Knowing your supply costs is essential, just like understanding your service costs.
Understanding the expenses influence pricing and efficiency. It will help you make informed decisions that benefit both your supplier relationships and your operations.
Watch the video to learn more about why this insight is important.
What is Cost to Supply?
Cost to supply is similar to cost to serve, but it focuses on the expenses your suppliers incur to deliver goods to your business. Understanding these costs is just as crucial as knowing what it costs you to serve your customers. By analyzing supplier costs, you can develop strategies like reverse logistics and pricing adjustments. For example, you may need to determine whether it’s more cost-effective for suppliers to deliver directly to your stores or use your distribution centers (DCs). In retail, many companies have shifted from direct store delivery to DC delivery, often charging suppliers a fee for handling orders and deliveries.
Why Supplier Costs Play a Critical Role
Understanding your suppliers’ costs is essential when making strategic decisions. For instance, you need to assess whether it’s more affordable for suppliers to deliver directly to stores or send bulk shipments to your DC. Many retailers use this analysis to figure out which option is more efficient. Having a clear understanding of these costs can lead to more productive negotiations with your suppliers, allowing both parties to agree on the most cost-effective approach.
The Value of Strong Supplier Collaborations
A successful cost strategy relies on strong, open partnerships with your suppliers. Trust and transparency are key to working together on cost reductions. In some cases, you may have a more efficient logistics network, allowing you to take over product pickups at a lower cost. Suppliers may also benefit from sending larger, less frequent orders, which could reduce their warehousing expenses and improve overall efficiency for both sides.
Creating Win-Win Partnerships
For this approach to be successful, both parties must share in the cost savings. When you collaborate openly, you can find solutions that benefit both the retailer and the supplier. However, if one side keeps all the benefits, the relationship is likely to fail. A balanced, win-win partnership encourages long-term success and fosters ongoing collaboration.
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Editor’s Note: The content of this post was originally published on Logistics Bureau’s website dated September 04, 2024, under the title “Cost to Supply v Cost to Serve and Why You Need to Understand It“.
