Businesses and companies need to be highly cautious about supply chain costs regardless of the type of industry they are in. Usually, they effectively manage their production, operational, and marketing costs; but only some companies realize the significance of supply chain costs. Today, we’ll discuss supply chain cost analysis; its importance, classifications, and strategies.
What is Supply Chain Cost Analysis?
Supply chain cost analysis allows businesses and companies to recognize the key efficient areas of the company and identify the ones that have the potential to become efficient. After conducting analysis, some companies end up recognizing the undesired and unwanted supply chain networks and determining the cost-efficient alternative options.
First of all, you should know the accounting strategy that the company is following in order to conduct an SCC analysis for the company.
It is a very popular method of costing and comprises segmenting various types of costs into different categories and clearly recognizing the goods that are relevant to the SC processes. You should perform the activity-based costing (ABC) method when;
- High overhead cost
- Different product variety
- Error and mistakes could become highly costly to the company
You can also perform the ABC method in the following manner;
- Estimating total product cost
- Gathering activity data
- Knowing factors that would impact the cost
- Realizing the cost of every activity
- Recognizing various steps involved in the process
- Determining the product process
The key activity you should perform in activity-based costing is collecting production information. Data collection becomes much simpler and easier if you are following any type of accounting method like standard or absorption costing method.
Importance of Supply Chain Cost Analysis
Supply chain cost analysis is highly significant because of the following reasons;
- SCC contributes roundabout 25% to 30% of the total costs of the company
- Plays a key role for those businesses that are providing online delivery services like DHL
- SCC would give you surprising results when sourcing, inventory, and logistics management aren’t working
- Allows you to know the cost involved and find ways to reduce it because companies usually avoid SCC
- Helps companies to recognize the efficient and inefficient SCC areas
Supply Chain Cost – Key Areas & Classifications
There are different types of SC costs involved and it is significant to beware all of them and they’re as follows;
- Miscellaneous costs happened for the contingencies or the petty work
- Working capital
- Packaging and packing
- Shipping costs inside or outside the country
- Taxes paid
- Administrative costs to perform various SC operations like order processing and sending invoices
- Storage cost to keep the material in the warehouse
- Transportation cost in delivering the raw material to the factory
- Anti-dumping duty
Supply Chain Cost Data Analysis
It is significant to make a cost contribution comparison of all the expenditures relevant to the total cost in terms of percentages. It allows you to differentiate various expenditures that fall under the category of SCC. Otherwise, the total expenditure won’t give you any idea about the SC costs.
Product & Business Type Comparison
While making the comparison, you should make a comparison between the same structured plants in similar areas to achieve value from this analysis. For instance, if a company is producing different types of products based on weight and size, then you should divide all of their costs relevant to the weight and size category. If different businesses are producing different types of products, then you should compare the cost of different plants if they are in the same business.
Efficient & Inefficient Areas
Cost comparison across the organization would help you to recognize the inefficient areas, and contrary efficient areas in the supply chain. It would make you take different types of actions to decrease the cost.
Strategies for Reducing Supply Chain Cost
It is significant to employ the demand planning tools and software in the SC planning process, it would give you an insight to accurately predict the demand. It allows SC managers in the following ways;
- Adjust their pricing strategies relevant to the demands
- Manage limited supply scenarios
- Adding new product lines
- Increasing margins
- Improving revenue growth
Employing the right and accurate demand planning and forecasting tools and software would help you to beware of all the processes and produce the right quantity relevant to the demand.
Transparent SC Processes
Transparent and visible SC processes play a key role in reducing supply chain costs. Streamlining SC processes helps SC managers to beware of the inventory status by producing the right amount of products and goods at the right time for the customers. However, AI-based demand planning software helps you to know the fluctuating market demand and supply due to the following factors;
- Transportation issues
- Changing shipping demand
- Seasonal peaks
SC Metrics Relevant to Goals
It is significant to streamline SC metrics and KPIs with the goals and objectives of the company. It would help the company to influence the final outcome.
- Optimize the cost efficiency
- Innovation and collaboration at the highest level
- Amplifying the organizational efficiencies
Conclusion: Supply Chain Cost Analysis
After an in-depth study of supply chain cost analysis; we have realized that analyzing SC costs is significant to recognize the efficiency and improvement needed areas. If you are learning about SC cost analysis, then you should keep in mind the abovementioned factors.
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