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week 12 supply chain cost - Coggle Diagram
week 12 supply chain cost
Cost allocation in SCM
Allocation decision
Direct costs
Direct labor
Direct materials
Indirect costs (overheads)
Managing director’s salary
Administration expenditure
Rent rates
Fixed / Variable costs
Traditional logistics costing
Problems with traditional cost accounting as related to logistics (Christopher, 1998)
The true costs of servicing different customer types, channels and market segments are poorly understood.
The emphasis on full cost allocation to products ignores customer costs
Traditional costing
Assumes all cost is volume-related
Has departmental focus, not process focus
Focuses on costs incurred, not cause of costs
Total Cost = Material + Labour+ Overheads
Overheads are allocated to the products on volume based measures e.g. labor hours, machine hours, units produced
Assumes all cost is volume-related
Does not take into account
Customer Diversity
Service Diversity/Complexity
Traditional allocation method=costs/product volume
Definition of ABC (activity based costing)
definition
an accounting method used to find the total cost of activities necessary to make a product or service
Principles of Activity Based costing
Each logistics transaction consumes activities in different quantity and quality.
For these activities we use resources. So activities are defined as «cost drivers»
In modern logistics we allocate costs under the activity cost center vs the traditional method (where cost is allocated to cost center like mfg, marketing etc.)
Activity-based cost (ABC) allocation method
first stage---costs--activities
second stage---activities ---products
Activity based cost calculation flow
delivery
document
picking unit
transport unit
Purpose of activity based costing
To identify the services and activities that are unprofitable
To be effective in assinging resources to the right activity
To focus improvement efforts to the right points
To make high and low cost/profit performances visible
Helps with future warehouse, distribution network planning
supply chain costs
definition
Investment Costs.
Logistics Costs.
Procurement Costs.
Production Costs.
Inventory Costs.
Order fulfillment Costs
SCM cost drivers
customer
location
volume
service needs
culture
customer complexity
customer order size
customer order frequency
products
substitutes
handling needs
sourcing
lead time
supplier performance
range
costs
procurement
inbound
store&maint
outbound
asset utilisation
the right assets
options
stock point
transport mode
resource ownership
collaboration
product velocity
product flow
consequences
lost sales
lost customers
lower profits
lost market share
at appropriate cost
appropriate service
Drivers of supply chain cost
The scope and variability of supply chain activities means that anybody who is in business to make a profit needs to understand the "cost to serve" for the different types of customers and the different types of products and services your company provides to them.
Investment Costs--Driven By---Supply Chain Strategy
Production Costs--- Driven By--- S&OP+Asset Utilization+ Procurement Policy
Inventory Costs--- Driven By--- S&OP+ Customer Service Strategy
Operations Costs--- Driven By--- SC network design+ Distribution Model+ Outsourcing
Operations cost categories and definitions
transportation
freight charge----cost incurred during delivery using various transportation modes
consolidation----the fee for combining small shipments to form larger shipments
transfer fee---cost incurred during the transfer of goods between different modes of transportation
pickup and delivery---transportation charges incurred between shipper's warehouse and air, rail consolidator's terminal
inventory holding
pipeline holding----holding cost during transfer
safety stock---holding cost of safety stock
administration
order processing---salaries of employees responsible for purchasing and order management telephone, fax and information
communication----telephone, fax and information transfer related costs associated with international logistics
overhead-----rent paid by international logistics group
customs
customs clearance----fee imposed by local customs to clear goods
brokerage fee----charge levied by an agent acting on behalf of the shipper or the receiver depending on the delivery terms
allocation fee----per house-bill
risk and damage
damage/loss/delay----percentage of the value of each unit shipped that will be lost, damaged pr delayed
insurance------Min 25usd or 0.5usd per 100usd insured value
handling and packaging
terminal handling---material handling fee charged by the transportation company
material handling----cost of labor and equipment used to move goods within the shipper's or receiver's warehouse
in/out handling----material handling charge levied by the freight forwarder for use of its facility
disposal charge----fee for taking away an empty container from the receiver's warehouse
packaging/supplies materials ----cost of preparing goods for shipment
storage----rental fee for warehouse space
Total Cost of Ownership(buyer point of view)
purchase price-----cost elements that make up the purchase price(direct material, direct labor, overhead, etc)
acquisition costs----costs incurred getting the product /service to point of use( inbound freight, sourcing, receiving, inspection, storage etc)
usage costs-----costs incurred in converting purchased material into finished product and supporting it through its usable life(scrap, final, inspection, lost productivity, warranties, returns, etc)
end of life costs------costs incurred in the termination of products life( disposal costs, excess inventory, winding down of project costs etc)
for all businesses, there are many "paths" through the supply chain for their products and service. the costs related to each path vary considerably, based on the customer/product mix, knowing this cost to service is vital
cost to serve---a smarter way to improved supply chain profitability
cost to serve
understanding the total cost of servicing our customers
at a customer and product level
so that the business can provide appropriate levels of service to its customers
to achieve business goals
cost to serve is not
activity based costing
Why we look into cost to serve ?
The Five Deadly Business Sins." Price is made by the market. So you should start analyzing
your costs once you fix the price.
cost-driven pricing vs price-driven costing
He states that the supply chain strategy has to have one clear objective: to bring products with world-class quality and leading technology to the ultimate customer, on time, every time, to end up at the lowest market price.
Cost to serve process
ongoing reporting of cost to serve
change management of processes and behaviors
identify product&service characteristics
identify customer characteristics
establish customer&product matrices
ABC sub process
identify & map activities
identify cost&drivers
allocate costs to activities
establish as is costs
identify & map to be activities
identify to be cost& drivers
allocate costs to activities
establish as is costs
Listing critical costs in SC
map the process and list activities
list the cost elements associated with various activity boxes in the process map
obtain cost data for each cost element from suppliers, should cost models, or internal data
organize the cost data in the cost activity worksheet
complete the worksheet for identifying critical costs in the supply chain
break down costs into level one, level two, level three etc
determine whether the cost elements are future cash flows or not
select the top two or three future cash flows(costs) to carry forward for more analysis, and list the reasons for doing so.
complete the master worksheet
Customer Profitability (calculated based on activity costs)
Analysis of the revenue streams and service costs associated with specific customers or customer groups
net sales value
cost of sales(actual product mix)
commissions
sales calls
key account management time
trade bonuses and special discount
order processing cost
promotional costs(visible and hidden)
merchandising costs
non-standard packaging/unitization
dedicated inventory holding costs
materials handling costs
transport costs
documentation/communications costs
returns/refusals
trade credit(actual payment period)
Customer “mining”
what customer characteristics drive cost in your business?
what customer characteristics drive up cost in serve?
with cost to serve reporting, a company has the ability to
negotiate terms with major customers
test alternative distribution modes/service
improve customer profitability
improve pricing methodology
improve processes
a review of cost to serve is often the first step to major supply chain improvement
Summary
Supply Chain costs are key factors in a company’s profitability as well as customer segmentation.
For effectiveness and efficiency of the supply chain one has to understand the costs and the related cost drivers.
ny positive action taken on cost drivers will increase income.
ABC costing is the preferred way to allocate costs in SC.
Cost to serve is used to analyze the outbound activities in supply chain ; helps to better understand the cost of different customer categories with different service requirements.