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Cost versus value:understanding the omnichannel cost-to-serve


25


Current Cost area Fulfilment costs situation 2016


Online is 20% of total sales


Home delivery costs 2-3 days is standard Returns costs


Average returns rate 38%


TOTAL


Current average cost as a % of sales


2% 0.8% 1% 3.8%


Future situation 2020


Online will be 25% of total retail sales


If next day becomes the norm


Average returns rate 41%


TOTAL


Future average cost as a % of sales


2.4% 1.2% 1.4% 5%


* All costs and calculations are based on


average apparel retail data collected through GS1 UK’s cost-to-serve project. Analysis was derived through the cost saving ready reckoner tool developed by the Cranfield School of Management.


MANAGING OMNICHANNEL COSTS In the words of Peter Drucker, “you


can’t manage what you can’t measure”. By calculating the cost-to-serve, retailers can uncover the hidden costs that are eroding their margins and take the necessary steps to minimise the impact to their business. Cost-to-serve is not a new concept. Most


retailers will have some form of activity based costing in place, yet for all the innovations of omnichannel this methodology hasn’t really been carried over. Research from GS1 UK found that less than 20% of UK apparel multichannel retailers surveyed know their cost-to-serve. Our findings are echoed in the grocery sector – IGD found that traditional channels are most likely to have a cost-to-serve measure in place with only 27% of online channels assessing this key metric. So what is it about new channels that


represent a challenge for cost management? By complicating the journey a product takes


to market, omnichannel reconstructs the way retailers should approach their cost-to-serve. From a straightforward linear supply chain to


something more closely resembling a solar system, we’re now dealing with a vastly complex network. Upstream apparel retailers are developing wider ranges and dealing with more suppliers. And, downstream they’re responding to an increasingly demanding customer and distributing through a growing number of channels, fulfilment methods, business models and doing so on a global scale. This increased network complexity


challenges the way businesses measure and understand their operational costs. Previously retailers could rely on average based activity costing however, the greater variations now in play require more granular cost insight to inform accurate decision making. We are also dealing with a more volatile


market meaning it is more difficult to control costs. Online shopping has given consumers access to choice on a global scale. And the ease in which customers can now compare offers has raised the level of competition in the market. The flexibility of the customers to shop anytime anywhere is also placing greater pressure on the service and speed of the retail offer, driving up costs of moving products through the supply chain. When desktop PCs were the main platform


for online shopping, website traffic was predictably managed during lunch times and after work hours. With the proliferation of smartphones and tablets, customer spending


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