Supply Chain Cost Analysis

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Supply Chain Costs

One of the most important and also most difficult parts of supply chain management is the supply chain cost analysis. This is an area that is at the same time incredibly important and extremely difficult. No matter what kind of organization you have, you need to make sure you know your supply chain costs. While almost every proper company has a good handle on their normal production costs and perhaps even marketing and sales costs, few companies have even attempted to really understand the costs of their supply chain.

Why Analyze Supply Chain Costs?

Alot of companies will be thinking to themselves - well if its so hard to analyze the supply chain expenses and costs, then why do it? What if I told you that in some industries and businesses the supply chain costs of a company as part of their total costs is 25-30%. There are of course businesses that supply chain costs are the main costs of the organization - think Fedex.

However even if you are a normal organization where logistics and inventory management and sourcing and planning decisions aren’t so vital, you might be surprised at how much of your costs are actually supply chain related. It’s for this reason that doing a Supply Chain cost analysis not only will give you an idea of the costs involved, but also will give you another area to improve and cut costs. This area will most probably not be a 100% optimized area either, since you don’t even have an idea of the exact costs involved.

By doing a supply chain costs analysis you can see which areas of your company are efficient and which need to more efficient. You will also realize alot of supply chain savings from projects that you will identify after performing this cost analysis.

How to analyze supply chain costs

In order to perform a supply chain cost analysis in your company, you will need to first of all find out the accounting method that is used in your organization. If you’re using something called activity-based accounting then you are off to a good start as this will generally divide all sorts of costs into their own proper category and you can hand pick which ones are associated with the supply chain. The data gathering for activity based accounting supply chain cost analysis is very easy. On the other hand, if you’re company uses a form of absorption costing or standard costing or perhaps just a very basic accounting method, then you will have your work cut out for you in trying to collect all the necessary data.

In order to collect your supply chain cost data, you will need to contact your financial controller or someone that has access to your enterprise resource planning system. For example if your company heavily uses SAP, then you will need to access the data that is stored in SAP. At the beginning it is difficult to know exactly what kind of data to look for as the term supply chain in an organization is very broad and can mean all sorts of different things in different entities.

If this is your first time doing a cost analysis of the supply chain, then you will want to collect as detailed data as possible into all the different fields that you can imagine. If you’re doing this kind of analysis, it would probably be good idea to do it for the most recent completed year so you have access to a whole year’s worth of data. Also, you should seperate your costs depending on which factory or entity of your company that you’re dealing with. Separating the data as such will allow you to see exactly where the problem is coming from.

Types of Supply Chain Costs

Here’s a good list of supply chain cost centers and categories that you might want to find out and track individually:

-Transportation costs from your supplier to your plant
-Your warehouse costs, whether it is a internal warehouse or external warehouse you operate
-Your administrative costs to process orders and manage invoices and all the little things that might be going on in your factory to manage the supply chain
-Your taxes
-Your shipping costs both international shipping and domestic shipping
-Your Packing and Packaging Costs
-Your Working Capital Costs as a result of your inventory throughout the year can also be tracked
-Your insurance costs
-Your company’s costs for mistakes with invoicing/delivery/orders etc..

This is just the basic costs that most companies will have to deal with. Other companies will other costs to worry about. The important thing is to try to cover all the existing costs of your company that fall under the supply chain.

Analyzing Your Supply Chain Cost Data

Once you have completed a year’s worth of results and divided it into different cost types and for each company entity, it is now time to do the supply chain analysis of costs. First you will want to see what the total figure is for your company. You can compare the total supply chain costs to your overall operating expenses. Simply subtract your margin from your sales, and that will give you a good idea of your company’s costs. Of course, there are more accurate ways to collect this data, but that’s a small trick if you only have access to widely available data.

If your supply chain costs end up being a significant part of your overall costs (anything above 20%), then you can already see that doing detailed analysis of this area was a wide decision.

The way you can derive value from this analysis is that you should compare between similar structured plants in the same cost areas. What I would do is to make sure you use a good metric to compare different plants. If you’re company produces products by the ton, then make sure all your costs are divided by the amount of tons that the factory in question produced in the year that this data was collected to see how much of this specific type of supply chain cost there is for a kilo or ton of your product. If on the other hand you have different business segment producing different product types, it is again a wise idea to compare the costs of different plants only in the area that they have similar business. Otherwise your analysis won’t be very sound or fair.

Comparing these specific costs across your organization could reveal inefficiencies in some parts of your company, it could tell you the supply chain best practices in some areas, and it could provide you direct actions you could take to reduce costs in your organization to realize savings.

Comparing supply chain costs of your plants and entities from year to year is a nice way to control you supply chain costs and also a good way to spot trends and witness progress.

So to repeat the process for creating a supply chain cost analysis is: split the company’s supply chain costs into as many identifiable parts as possible, ask the data from your financial people, organize your data according to product segments or product tonnage to establish consistency amongst your plants, and then you can compare the numbers and spot irregularities and follow them later on with more laser targeted projects.

That’s it folks, that’s how you can have your very own Supply Chain cost analysis.