfaction. So, if you're ready to shake things up and take control of your logistics, reach out to us today.