Glossary
Total Supply-Chain Management Cost (5 elements)
Tags: Glossary
Total cost to manage order processing, acquire materials, manage inventory, and manage supply chain finance, planning, and IT costs, represented as a percentage of revenue. Accurate assignment of IT-related costs is challenging. It can be done using Activity-Based Costing methods or based on more traditional approaches. Allocation based on user counts, transaction counts, or departmental headcounts is a reasonable approach. The emphasis should be on capturing all costs, whether incurred in the entity completing the survey or incurred in a supporting organization on behalf of the entity. Reasonable estimates founded in data are accepted as a means to assess overall performance. All estimates reflect fully burdened actuals, inclusive of salary, benefits, space and facilities, and general and administrative allocations. Calculation: [Order Management Costs + Material Acquisition Costs + Inventory Carrying Costs + Supply Chain-Related Finance and Planning Costs + Total Supply Chain-Related IT Costs] / [Total Product Revenue] (Please see individual component categories for component detail and calculations)
What is Total Supply-Chain Management Cost (5 elements)?
Total Supply-Chain Management Cost (5 elements)
Total Supply-Chain Management Cost refers to the overall expenses incurred in managing various aspects of the supply chain, including order processing, material acquisition, inventory management, supply chain finance and planning, and IT costs. It is typically represented as a percentage of revenue and is an important metric for evaluating the efficiency and effectiveness of supply chain operations.
The first element of total supply-chain management cost is order management costs. This includes the expenses associated with processing customer orders, such as order entry, order fulfillment, and order tracking. It also encompasses activities related to customer service and order customization. Accurate allocation of IT-related costs in this category can be challenging, but methods like Activity-Based Costing or traditional approaches based on user counts, transaction counts, or departmental headcounts can be used.
The second element is material acquisition costs, which involve the expenses incurred in procuring raw materials, components, or finished goods from suppliers. This includes activities like sourcing, supplier selection, negotiation, and purchasing. Accurate cost allocation in this category is crucial for evaluating the efficiency of the procurement process and identifying opportunities for cost savings.
The third element is inventory carrying costs, which encompass the expenses associated with holding and managing inventory. This includes costs like warehousing, storage, insurance, obsolescence, and depreciation. Accurate estimation of these costs is essential for optimizing inventory levels and ensuring that inventory is managed efficiently to minimize costs while meeting customer demand.
The fourth element is supply chain-related finance and planning costs. This includes the expenses incurred in financial activities related to the supply chain, such as budgeting, forecasting, financial analysis, and risk management. It also includes costs associated with supply chain planning activities, such as demand forecasting, production planning, and distribution planning. Accurate allocation of these costs is important for evaluating the financial performance of the supply chain and making informed decisions to improve efficiency and profitability.
The fifth and final element is total supply chain-related IT costs. This includes the expenses associated with the development, implementation, and maintenance of IT systems and infrastructure that support supply chain operations. This can include costs related to software, hardware, networking, data management, and IT personnel. Accurate assignment of IT costs is challenging, but it is important to capture all IT-related expenses to assess the overall performance of the supply chain.
To calculate the total supply-chain management cost, the sum of the individual component costs (order management costs, material acquisition costs, inventory carrying costs, supply chain-related finance and planning costs, and total supply chain-related IT costs) is divided by the total product revenue. This calculation provides a percentage that represents the overall cost of managing the supply chain in relation to the revenue generated.
It is important to note that accurate estimation and allocation of costs in each category is crucial for obtaining reliable results. Activity-Based Costing methods or traditional approaches based on user counts, transaction counts, or departmental headcounts can be used for cost allocation. The emphasis should be on capturing all costs, whether incurred within the entity or by supporting organizations on behalf of the entity. Reasonable estimates based on data are accepted as a means to assess overall performance. All estimates should reflect fully burdened actuals, including salary, benefits, space and facilities, and general and administrative allocations.
In conclusion, total supply-chain management cost is a comprehensive measure that encompasses various elements of supply chain operations. It provides valuable insights into the efficiency and effectiveness of supply chain management and helps identify areas for improvement and cost optimization. Accurate estimation and allocation of costs in each category are essential for obtaining reliable results and making informed decisions to enhance overall supply chain performance.