The Perfect Order: Right Cost

The eighth of Dr. Marien’s 8Rs of his Customer’s Bill of Rights is the Right Cost. Per Dr. Marien’s original article, the Right Cost was described as:

Finally, the preceding 7Rs illustrate that transportation charges and prices are only part of the cost formula. We refer to "Right Cost" rather than "Right Price" because total costs of ownership go beyond cost of goods or merchandise to include ancillary charges leading to delivered cost as well as inventory, procurement and logistics costs. The lowest delivered cost includes product costs, order and shipment documentation preparation, possible inspections, and transportation from initial origin to ultimate destination between buyers and sellers. When considering the costs of in-transit, stationary, and safety inventories plus warehousing, TCO analyses must be performed.

Ultimately, supply chain economics necessitates that inter-enterprise, cross-functional costs are considered that cut across suppliers, intermediaries, 3PLs and buyers in more complex, strategic sourcing decisions and operations. Getting back to the basics: Are the right charges assessed for order shipment, including product costs, trade discounts and allowances? Are special damages assessed if guarantees of deliveries are not met? Are consequential damages for lost sales or shut down production/operations assessed when sellers, carriers/3PLs and receivers do not meet agreed-upon performance requirements?

Logistics professionals must work with customers and other functional colleagues in their organizations to determine the performance specifications for the above rights. Metrics must be determined along with glossaries, which can be attached to purchase and transportation contracts.

Explainer: Setting the Right Cost

I want to start by pointing out something that Dr. Marien said at the beginning of his second paragraph, taking it a bit further. Paraphrasing his sentence, Dr. Marien stated that supply chain economics requires costs to be considered across all parties in a more strategic manner, albeit he focused on sourcing. I offer that the costs of business need to be considered strategically in consideration of the customer model, e.g., B2B, B2C, D2C. Notably, if a consumer product company is considering aligning itself with retail (online or brick-and-mortar), this potential retail vendor needs to do its due diligence and consider the costs of what this business model may likely require, initially and ongoing. Because retail vendor compliance (B2B, B2C) is tough.

Dr. Marien differentiated cost from price in his description of this customer right. Everything costs something: every hangar, hangtag, barcode label, shipping carton, and printed pack list, as well as each and every electronic transaction. Consumer product companies need to invest in the right software systems, establish the right business operations, hire and train the right people, and document the right procedures to ensure that their customers—or their customers’ customers—are guaranteed to receive their orders perfectly. The right cost is not the lowest cost, because the price to pay for that is failing to execute orders perfectly.

The cost of doing things tactically and not strategically are manual errors, redundant work, replicated data, and letting the exceptions manage the business. These are the costs that can peck away at profits and eat away at efficiencies. Retailer systems are not without error, nor are their chargeback (financial penalty) reasons always clear. This information is always easy to analyze. Vendors have control over the foundational data upon which their performance metrics are based, and can layer in protections against some retailer problems like replicate orders. Retailers, and their intermediary software providers, have the responsibility of processing and analyzing vendor supply chain data correctly to ethically and legally assess “special damages” and “consequential damages” without going beyond the actual cost of the infraction’s impact on supply chain disruption plus any actual administrative fees.

The Right Cost is not the lowest cost but is the necessary cost to ensure that the order is perfectly conveyed for use or sale based on the customer’s requirements and expectations. If your brand isn’t ready for this level (B2B, B2C) of retail, start by building your reputation via D2C or via an online marketplace where you have more control and fewer requirements.

This was the last of Dr. Marien’s 8 Customer Rights that he wrote in 2005. Today, could there be another “R” that is a customer right given the advancements in online shopping and e-commerce? What about the customer’s Right to Return? Let’s discuss that next.

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