Worksheet: Allocate cost to serve by activity

When costs are spread by sales dollars, small orders, rush jobs and returns cost nothing on paper. This sheet moves each cost line from a spread to an activity driver, then applies the result to your twenty biggest customers. It builds the Competent step of the check:

Order processing, pick and pack, freight, service and rebates are allocated by activity drivers (line items, drops, tonnes, claims), giving a cost to serve by customer group, channel and offer that people trust.

Step 1. From a spread to a driver, line by line

Cost line	Poor (spread by sales or headcount)	Good (by activity)	Driver we will use	Annual cost ($m)	Rate per driver
Order processing	Share of sales staff cost	Per order and per invoice line
Pick and pack	Labour spread by sales dollars	Per line item, with extra for complex items
Freight	Total freight spread by tonnes produced	Per drop plus per tonne, by zone	e.g. drops and tonnes	6.5	e.g. $95 a drop plus $22 a tonne
Service and claims	In overhead	Per claim and per service call
Rebates	Not included, or as a total	Actual, by customer
Payment terms	Not included	Days outstanding times cost of money

Step 2. Apply it to the twenty biggest customers

Customer	Orders	Invoice lines	Drops	Tonnes	Claims	Rebates ($)	Cost to serve ($)	Pocket price ($)	Pocket margin after cost to serve (%)

Step 3. Roll up and get it accepted

View	Cost to serve (% of revenue)	Accepted by finance?	Accepted by sales?
By customer group
By channel
By offer (standard, cut to size, project)

Step 4. Use it in the account review

Account review date	Cost to serve shown beside pocket price?	Decision it changed

Done when: order processing, pick and pack, freight, service and rebates are allocated by activity drivers. Finance and sales accept the result by customer group, channel and offer.

Adapted from our own pricing self-assessment (PSP, 2004).