Apr
29
Supply Chain Costs
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In response to my ramblings about supply chain last week, John Gross wrote –
“I would also challenge anyone who is contemplating China to look at his or her total cost. Consider the inventory holding cost, sourcing support cost, and transport cost vs. the cost of producing components in a lean manufacturing process.”
I also got a note from my good friend Shawn Alexander asking –
“How about some thoughts on costing of the supply chain? I am frustrated on how no one has a comprehensive, industry standard way to understand the cost of whatever logistical chain you choose for a product, and fewer still even consider the idea of adding this cost into their product costing/pricing.”
So my question is what so hard about doing the math to understand supply chain costs? Is it because of the millions we claimed in savings in the past few years? Is it because our companies’ margins are obscene (Shawn and I know that company)?
Seriously, the list of important costs is finite and include –
- Inventory costs (whether yours, your suppliers, or your distributors)
- Forecast errors
- Re-planning and PO changes
- Lost opportunity costs associated with late delivery and expediting including the 20 -60% of the time your sales force spends holding the customer’s hand instead of up selling because of the ease of doing business with you.
- Incremental transportation costs
What have I missed?
Would anyone in your business care if we could define a defendable model?
Gary
Apr
25
“Global Supply Chains”
Filed Under Supply Chain | Leave a Comment
You had a traditional relationship where your supply base has been located near you or at least within 1,000 miles. Over the past decade your base has been moved to China but you have kept the traditional requirements planning models in place. The problem is now your supplier is at least 4 more weeks removed from you and most likely double that because of some lead time requirement your company agreed to for pricing reasons.
Sound familiar?
This leads to high inventories, missed deliveries and very slow response from the supplier. It’s rampant in North America.
Solution?
Follow the logic of Lean and figure out what a flow of materials on a weekly basis looks like - your supplier is shipping weekly anyway. Just make it some of everything instead of batches of some things.
I know, I know that you are saying that our Chinese supplier can’t do that. Go look what they are doing for their biggest customers. Go look what your batch mentality (read that as PO’s and EOQ or whatever derivation you have running in your SAP implementation) is doing to your supplier’s suppliers.
Go look below the surface of the easy justifications and the resting on laurels of the millions saved by being in China and you’ll see that setting up a predictable flow of materials will reduce costs, reduce inventories, and improve delivery. Just like Lean (or JIT or Cycle Time reduction …) did the first time you were enlightened by it.
Gary
PS - Go do some reading on the environmental impact of what’s going on and think a little about Taguchi’s ideas of “loss to society”. I think the next big thing is going to be Green Sigma or Lean and Green or something along those lines.