Tag Archives: Supply Chain Costs

Manufacturing or Supply Chain

When I recently had to explain to my aunt (she is in her 70s) what I do she struggled with the word(s) supply chain – ‘during her work life supply chains did not exist’. I tried to explain how supply chain looks at the total flow of goods in a company – from suppliers to customers and everything in-between. After we parted I thought about how many of the companies I work with or have worked with have the same problem.

Occurrence of supply chain terms in literature 1800-2000

Occurrence of supply chain terms in literature 1800-2000

Today, 2015, there are still companies that have no concept or limited understanding of supply chain – even though the majority of the money they spend is directly controlled by supply chain processes. Over the last 20 years I learned that the difference is whether a company considers their supply chains as a strategic asset. Many companies that struggle or are merely median do not. They tend to focus on their manufacturing capabilities.

A company that considers its production capabilities strategic will be focused on optimizing factory operations. The emphasis will be on key drivers such as Cost of Goods Sold (COGS) for cost, Capacity utilization for asset efficiency and forecast accuracy for pretty much anything. Customer centric metrics are often translated to metrics like: Schedule adherence or manufacturing cycle time. This was common practice in the early nineties and resulted in the formation of supply chain special interest organizations back then. Continue reading

Financial vs Operational Metrics

There are hundreds of supply chain metrics, many of them ‘standard’ to a degree – order cycle time is a pretty standard metric, though you can tweak the “when” for when the order arrives as well as when the delivery is handed the customer, but most serious supply chain professionals agree on major definitions.

Some organizations use far too many metrics – I recall a Supply Chain re-engineering and ERP implementation I was involved with, which had with 20 operational reports, only two of which were used. The cost to develop was amazing. The flip side is organizations that attempt to guide operations exclusively with financial metrics. An example may be to look exclusively at either total supply chain cost, or perhaps inventory. If you are organized to look at supply chain by P&L only, or worse, by general ledger line, it makes perfect sense to simply set up a metric, and report and try to manage and optimize the supply chain by that financial view.  Continue reading

The Zero Inventory Supply Chain

At a recent training I was asked the question whether the Supply Chain Cost metric applies to a return operations.

“We receive consumer goods from retailers and .com customers and inspect these goods and then determine disposition; some products we repack, some we repair, some we scrap and the rest we return to the OEM.”

It sounded to me like a typical return supply chain. You have costs to operate these facilities, staff and materials used, right? All these are part of Total Cost to Serve.

“Yes, but we never own the materials. They belong to our customer, we are just the service provider, why should we report the cost of goods? Similarly, as we never own the materials why would we care about inventory in asset management?”

Ah, the question behind the question. A service supply chain may manage goods but not own them.

To address the question about the Total Cost to Serve calculation first: Yes, the cost to acquire materials is part of Supply Chain Costs. And this is accurate even for the service supply chain above. The cost for packaging materials acquired (sourced) for the repacking for example should be included in the Supply Chain Costs calculation. (That is assuming you acquire them and not your customer). But the cost of the returned good is not yours, which matches financial transactions as you do not buy the returned goods from your customer.

By the way, there are costs in Supply Chain Costs that may be zero or near zero in a traditional* supply chain. Disposition costs would be low for such a supply chain, unless the (Make) process has significant waste for example. Total Cost to Serve has a place holder for all relevant costs, the way the supply chain operates determines how much each a level-2 or a level-3 metric contributes to the level-1 metric.

The real question here though is whether all metrics at all levels apply to every supply chain. In my experience: Yes for level-1 metrics, not always for level-2 and level-3 metrics.

Level-1 metrics capture multiple indicators over the complete supply chain. For example Cash Conversion Cycle (‘CCC’) – Even if you do not have inventory you still buy and sell services. You need to pay your suppliers and collect from your customers. CCC is still relevant as it tells you how many days of business you need to float (to float = borrow money to pay your suppliers until you receive from your customers).

At level-2 and level-3 some metrics may not be needed as I may not have inventory to report. One could argue though that if you report material costs associated with the repacking process there will likely also be inventory to report. But service supply chains can be without any traditional inventory, in which case those metrics can report zero.

And then there is of course the zero inventory supply chain..
..taking ownership of the sourced goods at the same moment ownership transfers to the customer.. Perfectly free of inventory, or is it? Think about it.