In today’s volatile market, understanding the Total Cost to Serve (TCTS) is essential for companies aiming to improve profitability and customer service. TCTS provides a granular breakdown of supply chain expenses, helping businesses allocate resources efficiently and make data-driven decisions.

What is Total Cost to Serve (TCTS)?

TCTS is a cost analysis methodology that calculates the total expenses associated with delivering a product to a customer. It includes direct costs such as production, warehousing, and transportation, as well as indirect costs like administrative overhead and customer service.

Traditional cost accounting applies uniform costs to all products, which can mask high-cost customers or inefficient product flows. TCTS assigns costs based on actual activities, offering more precise profitability insights.

Yes! By understanding the actual cost-to-serve, businesses can adjust pricing to reflect true costs, ensuring better margins and competitiveness.

Advanced analytics, AI, and machine learning facilitate monitoring, alerting, and predictive modeling, enabling real-time cost management.

  1. Collect detailed cost and activity data.
  2. Use analytics to identify cost drivers.
  3. Develop a structured cost-to-serve model.
  4. Implement changes and continuously refine strategies.

Why is TCTS Important?

  • Improves profitability: Identifies unprofitable products, customers, or channels.
  • Enhances supply chain visibility: Breaks down cost drivers across the network.
  • Supports pricing strategies: Helps businesses align prices with actual service costs.
  • Drives operational efficiency: Uncovers inefficiencies and opportunities for cost reduction.

Components of Total Cost to Serve

1. Direct Costs

These are expenses directly tied to producing and delivering goods, including:

  • Raw materials and manufacturing
  • Inventory storage
  • Freight and transportation
  • Packaging and handling

2. Indirect Costs

These expenses support supply chain operations but aren’t directly linked to specific products:

  • Warehousing and distribution center overhead
  • IT infrastructure
  • Customer service and order processing

3. Activity-Based Costs

Unlike traditional cost accounting, which distributes costs evenly, TCTS relies on activity-based costing (ABC) to assign expenses more accurately. This method considers:

  • Order complexity
  • Shipping frequency
  • Customer-specific handling requirements

How to Optimize Total Cost to Serve

1. Leverage Advanced Analytics

Supply chain leaders should adopt AI and machine learning to gain real-time insights into cost drivers. Predictive analytics can optimize inventory levels, improve demand forecasting, and enhance route planning. Learn more about how Solvoyo’s AI-powered platform can help you utilize advanced analytics.

2. Implement Cost-to-Serve Modeling

By assessing costs at a granular level—product, customer, and channel—businesses can identify unprofitable areas and reallocate resources effectively. For example, Solvoyo’s TCTS approach optimizes across multiple objectives, balancing inventory costs, handling, storage, and transportation while meeting service level targets. See how our success stories demonstrate real-world TCTS optimization.

3. Improve Order and Delivery Strategies

Frequent shipments and LTL (less-than-truckload) deliveries can drive up costs. Businesses can use cost-to-serve models to determine the most cost-effective approach, adjusting inventory policies and safety stock levels in response to demand fluctuations. Read more about demand forecasting to optimize your inventory.

4. Enhance Collaboration and Transparency

By fostering supplier and partner collaboration, businesses can negotiate better rates, streamline operations, and reduce inefficiencies in the supply chain. To further enhance your understanding of cost analysis, explore resources from industry leaders like Gartner.

An All-in-One Platform for Your Supply Chain Planning

Total Cost to Serve is a game-changer for supply chain efficiency. With Solvoyo’s AI-powered platform, businesses can monitor and optimize TCTS, ensuring smarter decision-making and improved profitability. Contact our experts or Request a Demo to see how Solvoyo can help your business.