Supply chain costs are the company’s expenses to produce, market, and sell its products. Manufacturers define supply chain costs as the total cost of ownership (TCO). The total cost of ownership is the cost of a good or service over its useful life. This includes both direct and indirect costs, as well as any costs incurred before or after delivery. The total cost of ownership analysis is often used in business supply chains to identify which elements have the most significant impact on profitability.
How To Calculate Supply Chain Cost
- The first step in calculating total supply chain costs is to set up a system for determining all the cost drivers in your organization. Once you have that system in place, you can identify some of your internal issues, like excessive packaging, and translate them into dollar values.
- A method for evaluating external and internal issues is the Total Unit Cost (UTC). The formula uses each component’s purchase price multiplied by the appropriate monetary factor. By using UTC, businesses can get a clear picture of the actual costs of a given source of supply. This is especially useful when selecting or negotiating with suppliers. It also provides all stakeholders with an overview of their organization’s expenses.
- The next step is to determine how your product is made, determine what can go wrong, and estimate the cost of problems. You can put hard costs on a bill, but soft prices are harder to assess.
Supply Chain Cost Reduction Strategies
- Asset Utilization : Utilization of assets can be tracked, including delivery schedules, ownership, shift work, and storage capacity adjustments to peak demand.
- Transportation Strategy : Transportation strategies that consider the needs of a supply chain can lead to lower costs.
- S&OP (Sales & Operations Planning) : S&OP helps you share information, coordinate tasks, and unify your company into a single, structured plan.
Five Significant Supply Chain Cost Drivers
Global supply chains are vast, interconnected systems of suppliers, manufacturers, and distributors. To make intelligent long-term investment decisions about new facilities such as warehouses, factories, and essential resources and equipment, you must understand how to evaluate all the elements in these complex supply chains. Effective capital cost management can help you make better investment decisions. Here’s a checklist you can use to check your investment costs:
- Consider your entire supply chain network.
- Make intelligent market strategy decisions based on knowledge of the competition and insight into long-term results.
- Analyze possible “what if” scenarios for responsible investing.
Manufacturers should make good decisions about transporting their products and services to minimize costs. Manufacturers should also be aware of the factors that affect transport costs, such as delivery times and regulations on fleets and freight. Here’s a checklist you can use to check your prices:
- The right supply chain design can help you locate your manufacturers, distributors, and customers as close to each other.
- If you need more capacity than you have, use third-party logistics companies (3PLs) to help manage it for you.
- Plan different freight routes to and from your location based on existing capacity and constraints. Suitable for transport partners, suppliers, co-producers, distributors, etc.
When choosing a supplier for your supply chain products, you need to consider the impact of your decision on your overall supply chain costs. The obvious choice is to go with suppliers who can deliver quality material at the lowest price and in the shortest possible time. Here is the list of how you can manage this cost-effectively.
- Work with suppliers you already trust, and choose partners with experience in your industry.
- Use historical data and real-time analytics to make informed purchasing decisions that save money and time.
Manufacturers use inventory levels to manage the risk of volatile and uncertain supply and demand. These levels act as a buffer to protect manufacturers from sudden market fluctuations, but they can also incur high costs. Here’s a checklist you can use to check your prices:
- Inventory optimization software helps you manage inventory levels and transportation costs and can improve your capital usage.
- Reducing inventory costs doesn’t mean you should eliminate inventory. Instead, optimize your supply chain and maintain the right inventory for each product.
When manufacturing goods, you must use quality components to produce good-quality products. This concept applies to all business aspects, especially supply chains that rely on just-in-time production with low inventories. Here’s a checklist you can use to manage your costs:
- For manufacturers who prioritize quality as a critical competitive strategy, the ability to cope with fluctuating markets and reduce costs is greatly enhanced.
- By identifying and solving problems quickly and efficiently, manufacturers can reduce costs and ensure that projects stay on schedule.
- A good plan can reduce waste, increase productivity, and help you meet deadlines.